More thought needed on CDC design

The pensions industry has met the Government's proposals to develop collective defined contribution (CDC) with a mixed reception.

Consultancy Hymans Robertson has raised concerns that low earners in CDC pension schemes could subsidise the retirement incomes of wealthier members by as much as 30%.

It argued that CDC schemes, which pool large groups of members from different socio-economic backgrounds, risk lower income members subsidising the incomes of better paid members because they typically live longer.

Hymans Robertson used data from longevity data specialist Club Vita which found that affluence is a key factor in determining how long people will live and showed that the well-off could reasonably expect to live more than 10 years longer than the poorest members.   

Jon Hatchett, senior partner at Hymans Robertson, stressed the importance of reviewing a CDC scheme’s design and eligibility criteria. 

He said: “While the momentum for the development of CDC is gaining pace, we need to think hard about the way it is designed and operated. There must be a spotlight on the impact CDC could have on specific groups of members.

"Innovation is essential to ensure that DC members achieve the best possible retirement outcomes. But we want to ensure that any new options taken forward by the industry are fair to members and help alleviate social inequality, not exacerbate it.

“The ambition for innovation in defined contribution (DC) has already led to the development of a range of risk sharing options available for members today that can deliver many of the benefits of CDC without some of the drawbacks. CDC is a good option for certain scenarios, but not for all. In many cases more attractive alternatives exist which can deliver better outcomes for more members. We need to keep the goal of fairness in sight and be open to looking at a wider range of options, beyond CDC.”

This comes as consultancy Aon said its recent polling found that 36% of its 330 respondents stated that they were most excited about the effect the Mansion House reforms could have on the further development of CDC schemes.

Chintan Gandhi, partner and head of CDC at Aon, said CDC schemes have the potential to offer better outcomes and to facilitate wider investment opportunities.

He said: “The Mansion House reforms have added to the momentum around CDC – and that really is to be welcomed. The Chancellor has recognised that CDC schemes have the potential both to offer better outcomes and to facilitate wider investment opportunities – one of his key objectives for the broader economy. 

“By pooling risk and aspiring, but not guaranteeing, to provide increases to pensions, CDC schemes can help navigate new forms of volatility and hold more return-seeking investments - and over a longer period - than DC and closed DB schemes.”

This follows news that master trust TPT Retirement Solutions is actively thinking about how it can introduce CDC as a decumulation option for its DC members over time. 

Philip Smith, DC director at TPT Retirement Solutions, said: “At TPT, we’re set to launch our own decumulation solution in 2024 that will offer a simple and straightforward way for people to access a solution that provides a sustainable inflation-linked stream of income into retirement. 

“We’re also actively thinking about how we can introduce CDC as a decumulation option for our DC members over time, as the regulations allow.”