Aon has produced a survey of Aegon customers who are approaching the point they could choose pension over pot by buying into CDC, annuitizing or drawing down from their pot. The survey is interesting not so much for the results , which seem to be a lot of confused savers, but for the framing of the trade-offs.
I don’t know who was trying to prove what to whom, but this survey was published on an Aon website , with Aegon’s logo but no Aegon contact; but from its findings, Aegon’s technical expert could draw the following conclusion
“With the CDC concept appealing to almost half of those currently attracted to annuities and to almost one in five currently favouring income drawdown, this is certainly worth the DWP exploring further. However, we envisage it as an option for the individual to select, not as any form of default retirement product.”
Insurers want to undermine CDC. It is a low margin product that eats into high margin products such as the annuity and the drawdown SIPP. The plan is anything but transparent but it’s there alright.
Start by ambushing a selected group of an insurer’s customers, ask them questions that lead to a half-hearted endorsement and then conclude that a CDC should be another unused investment pathway, if someone else has the balls to set such an arrangement up.
Just what Aon’s role in this is , I am not sure. Were Aon paid, are they advising Aegon and what prompted them to come out with this bogus research? Here’s what their conclusion.
Consequently, decumulation-only CDC could be an attractive third option for DC savers, providing a distinctive alternative to annuities and income drawdown and addressing the underserved needs of a group of savers.
Aon, unlike Aegon, have championed the third-way of CDC but this looks anything but the endorsement that Kevin Wesbroom gave the concept. CDC has been consigned to the “poor man’s pathway” rather than the default spending strategy for the non-advised.
Let’s remember that in June, Standard Life’s Claire Altman made it absolutely clear that CDC could only achieve scale if offered as a default.
So let’s look at the framing of the trade offs between the choice of annuity or CDC, Here is Aon’s promotional gloss.
“The aim when devising the research methodology was to make the decisions about the available decumulation options as realistic as possible. We wanted to emulate the thought process that people go through when considering different trade-offs and features. People chose CDC for its potential to deliver higher average outcomes in retirement than annuity purchase, while also providing what drawdown can’t – the certainty of an income for life.”
There is a fantasy at play here, a fantasy that Aon know why people might “choose” CDC. People do not choose CDC, nobody has been offered a CDC pension in the UK. So the choice is entirely speculative as is the way that CDC is presented. In short , the trade-offs are bogus and the results deceptive.
For a bigger print version, go to the report itself
All this tells me is how hard it is for people to make a choice between two very similar financial products. What you can’t work out from the table is whether the annuity offers the same indexation as the CDC and there is nothing to help those making this choice understand the risk of a CDC going down. Faced with such a choice , I think I’d cash out.
Things are no easier with a choice between a CDC and a drawdown.
Whereas there is an income advantage between the annuity and CDC, the framing makes no difference between the drawdown and CDC income level and requires choice purely on the longevity insurance v your money can run out or be inherited conundrum. Faced with such a choice, I’d be tempted to cash out. We have been told that the CDC income is inflation protected, there’s no indication whether the initial drawdown income has been set to increase at a comparable rate. These are impossible choices.
Somehow, people seemed to have played “fantasy pathway” and a relatively low number say they would be interested in CDC. To call this kind of thing “evidence-based” is to confuse fact with fiction; this is pensions fiction.
CDC was never designed to be an investment pathway. It stared life as a whole of life pension and – thanks to arguments between lawyers, has still to see the light of day.
What people don’t want is an impossible choice. By adding CDC to the list of impossible choices, Aegon and Aon have marked CDC out of the game.
And Aon and Aegon have just made DC even harder. This may be what Aon and Aegon had in mind but it does no one any good to publish such half-baked choices , let along such conclusions
If Aegon and Aon were trying to discredit CDC they were going the right way about it. They are reinforcing all the prejudices against the product and leaving Government with an idea that maybe CDC wasn’t such a good idea after all.
Happily, this particular blogger is not on holiday and is not going to let this flimsy bit of research find its way into “evidence”. If we want to test people’s reactions to CDC, let’s get some CDC options priced to take into account the rate uplift created by the longevity pooling. let’s look at investment solutions available to a CDC fund and compare to them to what is actually available to someone in drawdown (by way of the drawdown pathway). Let’s look at drawdown pathway costings too. Most importantly, let’s make sure that the indexation on the drawdown matches that of the CDC and the annuity (something that is far from clear).
When we’ve got some proper pricing in place, then let’s do some user testing, And let’s be clear, trustees and other fiduciaries should not be choosing their at retirement choice architecture on such a spurious survey – still less our legislators and regulators.