United Kingdom

New Aon analysis shows UK CDC schemes would have weathered 2020’s market activity

LONDON, 07 October 2020 – Aon plc (NYSE: AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions, has published ‘Collective DC in adverse markets’, new analysis that shows how a UK Collective Defined Contribution (CDC) scheme would have weathered market disruption in 2020 - and would not have needed to cut members’ benefits.

Matthew Arends, Aon’s Head of UK Retirement Policy, said:
“CDC is now firmly back on the agenda, with the Pension Schemes Bill expected to continue its passage through the House of Commons this week, and Royal Assent of the Bill expected in late 2020.

“In ‘Collective DC in adverse markets’ we have explored how a typical CDC scheme design would have fared during 2020’s turbulent markets. We have also looked at how a CDC scheme’s performance would have compared with typical defined benefit (DB) and defined contribution (DC) scheme designs – and then assessed what this might have meant for member outcomes.”

Chintan Gandhi, Aon’s Head of CDC, said:
“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.

“For example, in response to the 25% asset falls we saw at the end of this year’s first quarter, we expect members of a typical CDC scheme, targeting say 3% p.a. pension increases at the start of the year, would have been able to expect a 2% increase both in the coming year and in future years. This represents lower increases to their benefits than they might previously had expected, but crucially, the one-off market shock would not have resulted in a cut to their benefits.”

Chintan 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.

“Our analysis revealed that a well-designed CDC scheme might have seen just one cut in benefits - during the Great Depression of the 1930s. Moreover, even after the market shock following the outbreak of the novel coronavirus (COVID-19), our hypothetical scheme is expected to deliver a modest, positive increase to members’ benefits in 2021.”

Matthew Arends continued:
“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.

“Sitting alongside the existing DB and DC options, CDC adds to the range of design choices for employers, and this will provide for a stronger pensions landscape for UK pension savers.”

‘Collective DC in adverse markets’ is available here.

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Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

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