CDC predicted to outperform DC and DB pensions

Collective defined contribution (CDC) pensions would outperform individual DC insured annuities and defined benefit (DB) schemes on average, according to Willis Towers Watson (WTW) analysis.

The consultancy’s analysis predicted that, assuming joint contribution rates of 15.2 per cent of pensionable pay, typical CDC pensions would average 70 per cent higher than individual DC insured annuities and 40 per cent higher than DB pensions.

WTW estimated that for each £10,000 payable from an insured annuity bought with a DC pot, or £12,000 payable from a DB scheme, the CDC scheme would pay out £17,000.

However, it noted that until CDC master trusts become available, employers will need to set up their own CDC scheme and, for a scheme to be well-governed and operate largely within the expenses charge cap, the employers’ workforces would need to be over 5,000.

Commenting on the findings, WTW senior director and head of UK CDC, Simon Eagle, said: “One of the most compelling features of the CDC is that, because pension levels are gradually adjusted to deal with experience, the scheme can afford to target higher investment returns than in most other pensions vehicles without short-term fluctuations in pension cost for the employer or pension level for the members.

“This means that, for a given amount of contributions, for each £10,000 payable from an insured annuity bought with a DC pot, or £12,000 payable from a DB scheme, the CDC scheme would pay £17,000. This helps provide employees with adequate pension levels.

“Initially, employers will only be able to access CDC if they provide it through their own trust. For CDC to become prevalent in the UK we would need further regulation from the government enabling CDC master trusts, so that an employer’s scale is no longer a constraint.”

WTW, who worked with Royal Mail on the design of its CDC scheme, also published a guide to answer the 15 most commonly asked questions about CDC.

The firm noted that CDC pension levels are variable before and after retirement, and there is therefore a wide range of potential comparative pensions either side of the 70 per cent and 40 per cent it determined.

In some scenarios, CDC pensions would perform better or worse than WTW’s prediction, and in “more extreme scenarios” CDC pensions could ultimately be lower than under other arrangements, WTW warned.

WTW’s analysis assumed joint contribution rates of 15.2 per cent of pensionable pay for each arrangement, each arrangement is newly opened, a common retirement age of 67 (each with no ‘5 year guarantee’ lump sum on death before 72), that 50 per cent contingent spouse’s pensions are payable under each arrangement, the arrangements provide pensions with comparable price inflation linkage, used common growth asset and low-risk return assumptions, price inflation and demographic assumptions, and assumed no cash commutation.

“In today’s flexible world of work, industry master trusts could be an especially effective way of providing CDC pensions, as members could continue to accumulate retirement contributions in the same scheme when changing employer,” concluded Eagle.

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