Aon said market turbulence would not have had an adverse impact on members’ benefits

A ‘well-designed’ collective defined contribution (CDC) scheme would have withstood recent market turmoil, according to Aon.

In an update to the firm’s Collective DC in adverse markets paper, originally published in October 2020, Aon said an efficient CDC scheme would have been able to resist the financial turbulence in the markets throughout 2021 and 2022, without having a negative impact on members’ benefits or their retirement outcomes.

Partner and head of CDC Chintan Gandhi said: “Based on the experience of 2022, a CDC scheme was expected to provide an increase of over 9% to members’ target pensions. That is not quite matching the prevailing rate of inflation, but not far off.

“The nature of a CDC scheme means members’ target pension increases can be adjusted to reflect positive and negative experience over a period of years, which means that the impact of market movements – in either direction – are shared between members and then smoothed over time.

“Given CDC schemes are expected to hold a significant proportion of growth assets, it is likely that CDC schemes would not have invested in a way that led to the liquidity pressure seen in many closed defined benefit schemes during 2022 – the rise of gilt yields.”

Associate partner and CDC specialist Madalena Cain added due to the high levels of inflation seen in 2022, defined contribution (DC) pots would have ‘struggled’ to see returns matching those levels of inflation:

“For DC savers invested in bond-based strategies approaching retirement, rising yields have led to a fall in their DC pot. For the 10% of these savers who typically buy an annuity at retirement, they may still be able to secure broadly the same level of retirement income as before, given annuity pricing moves in the opposite direction to rising yields.

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