Decumulation CDC

16th September 2022

The Department for Work and Pensions (DWP) is getting ready for Decumulation CDC (Collective Defined Contribution). They asked a question about it in their 14th June 2022 consultation paper entitled: Helping Savers Understand Their Pension Choices.

The DWP asked, ‘How could CDCs work in practice in the Defined Contribution decumulation market?’

To a large extent, they probably already know the answer. After all, single employer CDC schemes started on 1st August, and will be extended next year in a similar guise to multi-employer schemes and commercial master trusts. Whilst what is launched so far is whole of life CDC, surely decumulation CDC is just the second half of those schemes?

Consider a worker who joins the sponsoring employer late in life, at say age 65, with just 12 months to go until their State Pension age. They will only accrue a few pounds of pension savings in the coming year’s employment. Most of their pension savings are likely to be in DC, in one form or another, from previous employments.

Now suppose they ask to transfer those old DC plans into their new employer’s CDC scheme and then promptly retire. For them, this supposedly whole of life CDC scheme is virtually a decumulation-only CDC.

A key feature of these schemes is the strong trustee governance which should ensure fairness of treatment between all members.

The trustees will offer the member a starting level of annual pension in exchange for the money they transfer in from old DC plans. And every year from then on, the trustees will determine the annual increase for that pension. They are a collective enterprise, and once a slice of annual pension has been accrued, it gets the same rate of annual increase as everyone does.

CDC retirement income

Decumulation CDC is likely to prove a popular option for the part of retirement income that covers the must-pay ‘essential’ bills and perhaps other life affirming expenditure like that footie season ticket or Sky Sports subscription. After all, the CDC keeps paying for life with no danger of running out.

Although there is the possibility of some annual reductions, it is targeted to increase each year at the prevailing CPI inflation rate or above. OK, the inflationary rise is a target not a guarantee, but that’s a pretty useful step towards feeling comfortable that essential expenditure has been taken care of for the rest of one’s days.

I can certainly see advisers recommending decumulation CDC for some clients. But perhaps a more common scenario will be an adviser that gains a new client at retirement and during the fact-find process discovers that they already have some CDC pension, as well as other pension assets in SIPPs and Personal Pensions.

Advising on CDCs

So, what should an adviser do with a client who already has some CDC? Their remaining pension assets should then be tailored to fit around the CDC. The first question is to see whether the client has enough secure lifelong income, or whether more needs to be recommended.

Increasingly the commercial tools available to IFAs are able to determine the optimum split between secure or guaranteed income and flexi-access drawdown with a view to providing the highest level of sustainable income from the blend. Next, the remaining assets in flexi-access drawdown need to be invested in such a way that the client’s total retirement wealth – the decumulation CDC entitlement plus the SIPP-held assets for example – have a risk profile that is appropriate to the client’s personal circumstances.

The adviser might use software to do this or access the services of a discretionary fund manager. Either way, the key characteristics to take from the decumulation CDC in calculating the SIPP asset allocation are that the CDC is low risk, will last for the whole course of retirement and is likely to rise each year with CPI inflation.

The value-add that an adviser can bring will not be in managing the CDC, as the trustees will do that, but in understanding how best to arrange the other pension assets around it.

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