CDC outcome must look beyond the headline uplift

The potential for an income uplift with CDC (collective defined contribution) pension schemes and the opportunity to improve adequacy is only one element of the CDC comparison, says Hymans Robertson, as the firm releases its latest paper How much?! Looking beyond headline CDC uplifts. It argues that seeing the potential value of CDC as a single uplift figure risks oversimplifying a much more nuanced conversation about what a good retirement outcome can look like. Other factors such as income volatility, flexibility and inheritance are important. The income uplift itself can also vary significantly depending on what CDC is compared against, which members are considered and which measures of outcomes are used. 

The leading pensions and financial services consultancy advocates for a broader assessment of CDC and the different outcomes it can deliver for members. Comparing CDC with other DC decumulation options such as annuities and drawdown is not a simple like-for-like comparison, and members, trustees and employers may reach different conclusions depending on their objectives and priorities.

Commenting on the potential variance in CDC outcomes, Lauren Branney, Head of CDC, Hymans Robertson says:

“A potential 30% uplift from CDC has huge appeal, but it is important that this figure isn’t considered in isolation. There isn’t one answer to how much better off a member could be under CDC. It depends on what you compare it against, the member you are looking at and, importantly, what you mean by a good outcome.

“At its simplest, our report found that if you focus on average outcomes, CDC can deliver a higher income, but if you focus on the worst 5% of outcomes, an annuity can look more attractive. The comparison between CDC and drawdown is even more complicated with considerations needed around flexibility, inheritance and risk, and different members will place different value on each of these. A single headline uplift can only tell part of the story.

“The question of how CDC fits into the broader retirement market must be explored. People are not saving enough for retirement throughout their careers, and often do not make optimal choices when it comes to their retirement options. CDC can improve adequacy and may be a good solution for members wanting an income for life. As such, we may see a number of providers using CDC as their default Guided Retirement solution. More generally, having a wider range of retirement options available to individuals should enable more members to choose solutions that meet their own needs.”

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