CDC risks exacerbating social inequality

Low earning members of CDC (Collective Defined Contribution) pension schemes could subsidise the retirement incomes of wealthier members by as much as 30%, according to analysis by Hymans Robertson.

In a CDC scheme, members pool not only investment risk, but also longevity risk - the potential that a member will live longer than anticipated and need more money to fund their retirement. CDC schemes that pool large groups of members from different socio-economic backgrounds risk lower income members subsidising the incomes of better paid members, who typically live longer.

The leading pensions and financial services consultancy has calculated that in this scenario the scheme could effectively subside the retirement incomes of the wealthy using the savings of the less well-off by as much as 30%.

For its analysis Hymans Robertson used data from the leading longevity data specialist Club Vita which has found that affluence is a key factor in determining how long people will live. It shows that the well-off could reasonably expect to live more than 10 years longer than the poorest members.  

Commenting on the importance of reviewing a CDC scheme’s design and eligibility criteria, and assessing alternative risk sharing options for DC members, Jon Hatchett, Senior Partner, Hymans Robertson says:

“While the momentum for the development of CDC is gaining pace, we need to think hard about the way it is designed and operated. There must be a spotlight on the impact CDC could have on specific groups of members. Innovation is essential to ensure that DC members achieve the best possible retirement outcomes. But we want to ensure that any new options taken forward by the industry are fair to members and help alleviate social inequality, not exacerbate it.

The ambition for innovation in DC has already led to the development of a range of risk sharing options available for members today that can deliver many of the benefits of CDC without some of the drawbacks. CDC is a good option for certain scenarios, but not for all. In many cases more attractive alternatives exist which can deliver better outcomes for more members. We need to keep the goal of fairness in sight and be open to looking at a wider range of options, beyond CDC.”

Hymans Robertson has published a paper on the range of risk sharing options available: Risk Sharing: an age old solution to the old age problem and hosted a webinar  on the topic.