Hymans Robertson

I have argued for a long time that CDC schemes will provide more to savers than an annuity or individual drawdown.

WTW has told us they expect members to get 60% more and now Hymans say the same. Members prepared to sacrifice absolute security and the freedom to take their retirement savings (pension freedom) will find CDC the next best thing to a guaranteed pension (DB or State Pension). But while a “defined benefit (DB)” is great, you don’t get a chance to be in a DB scheme let alone swap your DC pot unless you are a public servant (where both accrual and DC transfer facility is a right of employment).

The private market will not return to DB, employers who provided staff with a DB pension wish they hadn’t and those who didn’t, are pleased to have escaped the DB end-game. The question is burned on my mind.

“Why should employers return to a type of pension provision that could go as wrong as DB did?”

That question was asked me by my boss when I was a consultant and back then (2018), there was nothing wrong with workplace pensions, we were still in the flush of pension freedoms, auto-enrolment had been a success and while we were in austerity, pensions were deep underwater in terms of funding. Pensions were bust and even the trade body had renamed itself “lifetime saving”, the LS in PLSA.

But things are different today. Hymans Robertson has changed its mind.

Except for some “freaks” at WTW, Aon and First Actuarial, nobody was serious about CDC and most people thought Royal Mail were only adopting CDC to keep away a pension strike, (all orchestrated by Union CWU’s Terry Pullinger).

Now Hymans Robertson has published a paper that makes a compelling argument for employers to switch to CDC on business grounds. This is the big story of this paper and it is the first to address my big question for CDC – “will employer’s want to switch to it?”

They went out and talked to their employer clients

91% of respondents said they are likely to consider CDC or similar schemes for their business, up from 81% in 2024.

Hymans modelling indicates that an employer with 10,000 employees and a contribution structure of 5% / 7% could increase members’ pensions by approximately 13% per year.

At the same time, pension costs could decrease by £3.5 million annually by transitioning from DC to CDC and adjusting their contribution structure

This little snippet of a big report contains the new idea that may be the answer to the question “why should employers return to pensions?“. If you give your staff a better pension on lower contributions and you are accepted for doing the right thing by the DWP, TPR, unions and most importantly your members, then CDC may look a better bet – so long as everyone recognises CDC will pay more from pound in as extra work pay to pound out as deferred after work pay. If people see CDC as better value than DC, if it meets the needs of workplace to pay a retirement income that lasts as long as you do, then why not switch to CDC?

Hyman’s report – a statement of where they have got to in that transformation from the dark days of the last decade. A better way of rewarding savers for saving for retirement income.

and it comes in three varieties..

The two new varieties need cost employers nothing to adopt CDC. Do so with a master trust which pays CDC pensions and you can continue to accumulate using DC with no disruption and no risk of change. Move to whole of life CDC and either put up the pension you pay to your staff (under CDC) at no cost or even reduce the payments you make to those at work without reducing their retirement pay (see above).

How is it done – by adopting the same design features whatever type of CDC suits the employer.

Of course there are member trade offs but are these things that people value? Do most people want to control their investment? Do they want the flexibility to take capital rather than income? Do they want to pass on capital on death?

If the argument that the money going in is paying so much more when coming out on a Value For Money basis, how can anyone not want to switch from DC to CDC and why can’t employers try to talk down the contribution rate?

The thesis that employers will buy into CDC is based on the analysis of member outcomes/

Perhaps the most interesting section of the analysis of the three opportunities is decumulation. It is not an overly enthusiastic assessment of the option

The worry that Hymans have is that this kind of CDC will, in their opinion, win or fail on the performance of the fund and the fund’s capacity to deliver enough to offer better alternatives to default decumulation (including presumably the annuity alternative).

I have seen concern about actuaries about CDC for decumulation, the worry is that there is not enough capacity to spread risk over the whole life and both those in payment and those building up right to pensions. The “other considerations” section, suggests to me that Hymans are not fully supportive of CDC for decumulation.

This shows in their modelling where whole of life gives both more income in normal circumstances and more in the worse 10% of scenarios. Only annuity is better in bad times, CDC is better than DC in both normal and bad times

This is the key chart in the paper showing even though Hymans prefer a whole of life CDC, they prefer any form of CDC to “Set and Maintain Draw-Down” (DD).

The great worry among the pension chatterers is “income protection”, this chart (thanks Darren Baillie) shows how annuities are the option for those who want certainties (though many public sector workers can  transfer DC pots to DB). But both predominate CDC options (discounting the Royal Mail model) show up pretty well relative to DC.

Of course to get all the detail, you need to read the paper and that means getting past the first couple of pages, so here it is your download of the report – see what you think when you’ve been through it or read it here.

The majority of the final section relates to investment and an expansion of the member research.