CDC pensions seem particularly well-suited for those seeking a lifetime income without the need for complex decisions, maximizing every bit of income from their pension pot. This is especially relevant given the stagnation in auto-enrolment rates and the proposed changes to inheritance tax on pension pots.
Giving up individual entitlements for a pooled approach is likely to generate better outcomes in aggregate. Estimates from consultancies like WTW, LCP, and Aon, as well as policy organizations like the Pensions Policy Institute (PPI), vary depending on the modelling used, but typically show an uplift in benefits of 40% to 50% compared to a DC with annuitisation at State Pension Age.
CDC involves a different set of trade-offs not just for members but for everyone involved in the schemes. As trustees, it is important that we fully understand these trade-offs and their implications for the scheme and the members themselves (notwithstanding that few will be worse off compared to the DC alternative whichever way these trade-offs fall for them.)
It is important that these trade-offs are represent a fair exchange for the membership. And it is also important to keep the scheme simple, particularly in the elements that members need to understand about the risks and benefits of the scheme.
The ‘magic’ of CDC lies in the pooling: pooling of investment returns and pooling of longevity. This sharing means the members in the scheme are cross subsidising each other’s outcomes. This needs to be done in a way that is fair, but this judgement is very much based on perspectives and circumstances.
Take the longevity aspect as an example. In a previous role, I considered risk sharing for the retail market and concluded that individually underwriting each entrant was a fair approach, ensuring the benefits from the scheme reflected members' longevity expectations as accurately as possible. At the other end of the spectrum, we have the Royal Mail scheme where all members, regardless of age or other mortality factors, accrue benefits at a uniform 80ths rate. Neither of these approaches is suitable for a multi-employer CDC. Individual underwriting is very fair but adds significant cost and barriers to entry. Flat accrual rates are not allowed per the draft regulations as they create a cross-subsidy from younger to older members.
In considering where to draw the line, it is tempting to focus on fairness as a key consideration because it is more empirical. Simplicity, though less easy to quantify, is equally important to the success of the scheme and the experience of the members. Trustees will need to be mindful of this dilemma when the time comes to make decisions concerning the scheme, ensuring that fairness and simplicity are well balanced to achieve the best outcomes for all members.
Mark Stopard, Head of Proposition Development – ZEDRA
