SET AND FORGET
Those who recommend CDC think its strength lies in its ability to solve this retirement income conundrum.
Aon principal consultant Kevin Wesbroom says: “CDC does not require members to participate in investment decisions once they reach retirement.” This is unlike in the current DC plan which requires members to make a decision about whether they want to use their pot to buy an annuity or income drawdown. Wesbroom says: “This requires a lot of member involvement and decisions.”
In contrast, CDC offers a steady income for people in retirement without making any of the decisions, says Wesbroom.
CDC will be able to fill the current gap in the market – one that builds a collective DC-type annuity. In addition, as the CDC scheme is a collective and has a longer lifetime than any individual member, it can take longer term views than any individual member.
“This allows the scheme to use a longer-term investment strategy and invest in return seeking assets for longer,” Wesbroom says. But others argue these problems can be solved within the current system.
Frank says: “If the ambition is to provide a lifetime inflation-linked income in retirement that can be done using DC.”
Achieving that goal requires a shift in perspective. Frank says: “The traditional measurement of success in DC is how the pot size is growing, but it should be the level of life-time income.”
The two key benefits of CDC – giving members a life-time retirement income without the need to make any investment decisions and managing assets collectively – can be achieved by master trusts.
STRONGER TOGETHER
As master trusts grow in size, they will have the scale needed to manage assets collectively, which will enable them to make better long-term investment decisions. They can create internal markets for illiquid assets.
The industry already recognises the conundrum posed by freedom and choice legislation. Not only has NEST asked the government for permission to provide a retirement income to its members, but commercial operators are also mulling the problem.
Steve Charlton, managing director of defined contribution EMEA and Asia at SEI, says: “As both a master trust and an investment company, we are working on developing a retirement income product.”
