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‘Collective Defined Contribution pensions would on average be 70% higher than traditional DC and 40% higher than typical DB,’ Willis Towers Watson

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October 5, 2020

Newly published CDC Guide compares expected CDC incomes and suitability to existing DC and DB employer arrangements

LONDON, 5 October 2020 – Willis Towers Watson has today published a new Guide to Collective Defined Contribution (CDC) pensions. The guide explains CDC, with reference to Willis Towers Watson’s work with Royal Mail on the UK’s first CDC scheme, and wider work on the development of CDC.

Simon Eagle, Senior Director and Head of UK CDC 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. To help the industry get to grips with this innovation we have published a guide to answer the 15 most commonly-asked questions.”

The Guide also summarises the results of new CDC analysis from Willis Towers Watson including:

  • For a given level of contributions, typical CDC pensions would be expected to average 70% higher than either individual DC insured annuities, or 40% higher than pensions provided on average in DB schemes. This boost arises from differences in investment strategy between the scheme designs.
  • Until CDC master trusts become available, employers will need to set up their own CDC scheme. For a scheme to be well-governed and operate largely within the expenses charge cap, employers would typically need relatively large workforces of over 5,000.

CDC is on track to become an option from next year, and so it is now a more distinct consideration for employers.”

Simon Eagle | Senior Director and Head of UK CDC

Eagle said “One of the most compelling features of 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.

“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.”

Notes to editors

Many organisations have in recent years compared expected CDC pension levels with IDC annuities, based on a variety of methods and assumed CDC designs. The 70% CDC pension ‘boost’ vs IDC annuity statistic 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. 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. The calculations also include a comparison of CDC with DB pension levels, which show a 40% increase in equivalent outcomes.
Download Willis Towers Watson’s guide to Collective Defined Contribution pensions, here.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas – the dynamic formula that drives business performance. Together, we unlock potential.

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