One of the difficult for collective pensions at the moment is that they are being talked about by people in the latter years of their careers. No so Lauren Branney of Hymans Robertson. I enjoy her thinking and her writing which are easily accessible via her linked in and this blog
Lauren Branney- Head of CDC & Senior Actuarial Consultant at Hymans Robertson
Millions of people are not saving enough for retirement, so anything that could provide a higher pension for the same contributions is understandably attractive. It’s easy to see why policymakers and the pensions industry, while recognising some of the trade-offs relative to other products, are excited about the potential of CDC. The prospect of higher pensions from CDC can sound like free money – what’s not to like, but is that really the full picture? Read my thoughts below:
Trustees warned to look beyond ‘income uplift’ when assessing CDC options
A bar graph made of colored pencils shows fluctuations but a general uptrend
The consultancy firm said that it is important to look at potential increases to retirement income and the opportunity to improve retirement adequacy, against a range of other factors include flexibility, income volatility and inheritance.
In its latest report on the issue — ‘How much? Looking behind headline CDC uplift’ — Hymans Robertson argues for a broader assessment of these new schemes, rather than simple like-for-like comparisons. It adds that members, trustees and employers may reach different conclusions depending on their objectives and priorities.
“A potential 30 per cent uplift from CDC has huge appeal, but it is important that this figure isn’t considered in isolation.
“There isn’t one answer to how much better off a member could be under CDC. It depends on what you compare it against, the member you are looking at and, importantly, what you mean by a good outcome.
“At its simplest, our report found that if you focus on average outcomes, CDC can deliver a higher income, but if you focus on the worst 5 per cent of outcomes, an annuity can look more attractive. The comparison between CDC and drawdown is even more complicated with considerations needed around flexibility, inheritance and risk, and different members will place different value on each of these. A single headline uplift can only tell part of the story.“The question of how CDC fits into the broader retirement market must be explored. People are not saving enough for retirement throughout their careers, and often do not make optimal choices when it comes to their retirement options.
“CDC can improve adequacy and may be a good solution for members wanting an income for life. As such, we may see a number of providers using CDC as their default Guided Retirement solution. More generally, having a wider range of retirement options available to individuals should enable more members to choose solutions that meet their own needs.”
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There are very few actuarial consultancies who are not providing DC or hoping to proved CDC .
This makes the likes of Hymans Robertson, Gallagher (and First Actuarial) Howden and LCP a small group who are making noise about collective pensions independent of their success. There are other consultancies I have not mentioned who have yet to play their cards. The advisers will undoubtedly shape parts of the market but I suspect that this time around the unions will be more influential.
It is an extremely tricky job managing the obvious bifurcation of the market as an intermediary. How do you manage the situation client by client?
For once, I feel lucky that We have in Pensions Mutual a proposition which is clearly collective and will be selected by employers who take advice from advisers, unions and their staff.
Wishing you a speed6 recovery, old boy.