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.
The largest providers in the industry are currently coalescing around two broad new retirement solutions to meet these requirements – Flex & Fix (F&F), 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.
Using the key features noted above, and our views of appropriate investment strategies for each, we have undertaken modelling to compare possible member outcomes from the two approaches. Our more in depth report: A new era for UK DC retirement solutions sets out detailed results and explanation of the assumptions used in the modelling.
Before turning to the modelling results, it is helpful to be clear about how to interpret them. The differences between F&F and R-CDC are driven by underlying design choices. In particular, how long growth assets remain invested and how much ongoing decision‑making is required from members in retirement. The results below should therefore be read as illustrating the consequences of these design choices.
Our modelling shows that R-CDC generates a higher lifetime income in the vast majority of scenarios, due to the different investment strategies. Specifically:
The higher lifetime (and initial) R-CDC income is mainly due to the expected investment strategy. Return-seeking assets are able to be held for longer than in F&F, as there is no expectation of annuitising. Longevity pooling is also a contributor to higher incomes in R-CDC.
R-CDC is expected to deliver smoother retirement incomes than F&F. The main reason is that F&F can only smooth over the shorter period up to the annuity purchase (around age 80) rather than R-CDC's longer timeframe.
A secondary reason F&F income is more volatile comes from 'conversion risk' at the point of annuitisation; when the member's income is locked to whatever annuity rate is available at that time. A sudden shift in market conditions or longevity pricing can cause a sharp adjustment in income at annuity purchase. Some of this risk can be managed (through de-risking prior to the annuity purchase, or staggering annuity purchases over time). However this will not mitigate the risk fully and also reduces the allocation to growth assets, so would be expected to reduce the design's cumulative lifetime income.
These results highlight that the trustee choice between R-CDC and F&F as a default involves deciding what trustees want the default to do. R-CDC uses pooling and collective management to deliver a higher, stable income with limited need for future decisions; F&F retains flexibility but exposes members to continued investment, withdrawal and annuitisation choices. The modelling illustrates how these choices affect expected income levels and stability over time.
The different expected outcomes highlighted above are a direct consequence of underlying design choices, particularly the balance between simplicity, flexibility and the degree of ongoing engagement expected from members in retirement. There are a few different areas where these trade-offs emerge:
F&F will tend to deliver higher death benefits if the member dies in the early years of retirement. Any remaining pot generally passes to their beneficiaries as a lump sum – albeit upcoming inheritance tax changes reduce the appeal of drawdown as a planned route for bequest.
Under an R-CDC approach, the ability to leave an inheritance lump sum is more limited. However, R-CDC is likely to include spouse's pensions and/or guarantee periods as the mechanism for death benefit.
The Government's aim is to have enabling provisions for R-CDC schemes in place as close as possible to the point at which schemes begin to comply with Guided Retirement duties. This means R-CDC and F&F should both be viable options for DC schemes to choose when complying with Guided Retirement.
Choice of an appropriate default should reflect expected member demographics and behaviour. Schemes seeking simplicity and a paternalistic default for members may find R-CDC well aligned to the spirit of Guided Retirement, as it is designed for members who do not wish to make active decisions. For members who wish to engage more, seeking control and flexibility, F&F may be a good self-select option.
Guided Retirement places a greater emphasis on the outcomes delivered by retirement solutions, particularly for members who do not wish to make ongoing financial decisions in later life. Both F&F and R-CDC offer credible ways to meet this objective, but they do so through different design principles and with different implications for member experience.
For trustees, the choice is therefore less about selecting the 'best' solution, and more about deciding how much complexity should sit with members versus the scheme. In practice, the effectiveness of a default may be judged on how well it performs if and when members disengage.
Shriti is a Scheme Actuary and senior pensions consultant at WTW, advising trustees and sponsors of pensions schemes on funding, risk management and endgame strategies. She is a recognised voice in CDC and DC decumulation and is the Communications Lead for the Institute and Faculty of Actuaries’ CDC working party. Shriti leads on external content across WTW’s GB retirement business driving the production of thought leadership.
Keith is a Director based in the Edinburgh office, specialising in investment strategy, DC decumulation and CDC. He currently serves as Chair of the IFoA CDC Working Party and Chair of the Society of Pension Professionals’ CDC Committee.
