CDC schemes would have weathered 2020 volatility, Aon says

Research by Aon explored how a CDC scheme design would have performed during volatile markets conditions

UK collective defined contribution (CDC) schemes would have weathered 2020 market volatility and would not have needed to cut member benefits, Aon says.

Its research - Collective DC in adverse markets - explored how a typical CDC scheme design would have fared during 2020's turbulent markets.

It found that the recession triggered by the Covid-19 pandemic crisis is not expected to have resulted in members' benefits being cut, even if the scope to award future pension increases had been reduced.

Indeed, its modelling showed that cuts to benefits were only necessary in extreme conditions, such as significant recessions - adding a well-designed CDC scheme would have only seen one cut during the past 90 years, during the Great Depression of the 1930s.

Aon head of CDC Chintan Gandhi explained: 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.

Gandhi continued: We have also considered how a well-designed CDC scheme, targeting inflationary increases to members' benefits, might have performed more generally. To do this, we have 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.

Aon head of UK retirement policy Matthew Arends added: 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. We expect a number of employers will look to the attractive features of CDC for building a more resilient future, for both member and employer outcomes.