The whitepaper was based on a survey of 1,150 respondents conducted online in June and July 2022 within Aegon’s Feedback Community. Of those surveyed, 80 per cent were customers of Aegon and, compared to the general population, they included a higher proportion of males (62 per cent) and those over 55 years old (also 62 per cent).
Methodology
The survey methodology initially required participants to choose a preference between annuity and income drawdown for decumulation. Respondents were then split into two groups based on this preference and asked to make carefully constructed trade-offs between the features of CDC versus the features of their initial preference.
Throughout the research, the various features involved in each means of decumulation were described but labels such as ‘annuity’, ‘income drawdown’ or ‘CDC’ were not used. The trade-offs presented to each individual depended on their initial preference for either annuity or income drawdown. The aim of this ‘trade-offs’ methodology was to assess the appetite for different options after putting the participant into a realistic frame-of-mind about choosing their preferences and options for retirement.
Key findings of the survey include:
• 33 per cent of participants initially preferred the option with features of an annuity, compared to 67 per cent preferring income drawdown features, before viewing information about the relative features of a CDC pension.
• Those most likely to choose an annuity were of lower-than-average wealth and therefore with a higher degree of dependency on state pension - 42 per cent of whom preferred an annuity.
• Among those whose initial preference was the annuity option, after viewing the full trade-off series, 49 per cent then preferred the CDC pension, while 51 per cent still preferred an annuity.
• Among those whose initial preference was income drawdown, after viewing the full trade-off series, 79 per cent still preferred income drawdown while 21 per cent then preferred the CDC pension.
• Overall, CDC pensions were less likely to be chosen by those with higher-than-average levels of wealth.
• In the main, those who preferred annuities over CDC pensions explained their choice as being due to the lower risk provided by an annuity.
• Those who preferred income drawdown over CDC, mainly explained that this was due to the ability to “provide for a partner or enable my family to inherit my savings when I die”.
• 30 per cent of the overall sample ended, after the trade-offs, with a preference for a CDC pension.
Matthew Arends, partner and head of UK Retirement Policy at Aon, said: “Almost a third of respondents expressing a preference for a CDC pension in retirement represents a significant proportion of DC retirees. Although annuities have become cheaper since the survey was conducted, I think we can still expect a CDC pension to be relevant to many. Consequently, decumulation-only CDC could be an attractive third option for DC savers, providing a distinctive alternative to annuities and income drawdown and addressing the underserved needs of a group of savers.
“The aim when devising the research methodology was to make the decisions about the available decumulation options as realistic as possible. We wanted to emulate the thought process that people go through when considering different trade-offs and features. People chose CDC for its potential to deliver higher average outcomes in retirement than annuity purchase, while also providing what drawdown can’t – the certainty of an income for life.”
Steven Cameron, pensions director at Aegon, said: “There are many millions of members of DC schemes who face making future choices about retirement income. As automatic enrolment matures, more will have substantial pots at retirement and choosing well will be increasingly key to making the most of retirement. Our research findings support the Department for Work and Pensions’ (DWP) intention to advance a new ‘third choice’ of decumulation-only CDC arrangement.
“Annuities offer a guaranteed specified income for life, but in recent years have delivered an unattractively low income. Income drawdown offers maximum investment and income flexibility but risks the individual running out of money. The CDC pension we tested has less flexibility than drawdown but would pay a higher income than an annuity, albeit with the risk it may vary up and down depending on market and scheme performance. With the CDC concept appealing to almost half of those currently attracted to annuities and to almost one in five currently favouring income drawdown, this is certainly worth the DWP exploring further. However, we envisage it as an option for the individual to select, not as any form of default retirement product.”
‘Collective DC decumulation – is there demand?’, is available here.
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