New Guided Retirement requirements proposed in the Pension Schemes Bill mean trustees of defined contribution (DC) pension schemes will need to select a "default pension benefit solution" for their members at retirement. The chosen solution has to provide an individual with a regular income throughout retirement and will become the default choice for any member who doesn't actively choose another solution at retirement. This requirement is expected to come into force for master trust arrangements in 2027 and for single employer trusts in 2028.
The largest providers in the industry are currently coalescing around two broad new retirement solutions to meet these requirements – Flex & Fix, which encompasses a range of different solutions that combine drawdown and the purchase of an annuity in different ways, and a post-retirement only version of Collective Defined Contribution (typically referred to as Retirement CDC or R-CDC). Both aim to provide sustainable retirement income with longevity protection, so that members don't run out of money in retirement, but they achieve this in different ways.
We have used stochastic modelling to illustrate the range of potential outcomes for members under each of these solutions alongside the traditional approach of providing a regular income for life solely through an immediate annuity purchase. As there can be many flavours of Flex & Fix, we have modelled three different designs for comparison.
Our modelling shows that R-CDC is expected to provide higher incomes at retirement than both an immediate annuity (+25%) and a range of Flex & Fix variants (+15% or more). This is due to the efficient pooling of longevity risk from the point of retirement onwards and the ability to invest in growth assets for longer in an R-CDC arrangement.
Allowing for the expected lifestyling of investments in the run up to retirement typically associated with immediate annuity purchase, R-CDC provides even higher expected retirement incomes (+40%) for members currently building up pension savings in DC.
Due to the smoothing mechanism in R-CDC, the income is also expected to be more stable over time in R-CDC compared with Flex & Fix.
Please download the pdf below for more information on our findings, and details on our modelling approach and assumptions.
| Title | File Type | File Size |
|---|---|---|
| A new era for UK DC retirement solutions | 1.1 MB |
