The Royal Mail is to have the first collective defined contribution pension scheme in the UK.
A government consultation on CDCs published today said there was a good case for Royal Mail launching a CDC scheme and legislation would be created to allow that to happen as soon as possible.
The Royal Mail and the Communications Workers Union previously agreed in principle to create a CDC scheme but could not do so in practice until there has been a consultation followed by it being written in to law.
The company’s current defined benefit pension fund will close to future accrual at the end of March.
Over 70 organisations and individuals responded to the Department for Work and Pensions consultation and for the most part were very supportive of introducing this type of pension scheme to the UK.
Unlike the DB scheme Royal Mail is ending CDCs do not guarantee a certain income for a member’s retirement. There is a target payout amount which is based on a long term, mixed risk investment plan.
The CDC scheme members contribute to a large collective pot, which provides an income to individuals when they retire. In that sense they are different to defined contribution schemes where each member has an individual pension pot.
Work and pensions secretary Amber Rudd welcomes the CDC model:
“These pioneering proposals should deliver improved investment returns for workers and savers while cutting costs and red tape for British job creators.
“The new type of pension is currently used in Denmark and the Netherlands – two countries widely recognised as having among the best pension systems in the world.
“Any steps that result in better saving returns for workers are something to celebrate and I look forward to working with industry to enhance the prospects of millions of workers.”
Aviva head of financial research, John Lawson, describes the type of scheme proposed by Royal Mail as having fixed contributions, a target benefit, and pool investment and mortality risks.
“As many have pointed out, this is analogous to with-profits in the accumulation phase, followed by a with-profits annuity in decumulation,” says Lawson.
The government notes the biggest risk to CDC pensions is members not understanding it:
“There was a clear consensus that communicating the variable nature of the pension income in a CDC scheme will be a huge challenge for schemes – but that misunderstanding around the nature of CDC benefits will be the single biggest risk a scheme will face.
“We are very alive to this issue, and fully recognise the challenges it poses.”
The report on the consultation states government has been clear the CDC model is not a “catch-all solution” and it will start with the Royal Mail scheme followed by different models for other schemes.
“We intend to legislate as soon as parliamentary time allows for the CDC model set out in our consultation paper, but aim to do so in a way that can quickly accommodate other models of CDC if appropriate in the future.”
Aegon pensions director, Steven Cameron, says much caution needs to be exercised with the new model which has the potential to making pension planning more difficult.
“Royal Mail clearly has the best intentions and we hope the scheme will deliver good outcomes for its members.
“However… critics point to the complexity of explaining the scheme’s benefits to members and their incompatibility with pension freedoms. Individuals are told what their ‘target benefit’ is but this is not guaranteed and it is likely that actual benefits will be different from the initial target, making planning difficult.
“Most worryingly, there is a very significant risk that monthly pension income once in payment could fall. There is also the potential for one generation of members to subsidise another.”