Collective defined contribution looks closer than ever to becoming a reality, but some experts still doubt whether those planning for their retirement even want the product.
CDC has been praised by its advocates for reasons including simplicity and performance levels. Its critics have cast doubt over the potential demand for CDC, given the decline of guaranteed income products like annuities.
Could CDC be the simple solution people want?
Those close to retirement are currently faced with a baffling array of options for decumulation. Speaking in a Pensions Expert podcast, Kevin Wesbroom, senior partner at pensions consultancy Aon Hewitt, argued for CDC’s role in simplifying the decumulation phase of DC.
I’m nervous about how we can help members understand what is going to be a pretty complex black box
Will Aitken, Deloitte
“It gives you a higher income than an annuity. It lasts as long as your lifetime so you don’t run the risk of outliving your savings, and it does what a lot of people want,” Wesbroom said.
“It gives them a reasonably steady, fairly predictable income in return for their retirement savings, without them having to make lots of complex decisions,” he added.
Will Aitken, director at consultancy Deloitte, said research suggests savers generally do not follow up their intention to buy an annuity with a purchase upon retirement, opting for cash instead.
“Is an annuity really the right comparison, given that annuities are no longer the default option for people who retire, and are we really offering people what they want, or what we think they should want?” he said.
In Wesbroom’s view, a “CDC annuity” option would be a good addition to current pension freedoms. “People want freedom not to choose,” he said.
Is CDC too good to be true?
“It’s a pretty good answer, I would maintain, for what a lot of people want,” Wesbroom added.
If some experts’ estimates are to be believed, it is a very good answer indeed. In their 2017 paper ‘The Purpose of Finance’, David Pitt-Watson and Dr Hari Mann pointed to studies that suggest CDC can provide a pension 30-40 per cent higher than in a DC arrangement.
Not everyone shares this optimism. “I’m extremely nervous about telling people it’ll produce 30 per cent more,” Aitken said.
Where do we go from here?
It looks increasingly likely that legislation will be implemented that will allow for Royal Mail’s proposed new CDC scheme.
Govt ‘tempted’ by latest Royal Mail CDC proposals
The Department for Work and Pensions is “tempted” to lay regulations facilitating the creation of collective defined contribution schemes, following a recent breakthrough by the team drafting proposals on behalf of Royal Mail.
Wesbroom predicted CDC would come in on a progressive basis, and depends on getting the Royal Mail scheme “over the line”. This would “open up the possibility for further variations on the CDC theme”, he said.
This did little to allay Aitken’s concerns. “I’m nervous about how we can help members understand what is going to be a pretty complex black box, and still feel trusting in pensions,” he said.
