Aon Hewitt has applauded the news that legislation to permit Collective DC pension plan designs in the UK is likely to be included in the Queen’s Speech on Wednesday.
Kevin Wesbroom, senior partner at Aon Hewitt, said:
“The new flexibilities to UK pension plan design to be introduced in the Queen’s Speech are a step we have encouraged and are delighted to see moving ahead. Employers will have certainty that they will be able to introduce Collective DC plans to provide their members with a regular income in retirement.”
Collective DC (CDC) plans – also known as Target Pension plans - are pension scheme designs where the cost of the plan is fixed as a percentage contribution rate but the benefits from the plan are targeted, not guaranteed. The benefits paid from the plan are determined by the performance of the plan assets. For the employer, this design has all the advantages of individual DC, while the individual saver receives a retirement income and the knowledge that they will not outlive their savings. Analysis by Aon Hewitt has shown that members of CDC plans can receive retirement incomes that are on average one-third higher than those secured via an individual DC plan that is ‘lifestyled’ into an annuity - and at the same cost.
Another attraction of CDC plans for employers and members is that they do not contain costly guarantees, when compared with other Defined Ambition and DB designs.
Matthew Arends, partner at Aon Hewitt said:
"Many individuals will want to use some or all of their DC retirement savings to generate an income to live on in retirement. This was borne out by the survey of over 200 pension professionals who joined our web briefing on the Budget changes. 73% of respondents said that they expected to offer a combination of cash and income generating strategies in their DC plan.
“Consequently, there will be a need for some form of income generating solution from at least part of members’ DC pots to replace income that previously would have been provided by an annuity - so we can expect a proliferation of market innovation to fill this need. However, many of these new options will expose members to increasingly complex decumulation decisions. CDC plans have a big role to play because they are pooled vehicles and so avoid the need for members to take investment decisions."
Matthew Arends concluded:
"CDC plans have held the promise of providing the combination of certainty of cost for the employer along with straightforward access to a retirement income for members. That promise can now become a reality. We envisage that many employers will take the opportunity to use CDC as a core part of retirement savings to provide an income – in addition to fully flexible DC cash savings."
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