Management Consulting

In 2020, Aon conducted an analysis titled "Collective DC in adverse markets," which focused on the resilience of UK Collective Defined Contribution (CDC) schemes during significant market disruptions. The analysis revealed that a typical CDC scheme would have effectively weathered the market turmoil of that year without necessitating cuts to members' benefits. This was particularly relevant given the context of the Pension Schemes Bill, which was progressing through the House of Commons at the time. The study highlighted the unique structure of CDC schemes, which allows for the adjustment of members' target pension increases based on market performance over time. For instance, following a 25% decline in asset values at the end of the first quarter of 2020, members who initially targeted a 3% annual pension increase would have adjusted their expectations to a 2% increase for the upcoming year. While this represented a reduction in anticipated benefits, it was crucial that members did not face outright cuts to their benefits due to the smoothing mechanism inherent in CDC schemes. Further analysis indicated that a well-structured CDC scheme could have experienced only one instance of benefit cuts during the Great Depression, showcasing its robustness. Even after the market shock from the COVID-19 pandemic, the hypothetical CDC scheme was projected to provide a modest positive increase in benefits for 2021. This adaptability positions CDC schemes as an attractive option for employers seeking to enhance the resilience of their pension offerings, thereby contributing to a stronger pensions landscape for UK savers.