Greater flexibility in retirement CDC could improve member outcomes

Increased flexibility should be built into Retirement Collective Defined Contribution (R-CDC) pension designs to improve retirement outcomes for members, claims Hymans Robertson. It argues that while CDC can meet the complex demands of members by improving pension outcomes and providing security, the broader pensions system falls short of providing the flexibility needed to make changes, particularly in the early years of retirement. The leading pensions and financial services consultancy is calling for current tax restrictions to be eased as they risk limiting the effectiveness of CDC for UK savers. It’s urging policymakers to allow more flexible approaches to retirement CDC, including carefully designed transfer options, to ensure better retirement outcomes.  

Commenting on the issues facing the industry in designing pensions that provide members with security, long-term income and flexibility, Paul Waters, Head of DC Markets, Hymans Robertson, says:

“There’s a broad challenge facing the pensions industry as it balances competing member priorities. Individuals are not one-dimensional and while they value security, they also want flexibility and control. At the same time they are looking for the highest possible retirement income. Meeting all these demands involves trade-offs that the industry is grappling with as it designs retirement propositions.  
 
“Automatically moving members into a retirement income product that protects against running out of money would be particularly successful at improving member outcomes at scale. This is already recognised and is the premise behind Guided Retirement’s inclusion in the Pension Schemes Act. Defaults can also play a part by building in an element of security with longevity protection to prevent people from running out of money. It’s helpful, however, that products allow for flexibility if the customer wants to do something else, especially in the early years of retirement.  
 
“Pension schemes and providers are trying to design options that meet all these requirements: default products that solve the challenge of the trade-off. The early flex-and-fix type of DC designs that have been developed have sought to address this tension but often involve complexity or compromise. Retirement CDC has the potential to be a major step forward in providing a solution. It can provide a secure income for life and help address the very real risk of individuals running out of money, it just doesn’t score highly on flexibility. 

Commenting on the changes that are needed in regulation to allow greater flexibility for CDC, Paul continues:

“With the right design and appropriate safeguards, it should be possible to introduce greater flexibility into CDC without undermining the benefits of risk sharing. But policy change would be needed to enable this. The tax position needs to be looked at to enable someone receiving a CDC scheme pension to transfer to an income drawdown policy.  There are also logistical barriers when designing solutions that move customers from income drawdown to R-CDC under flex-and-fix designs which could be removed. And Financial Advisors will need clarity on their requirements when evaluating these types of decisions for their clients. From an actuarial scheme design point it can be managed, for example, some form of underwriting and the actuary setting terms that protect the risk sharing of the scheme from unhealthy members transferring out.” 

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