The use of a single longevity assumption will mean that, on average, the lifespans of wealthy members are underestimated and the lifespans of the less well-off are overestimated. So, the contributions of the poorest would, in effect, subsidise the pensions of the wealthiest.
Longevity analysis needs to be a key component in any multi-employer CDC scheme to avoid unintentional cross-subsidies. It must be sophisticated enough to provide a realistic assessment of members’ life expectancies, and efficient enough to apply at scale and low/zero effort for members.
Benefit accrual
A simple single-employer CDC scheme design would let all members earn benefits at the same rate for the same level of contributions through their working life. This is (relatively) easy to communicate and straightforward to implement.
It does mean the contributions of the young effectively subsidise the pensions of older members. This is because the pensions of older employees will come into payment sooner so have less time to earn investment returns.
The draft consultation for unconnected multi-employer schemes does not allow this scheme design feature. This means the multi-employer solutions will have much lower cross-subsidies than are allowed in the single-employer regime.
But in doing so, it gives the industry a sizeable communication challenge to make all this transparent enough to manage members’ expectations.
Retail market CDC
The DWP is yet to consult on decumulation-only CDC and we hope, that when the time comes, they will tackle the really important issues of default retirement and longevity pooling.
This would open up more creative options for adequate and sustainable retirement incomes, and the potential for retail savers to access the benefits of CDC.
While in most ways, the early weeks of this October will not be remembered for much, for the pensions industry, we could look back and see it as a point of profound change. And for generations of future DC savers, this could be a very good thing.
Paul Waters is head of DC at Hymans Robertson
