The Association of British Insurers (ABI) has warned that government predictions for collective defined contribution (CDC) pensions provide an inaccurate picture of potential returns due to the diversity across members and the financial conditions they experience.
The Government said that it anticipates that people withdrawing money from a CDC pension, which combines member and/or employer contributions into a pool from which benefits are drawn, would receive a 22 per cent higher payout compared to alternative retirement options.
But the ABI argues that the prediction is based on assumptions that do not take into account recent increases in inflation and interest rates, legislative changes affecting CDC, and revisions to pension freedoms.
According to research the ABI commissioned from Milliman and Barnett Waddingham, alternative choices might perform as well as CDCs or perhaps better. It finds that the final result for a member depends on several variables, including investment performance, personal longevity, and the particular financial products selected.
The study found that most options for managing retirement savings are similar unless someone lives into their 90s, in which case CDC works better. According to the research, the rate of return for the member is much lower in CDC and individual DC with annuitisation than in individual DC and drawdown. This is because in CDC and individual DC annuitisation, benefits are lost after the member’s death, whereas in the drawdown scenario the remaining savings are passed on.
The analysis emphasises how impossible it is to quantify the potential advantages of CDCs for savers in terms of a single number. This is because there are so many variables and unknowable elements at work – life expectancy is unpredictable as are investment results.
The research acknowledges the complexity introduced by elements such as investment strategies, member lifespans, product offers and assessment measures and takes into consideration both mature CDC schemes and new ones in the buildup stage.
In addition, savers might not be aware of or understand how a CDC scheme could cause their income to fluctuate, which is another risk that needs to be factored in. Furthermore, according to the ABI, it’s still not obvious how they fit into the framework for managing and gaining access to pensions.
The ABI suggest that pension plans must be required to give their members a variety of options to generate a sustainable income as part of the DWP’s decumulation strategy.
ABI director of policy, long-term savings Yvonne Braun says: “We strongly support the Government’s objective of ensuring that people achieve good financial outcomes in retirement. However, the Government’s projections for the returns savers would get from CDC pensions are based on an incomplete picture.
“CDC schemes will not necessarily provide a better outcome compared to traditional defined contribution pensions. There are many ways to deliver both security and flexibility, and no single product – whether drawdown, annuities, a combination of them both, or CDCs – will work or be appropriate for everyone.
“Rather than solely focusing on starting a CDC-in-decumulation market, the Government needs to ensure that schemes offer a range of options to enable people to achieve a sustainable income in retirement.”
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