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:
“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.”
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.
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