Risk sharing options, such as collective defined contribution (CDC), could provide members with higher value retirement outcomes, although careful plan design will be needed to address intergenerational value transfer issues, Hymans Robertson has said.

Hymans Robertson's analysis showed that risk sharing could provide an uplift in income by as much as 50 per cent from a traditional DC plan, through the opportunity to invest in higher growth assets and the pooling of longevity risk, both of which the intergenerational risk sharing element of CDC enables.

However, it argued that is also the potential for significant value transfer between young and old members of a CDC scheme dependent on the specific design.

Indeed, Hymans Robertson’s analysis showed that under certain scenarios a 50 year old may receive a pension 60 per cent higher than under DC, while a 20 year old in the same CDC scheme could receive a pension 40 per cent lower than in DC.

Given this, it argued that while risk sharing options, such as CDC, could provide members with higher value, and more secure, retirement outcomes, intergenerational value transfer issues should be assessed first, with careful plan design and communication to members, "key" to the success of CDC.

“There is a trade-off between simplicity of design, and fairness and transparency to members. It’s a design question that can be addressed, with many options available," Hymans Robertson head of DC market, Paul Waters, explained.

“For example, a traditional DC scheme in accumulation with longevity pooling in retirement can deliver a significant benefit uplift without value transfer from younger to older members."

With the new government already recognising the need for greater adequacy in pension income with the Pensions Review, Waters argued that it is now time to move forward with CDC in its broadest form, allowing a wide range of risk sharing designs for DC members.

He continued: "The importance this could play must not be underestimated as it could be life-changing for members.

“Yet, for this to be considered a viable option, new frameworks and products must be developed. We are calling on the government to confidently back the expansion of CDC, and legislate to enable the broadest range of CDC design structures to be put in place.

“But the industry needs to play its part too, as careful design and communication is key when it comes to CDC. We must ensure stakeholders involved in the design understand the risk sharing mechanisms, and the impact on members, such that they can be addressed.

“At the same time communication strategy for members should be developed so members are to be able to trust their scheme and feel secure about their retirement plans, through the good times and the bad.”

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