Regulators will face significant pressure to ensure a withdrawal structure that is effectively future-proofed if decumulation collective defined contribution (CDC) arrangements are to thrive.
That was the view of delegates at a Corporate Adviser round table this month at the House of Lords, in which delegates discussed whether the existence of a decumulation-only CDC arrangement would increase the likelihood of consultants selecting that provider.
Providers including Aon, Cushon and Standard Life have said that they are likely to offer a decumulation-only collective DC collective arrangement within the next five years.
CDC attraction?
George Currie, senior consultant at LCP said: “In terms of in terms of provider selection, at least at LCP, when we advise clients on which providers to select, decumulation is only one of a number of factors that we assess. I don’t think the presence of a CDC arrangement in and of itself would make us lean towards one provider or another.
“We would still assess them in the round on their investment strategy, their broader investment proposition, their administration services, their capabilities in terms of communication, in the accumulation and in the decumulation phase.”
It was agreed that not all CDCs are effectively the same with the Netherlands highlighted as an example of having a wide spectrum of CDC arrangements. Delegates also debated whether a CDC scheme would prove to be a good option for retirees.
Fidelity investment director James Monk said: “We just don’t know enough about how it works in practice at the present. The conceptual idea is really strong, so as long as it can be put in place effectively, communicated well, run well forever and not have regulatory framework and bonus rates that change drastically over the next 20 years. There’s going to be a real pressure on regulators to make sure it’s got a good future-proof withdrawal.”
Simon Redfern DC consultant at First Actuarial highlighted that participating in a CDC arrangement involves pooling risks and sacrificing potential individual inheritance for protection against longevity risk, despite scepticism about its viability compared to annuities.
Competitor product
He said: “A member needs to understand they are pooling risk with a whole bunch of other members. They are giving up the potential inheritance of an individual pot but also protecting themselves against longevity risk, against that running out of cash. It absolutely is a set-and-forget. You can see conceptually it makes a lot of sense. But we have got a long way to go before we get anywhere near an actual product coming into the wider market and I think there’s an awful lot of scepticism out there.
“Is the Association of British Insurers (ABI) going to sit back and let this happen? because effectively it’s an annuity without all the protections and you’re going to get more out of it than an annuity because you haven’t got to put all of those protections in place.”
Delegates had concerns about individuals’ understanding of the inheritance implications when entering retirement in CDC, highlighting the extent to which people have welcomed freedom and choice, with participants noting that the topic often arises when people explore retirement options online.
Marie Blood, DC consultant at Barnett Waddingham noted the way some members shared similar objections to annuities, emphasising the reluctance of many to see money “die” with them. Delegates agreed that this sentiment is also echoed by those who had transferred out of defined benefit plans, emphasising the importance of addressing these considerations in retirement planning discussions.
The post DC pensions into retirement roundtable: Collective challenge appeared first on Corporate Adviser.
