Earlier this week Willis Towers Watson explained how an individual’s buying power from a CDC scheme could be 70% higher than from a conventional DC scheme. Hot on its heels, Aon analysis shows UK CDC schemes would have weathered 2020’s market activity, surfing the pandemic’s waves to provide its members with much needed certainty in troubled times.
As with the WTW report, Aon are hanging this coat on a legislative peg
“CDC is now firmly back on the agenda, with the Pension Schemes Bill expected to continue its passage through the House of Commons this week, and Royal Assent of the Bill expected in late 2020″. – Matthew Arendts.
In case anyone considers this “fake news”, these two consultancies (who are planning to merge in 2021) are – together with Mercer- the dominant institutional pension advisers globally. In the power play for strategic pension advice to Britain’s corporates, Aon and WTW are a microsoft or an apple.
This joint endorsement of CDC represents a full on challenge to the culture of pension lockdown, could we have reached or even passed the nadir of de-risking?
You can read Aon’s detailed research in ‘Collective DC in adverse markets’. The new analysis shows how a UK Collective Defined Contribution (CDC) scheme would have weathered market disruption in 2020 – and would not have needed to cut members’ benefits.
Aon has explored how a typical CDC scheme design would have fared during 2020’s turbulent markets. It has also looked at how a CDC scheme’s performance would have compared with typical defined benefit (DB) and defined contribution (DC) scheme designs – and then assessed what this might have meant for member outcomes.
Whereas the WTW paper looked at the efficiencies created by the collective structure , Aon concentrates on the flexibility of the CDC approach which creates a capacity to surf across waves that would swamp less agile craft
“The nature of a CDC scheme means that members’ target pension increases can be adjusted to reflect positive and negative experience over a period of years. This means that the impact of market movements – in either direction – are shared between members and then smoothed over time” – Chintan Ghandi
What this means for people such as postal workers
In response to the 25% asset falls we saw at the end of this year’s first quarter, Aon expects members of a typical CDC scheme, targeting say 3% p.a. pension increases at the start of the year, would have been able to expect a 2% increase both in the coming year and in future years.
This represents lower increases to their benefits than they might previously had expected, but crucially, the one-off market shock would not have resulted in a cut to their benefits.
Aon also considered how a well-designed CDC scheme, targeting inflationary increases to members’ benefits, might have performed more generally. To do this, they back-tested the impact of past market performance (between 1930 and 31 March 2020) on the benefit adjustment outcomes for members of a hypothetical CDC scheme.
Its analysis revealed that a well-designed CDC scheme might have seen just one cut in benefits – during the Great Depression of the 1930s. What’s more, even after the market shock following the outbreak of the novel coronavirus (COVID-19), Aon’s hypothetical scheme could have expected to deliver a modest, positive increase to members’ benefits in 2021.
Will CDC be adopted by more than the Royal Mail?
Aon claim that the ability of a CDC scheme to adjust target levels of pension increases operates as an efficient way of adjusting members’ benefits to reflect positive and negative experience over time. It expects a number of employers will look to the attractive features of CDC for building a more resilient future, for both member and employer outcomes.
Sitting alongside the existing DB and DC options, CDC adds to the range of design choices for employers, and this will provide for a stronger pensions landscape for UK pension savers.
Many commentators, including me, see potential growth in CDC from UK master trusts looking to provide members not with investment pathways but with a default way of getting their pots paid to them as a wage for life.
Both Willis Towers Watson and Aon run substantial DC master trusts. Will they take the opportunities in the Pension Schemes Bill for master trusts to switch in full or in part to CDC?
Will these consultancies put their client’s money where their mouth is?
Aon’s ‘Collective DC in adverse markets’ is available at https://www.aon.com/getmedia/7e8cec1d-c215-4ce3-a77c-03f9b1fadef1/Aon-Collective-DC-in-adverse-markets.aspx