CDC pensions expected to be 70% higher than DC

The boost to outcome is due to the differences in investment strategy, says Willis Towers Watson

Typical collective defined contribution (CDC) pensions would be expected to average 70% higher than either individual DC insured annuities, or 40% higher than pensions provided on average in defined benefit (DB) schemes, analysis from Willis Towers Watson claims.

In a guide to CDC pensions - published 5 October - the consultant said the boost to outcomes results from differences in investment strategy between the scheme designs.

It said the 70% CDC pension uplift when compared to traditional DC is higher than statistics from some other organisations in part because the new analysis is based on a new design of CDC for the UK, and in part because the analysis is forward-looking.

Willis Towers Watson said the projected pension levels are for a CDC plan opening now and use current annuity pricing, which is relatively expensive by historic standards, even over the past five years. It assumed the individual DC member invests in a typical default investment strategy, holding 100% growth assets up to age 57 and then uniformly de-risking to bonds (50% gilts / 50% credit) at retirement at age 67. It assumed median 30-year returns are gilts plus 0.6% per annum.

But it said there would also be a significant uplift when compared to traditional DB schemes, when using a best estimate asset returns of gilts plus 3.0% per annum pre-retirement and gilts plus 0.85% per annum post-retirement.

Senior director and head of UK CDC Simon Eagle said: One of the most compelling features of the CDC is that, because pension levels are gradually adjusted to deal with experience, the scheme can afford to target higher investment returns than in most other pensions vehicles without short-term fluctuations in pension cost for the employer or pension level for the members.

This means that, for a given amount of contributions, for each £10,000 payable from an insured annuity bought with a DC pot, or £12,000 payable from a DB scheme, the CDC scheme would pay £17,000. This helps provide employees with adequate pension levels, he said.

Despite this, the consultancy said, until CDC master trusts become available, employers will need to set up their own CDC scheme - something that would only be practical for businesses with workforces of over 5,000.

Eagle added: Initially, employers will only be able to access CDC if they provide it through their own trust. For CDC to become prevalent in the UK we would need further regulation from the government enabling CDC master trusts, so that an employer's scale is no longer a constraint.

In today's flexible world of work, industry master trusts could be an especially effective way of providing CDC pensions, as members could continue to accumulate retirement contributions in the same scheme when changing employer, he said.

The analysis comes as there has been an increase in interest in CDC, driven both by Royal Mail's work on the UK's first CDC scheme, and wider work on the development of CDC.

Eagle said: We've seen increased interest in CDC since the government tabled the Pension Schemes Bill at the start of the year. CDC is on track to become an option from next year, and so it is now a more distinct consideration for employers.