Collective defined contribution (CDC) should be approached innovatively and include different options, from whole of life CDC through to decumulation-only market-based CDC, Hymans Robertson has urged.
In its most recent paper – DC: Developing a framework for the next government – the firm also warns that innovation of the scale needed for the success of CDC will take time, effort and ingenuity.
The paper sets out developments that should be adopted following the UK’s general election, as Hymans Robertson believes that whichever party forms the next government will be supportive of CDC.
The report highlights four areas that any future government hoping to encourage development should adopt.
First, it calls for ensuring intergenerational fairness, which includes build-in design features and governance that minimise the risk of unwarranted member/employer cross subsidies and intergenerational value transfer, and allow for an exit strategy that is fair for all.
It also calls for creating benefits through scale, which involves arranging the start-up phase so that benefits of scale flow quickly to early joiners, as well as the need to attract employers and providers to support and adopt CDC through initiatives that demonstrate advantages of CDC.
Hymans Robertson also calls on the government to harness inertia to create good outcomes for the majority, not great outcomes for a few. This includes prioritising inertia and defaults which have transformed DC saving, with engagement and communication as an underpin.
Lastly, the government is urged to lay down regulation that provides certainty but allows for vital innovation.
Paul Waters, head of DC markets at Hymans Robertson, pointed out that the government is giving a lot of encouragement to CDC and there’s “clearly a need” to help savers boost their retirement income.
He said that CDC is an opportunity to deliver better pensions and it could help millions of savers reduce the burden of decision-making on members, share risk equitably between members and employers, and re-establish the social contract between generations.
Waters added that the opportunity to pool longevity risk through the CDC solves one of the biggest challenges facing DC savers and it will allow members to “spend a set pot of money effectively over a time horizon that could easily be three years or 30 years”.
He said: “It offers the potential to sweat the same amount being saved and deliver higher pensions which is an attractive prize.”
However, Waters warned that for CDC to thrive and be inclusive for the benefit of members and employers “it needs scale and diversity which innovation can provide”. He added that offering a variety of approaches would enable the power of market forces and lead to both choice and good value for money for members.
“Developing CDC as just a single plan design risks it not being adopted by the majority of schemes and could easily lead to confusion and poor outcomes for savers, by fitting a round peg into a square hole,” Waters noted.
He added that the first CDC plan being launched now “should be celebrated” but moving forward from this to developing it further “it can, and should, take different forms”.
“UK pension schemes and their members are not homogenous,” Waters said.
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