As part of the package of consultations and responses issued following the Chancellor’s Mansion House speech, the Government said it expects people taking money out of a CDC pension, which pools member and employer contributions, to get 22% more from their pension than other retirement options. Other research has modelled even bigger uplifts for CDC.
To test this prediction and better understand the reality of what CDC pension schemes can offer, we commissioned research from Milliman and Barnett Waddingham (MBW), which shows that the picture is more mixed than Government has indicated.
According to the research, other options can perform just as well – if not better – than CDCs. The outcome for the member depends on a range of factors, such as how investments perform, how long the individual lives and the products they choose.
While there could be a place for CDCs in the market, they’re not going to work for everyone. No one can predict how long an individual may live, or the returns someone might get on their investment. And it’s not realistic to put one number on just how much CDCs could deliver for savers when there are so many variables and unknowns.
In some scenarios, CDCs could perform better – for example, for those who live longer. However, individual defined contribution and income drawdown or annuities could result in better outcomes for others. That’s why DWP’s decumulation policy needs to include a duty for pension schemes to offer their members a range of options to achieve a sustainable income.
MBW’s research is the first study that compares CDC to different options that include combinations of annuity and drawdown. The Government’s projection is based on assumptions that predate pension freedom reforms, the legislative reform for CDC and the recent rise in inflation and interest rates.
Other risks also need to be addressed, including that savers may not be aware or understand that their income could fluctuate in a CDC scheme. And it remains unclear how they fit within the wider framework for how people can access and manage their pensions.
Yvonne Braun, Director of Policy, Long-Term Savings, ABI said: “We strongly support the Government’s objective of ensuring that people achieve good financial outcomes in retirement. However, the Government’s projections for the returns savers would get from CDC pensions are based on an incomplete picture.
“CDC schemes will not necessarily provide a better outcome compared to traditional defined contribution pensions. There are many ways to deliver both security and flexibility, and no single product – whether drawdown, annuities, a combination of them both, or CDCs – will work or be appropriate for everyone.
“Rather than solely focusing on starting a CDC-in-decumulation market, the Government needs to ensure that schemes offer a range of options to enable people to achieve a sustainable income in retirement.”
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