Collective Defined Contribution Schemes
The Pension Schemes Act introduced an alternative pension scheme design to both Defined Benefit and Defined Contribution, known as Collective Money Purchase, and often referred to as Collective Defined Contribution ("CDC"). These are risk sharing (or target pension) plans widely used in several other countries including Canada and Holland, and are now permitted in the UK.
Aon has conducted significant research into the CDC design which demonstrates that CDC plans can offer advantages of cost certainty to employers and better member outcomes than DC in terms of higher average pension incomes. In addition to this, CDC plans can provide members with a much better idea of their income in the run up to retirement than today's typical DC plan.
Details of our research are available in our White Paper 'The Case for Collective DC' which is available for download. We are interested in hearing your thoughts on how pension provision should evolve in the UK. We would also relish the opportunity to talk to you about our work in the CDC arena, get your input into the subject and continue to evolve our CDC template design. In addition our latest piece of thought leadership ‘Collective DC in Adverse Markets’ provides an updated briefing on how typical scheme design would have fared during 220, which has been a year of exceptional asset price volatility.
If you would like to discuss any of the Government's proposals further, or speak to us on our latest research and briefings, please speak to your usual consultant or one of the CDC team:
We have also recorded this recent short video on the topic of CDC in which Matthew Arends, Head of UK Retirement Policy, explains further the benefits of a CDC scheme and what the future for CDC holds.
Please click here to download your copy of Aon's whitepaper outlining the case for Collective DC plans.
Collective DC – The Power of Pooling.
Our The Power of Pooling research covers how CDC as a decumulation option looks set to transform the pensions industry.
A retiree at 65 can, on average, expect to live to an age of 86. However they face a 50% chance of their actual lifespan lying somewhere between age 80 and age 93. Regardless of the size of their pension pot at retirement, this means they have a very material challenge to decide how to budget for this uncertainty, as they try to balance the pace at which they their retirement savings against how long they might live.
This is where CDC can help, as it can provide what the majority of pension savers want in retirement: a target, inflation-linked income, which is payable for life and does not require them to make complex financial and investment decisions.
Our research shows what retirement outcomes might look like from a CDC decumulation solution, compared with annuity purchase and, in particular, income drawdown. We conclude that CDC provides, on average, higher outcomes in retirement than annuity purchase, while also providing the certainty of an income for life that drawdown cannot.
We also note that we may see demand for CDC to become a default decumulation option – which does not currently exist at an industry level in DC, yet the value of a decumulation default is widely recognised in a culture where pension savers have not been required to make any decisions during the build-up (or accumulation) of their pension.
Please click here to download your copy of Aon’s research – The Power of Pooling: CDC as a Decumulation Solution
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.
Our analysis shows that 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. In particular, we find that UK CDC schemes would have weathered the market disruption of 2020, and would not have needed to cut members’ benefits.
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, more resilient, pensions landscape for UK pension savers.
Please click here to download your copy of Aon’s briefing – Collective DC in adverse markets.
CDC Quiz - 'Is CDC right for my scheme?'
Our CDC-simplified quiz is a quick and simple way of navigating the Collective Defined Contribution (CDC) options that will emerge in the UK. We have designed this quiz for those currently running schemes – whether defined benefit (DB) or defined contribution (DC) – to see if a CDC pension scheme could be right for them. Based on the answers to each of the questions, you can also establish which ‘flavour’ of CDC might be suitable for your circumstances.
Some flavours of CDC are likely to be more appropriate for different industries, organisations and schemes – whether they currently offer just DB, just DC, or, as with many, a combination of both. The way you answer our quiz gives a steer towards the flavour of CDC that could help address your specific needs over time.
Now that CDC schemes are a real option, we are seeing an increasing number of industries, organisations and pension schemes looking to gain a greater understanding of this innovative approach. There is a growing awareness that CDC provides pension savers with access to an income for life in retirement, and from fixed-cost DC savings – all without having to make complex financial and investment decisions.
Please click here to take the quiz.
CDC Explanatory Guide
Our explanatory guide – “CDC: The Dawn of a New (Pensions) Era” is a short, accessible guide, explaining what a CDC scheme is and the value CDC brings to employers and pension savers alike. We also look at how CDC looks set to evolve in the UK, and (in conjunction with our Quiz) help those running pension schemes to quickly assess whether a CDC scheme could be right for their circumstances.
Please click here to download your copy of Aon’s explanatory guide – CDC: The Dawn of a New (Pensions) Era.
Collective DC - Mythbusters
When legislation to permit the operation of Collective Defined Contribution plans (CDC plans, also referred to as Target Pension plans) was implemented, there was a positive deluge of articles criticizing these plans - before they have even started!
This article sets out a compilation of the most common accusations against CDC plans - and sets out the truth of the matter. CDC plans offer the potential for better, more reliable pensions outcomes for many UK employees - for the sake of these employees, we will continue to argue in favour of CDC plans.
Click here to view the Top Ten Mythbusters
Stability and Fairness: our second whitepaper on collective DC
We are delighted to present our second paper analysing the potential for Collective Defined Contribution ("CDC") benefit plans to offer better member outcomes for retirement savings in the UK. Our first paper above analysed the basic feasibility of potential CDC plans running in a steady state, that is, with a steady population of members. In this paper, we expand significantly on that analysis to ask whether it is possible to design a CDC pension plan that can be grown from zero assets, survive membership shocks in the context of a bulk transfer into the plan, and close back down to zero assets. This is akin to the key questions to ask when buying something like a car: "Does it start, go and stop?
Please click here to download your copy of Aon's second whitepaper on Collective DC.
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