Freedom and choice. These evocative words often spark an immediate positive reaction. Who wouldn’t want that? 

Then, there’s security and simplicity. These also sounds pretty good. Although, less powerful language perhaps. 

When thinking about this, it’s the context that matters. When applied to retirement and decision making, the realities of freedom and choice can be less appealing. For those without access to a financial planner, securing an income from a Defined Contribution (DC) pension can feel like a daunting process. 

When asked what matters most, common responses lead us to a guaranteed income in retirement, sufficient to live the lifestyle we'd like to lead. Flexibility and leaving an inheritance for others are very important to some people, but not all.  

We’re currently engaging with members to understand how they feel about the trade-offs involved in a Collective Defined Contribution (CDC) scheme. In particular, testing views on: 

1. Flexibility – to what extent is the loss of flexibility compensated by the “do it for me” benefits of CDC? 
2. Variability – how comfortable are people with the potential for income in retirement to fall from time to time, and by how much? 
3. Attractiveness – which features of CDC make it most appealing? 
4. Fairness – attitudes towards different members receiving different amounts for the same contributions paid. 

We need to help people plan for retirement with confidence, while ensuring they’re sufficiently aware of the practicalities of the pension scheme they’re saving into. For CDC, the mechanics can be hard to explain in a way that people can easily understand, but the principles are not.

Pension schemes are designed to deliver: 

• A secure income for life;
• At a fixed cost to you and your employer; and
• Where retirement decisions are managed for you

The key difference between CDC and Defined Benefit (DB) schemes, from a member’s perspective, is certainty. Like DC schemes, the benefits you will build up in a CDC scheme are not guaranteed and subject to change. This presents a communication challenge, and some of the challenges faced in the Dutch pension system give us useful insight into this. 

What’s clear to me is that building trust is essential. Ultimately, CDC will be judged on outcomes and customer experience along the way. 

With CDC in the UK, we have the opportunity to get this right. How we do that, is the test.

If you would like to discuss further, please get in touch.

This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.