UK. CDC benefits may be 50% greater than those offered by DC, says LCP
The expected benefits offered by collective defined contribution (CDC) schemes could be 50% greater than those offered by defined contribution (DC) schemes, research from Lane Clark & Peacock (LCP) finds.
The consultancy examined 2,500 simulations looking at a 43-year-old saver beginning a 25-year career, with the assumption of a 12% annual contribution rate. Its analysis compared the expected retirement pension as a proportion of the final salary for a typical CDC scheme and DC scheme and found CDC benefits could be up to 50% greater than those offered by traditional DC arrangements.
LCP’s projections also revealed a median CDC outcome of 41% of the final salary for the worker in this scenario, retiring aged 68 after a 25-year career receiving a single life pension, compared to a 27% median outcome for a DC saver in the same scenario.
LCP said there are various potential outcomes for DC members which are driven by the investment performance of the scheme. However, its projections found the ability of DC savers to invest collectively, and the risk-sharing nature of CDC, means the best outcomes under CDC would likely generate “significantly better” outcomes than for DC savers.
The firm stated CDC has enjoyed cross-party support and it anticipates new regulations to enable multi-employer schemes to be introduced in the early stages of the new government, with the expectation that once these measures have been enacted, multi-employer CDC schemes could come to market from 2026. It said it expects there could be a “decumulation only” CDC model in the next few years to enable employees who built up DC pots over their careers to buy a CDC pension upon reaching retirement.
LCP noted in addition to providing improved pensions for the next generation of savers, CDC schemes could also contribute towards economic growth due to their “exceptionally” long time horizons, making them well placed to contribute to a wider increase in growth investments by schemes.
Partner Helen Draper said: “With Department for Work and Pensions figures highlighting that two out of every five of working-age people in the UK are currently under-saving for their pension, the new CDC approach could be game-changing for many people.
“The CDC model has lots of positives for individuals as it targets far higher benefits than DC alternatives, avoids the need for members to make difficult investment decisions and has the potential to significantly increase intergenerational fairness. For employers, there is more certainty on the costs to the scheme, support from employee representative groups and more freedom when it comes to choosing contribution rates.
“We have been talking about these schemes for a while, but recent developments mean now is the time for sponsors and trustees to get to grips with this new approach and embrace the many opportunities and benefits they can provide.”
Partner Steven Taylor added: “We believe CDC schemes have the potential to significantly improve retirement outcomes for the next generation of savers. CDC can achieve this without recreating the employer cost concerns that have hampered defined benefit schemes, and so we believe it will be attractive to employers and employees alike.
“In the early years, CDC schemes will be massively cashflow positive and will have heavily growth-focused investment strategies. This makes them an attractive focus for the new government to help pensions investments into growth assets.”
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