UK collective defined contribution (CDC) schemes would have weathered 2020 market volatility and would not have needed to cut member benefits, Aon says.
Its research - Collective DC in adverse markets - explored how a typical CDC scheme design would have fared during 2020's turbulent markets.
It found that the recession triggered by the Covid-19 pandemic crisis is not expected to have resulted in members' benefits being cut, even if the scope to award future pension increases had been reduced.
Indeed, its modelling showed that cuts to benefits were only necessary in extreme conditions, such as significant recessions - adding a well-designed CDC scheme would have only seen one cut during the past 90 years, during the Great Depression of the 1930s.
Aon head of CDC Chintan Gandhi explained: "The nature of a CDC scheme means that members' target pension increases can be adjusted to reflect positive and negative experience over a period of years. This means that the impact of market movements - in either direction - are shared between members and then smoothed over time.
"For example, in response to the 25% asset falls we saw at the end of this year's first quarter, we expect members of a typical CDC scheme, targeting say 3% p.a. pension increases at the start of the year, would have been able to expect a 2% increase both in the coming year and in future years. This represents lower increases to their benefits than they might previously had expected, but crucially, the one-off market shock would not have resulted in a cut to their benefits."
Gandhi continued: "We have also considered how a well-designed CDC scheme, targeting inflationary increases to members' benefits, might have performed more generally. To do this, we have back-tested the impact of past market performance (between 1930 and 31 March 2020) on the benefit adjustment outcomes for members of a hypothetical CDC scheme.
"Our analysis revealed that a well-designed CDC scheme might have seen just one cut in benefits - during the Great Depression of the 1930s. Moreover, even after the market shock following the outbreak of coronavirus, our hypothetical scheme is expected to deliver a modest, positive increase to members' benefits in 2021."
Aon head of UK retirement policy Matthew Arends added: "The ability of a CDC scheme to adjust target levels of pension increases operates as an efficient way of adjusting members' benefits to reflect positive and negative experience over time. We expect a number of employers will look to the attractive features of CDC for building a more resilient future, for both member and employer outcomes.
Back-testing CDC benefit adjustment outcomes
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