Understanding savers needs is ‘crucial’ when deciding whether CDC or DC is the best option

In their new report The future of pensions?, LCP have developed a framework to help sponsors, trustees and other stakeholders assess what option might be best for their savers as the universe of pensions possibilities expands.

With Royal Mail’s CDC scheme live and multi-employer rules expected imminently, employers, schemes, and providers must now decide whether to adopt CDC for their savers. At the same time, with 40% of working-age people under-saving for retirement, new DC innovation and targeted guidance are being rolled out to help savers find the right fit.

In their report, LCP have outlined the five criteria that they think are the key common characteristics that make up a ‘good’ pension scheme. They are urging sponsors and other stakeholders to decide what sort of solution to offer based on what they think are the most important consideration for their members.

In the report LCP highlight that they believe being part of a CDC scheme is likely to be appealing for savers with moderate incomes, who value financial certainty in retirement, want limited decision making or want to cover regular financial commitments.

DC, on the other hand may be valued most by those who want flexibility in retirement, ownership of their own pot and are potentially more engaged in their saving journey.

The five criteria are:

1. Member outcomes: What retirement outcomes are savers getting for the contributions paid in? i.e. Does the scheme deliver “bang for your buck”?
2. Fairness: The perception of fairness is important in pensions to build trust. Savers will engage more with a solution when they believe that if they make the right choices or that they trust that someone else is making the right choices will result in a good outcome in retirement.
3. Communication: It’s important that the pension offering chosen can be communicated to savers appropriately – both in explaining the offering, but also in articulating any actions required by members clearly.
4. Ease of retirement planning: Many members spend 40 year or more saving for their retirement. A seamless transition into retirement can help to build trust that savings have been accessed efficiently.
5. Matching individuals’ needs in retirement: Individual retirement needs will be different from person to person and this requires flexibility and a range of options post-retirement. CDC and DC can be complementary in providing different retirement profiles for different cohorts of people.

Steven Taylor, LCP Partner and Head of CDC, said: “We’re now at an inflection point in UK pension provision. CDC schemes are on the cusp of becoming a reality and now is the time for sponsors and other stakeholders to take a step back and look at how different solutions can be practically applied for their savers. Both CDC and DC have a part to play in providing the solutions needed by the next generation of retirees.

Helen Draper, LCP Partner, commented: “It’s crucial that sponsors understand what issues are priorities for their employees so as to work out what solution is best for them. Both CDC and DC have merits based on individual saver needs.”

Sam Cobley, Partner in LCP’s DC team, added: “Supporting savers post-retirement is increasingly an area of regulatory and industry focus as DC assets mature. A number of DC post-retirement solutions have recently been launched to support those who wish to have flexibility in retirement. CDC also has a fundamental role post-retirement for those wishing to have more regular predictable income, for example to cover rental costs and other regular overheads.”