CDC schemes offer an alternative to traditional DB and DC schemes. The risk sharing nature of CDC, and the greater investment freedom this generates, creates the potential for significantly higher pensions at retirement.
LCP analysed 2,500 different simulations looking at a 43-year-old beginning a 25-year career and assuming a 12% annual contribution. The charts show the expected retirement pension as a proportion of the final salary for a typical CDC scheme and a traditional DC arrangement.
The projections shown illustrate a median CDC outcome of 41% of the final salary for a 43-year-old joiner (retiring at age 68 after a 25-year career and receiving a single life pension). This compares to a 27% median outcome for a DC saver.
Like at present for DC, there are a range of potential member outcomes driven by investment performance. However, a key finding is that the ability to invest collectively means that the best CDC outcomes will likely be significantly better than for DC savers. Even in tough economic times, CDC outperforms DC in the vast majority of circumstances.
CDC has enjoyed significant cross-party support, and LCP expects to see new regulations allowing multi-employer schemes to emerge early in this parliament.
Once these new regulations are in place, multi-employer CDC schemes could come to market from 2026.
They also expect that there may be a ‘decumulation only’ CDC model in the next few years which would allow individuals who have built up DC pots during their lives to buy a CDC pension at retirement. LCP are urging trustees and sponsors to consider the part these schemes should play in their future provision.
In addition to improved pensions for the next generation of savers, LCP believe CDC schemes can also contribute to economic growth. In particular, due to their exceptionally long investment time horizons CDC schemes are very well placed to contribute to a wider increase in growth investments by pension schemes.
Helen Draper, Partner at LCP, commented: “With DWP figures highlighting that 2 out of every 5 of working-age people in the UK are currently undersaving for their pension, the new CDC approach could be game-changing for many people.
“The CDC model has lots of positives for individuals. It targets far higher benefits than DC alternatives, avoids the need for members to make difficult investment decisions and has the potential to significantly increase intergenerational fairness. For employers, there is more certainty on the costs to the scheme, support from employee representative groups and more freedom when it comes to choosing contribution rates.
“We have been talking about these schemes for a while, but recent developments mean now is the time for sponsors and trustees to get to grips with this new approach and embrace the many opportunities and benefits they can provide.”
Steven Taylor, Partner at LCP and Head of CDC, commented: “We believe CDC schemes have the potential to significantly improve retirement outcomes for the next generation of savers. CDC can achieve this without recreating the employer cost concerns that have hampered DB schemes, and so we believe it will be attractive to employers and employees alike.
“In the early years, CDC schemes will be massively cashflow positive and will have heavily growth-focused investment strategies. This makes them an attractive focus for the new government to help pensions investments into growth assets.”
|
