Royal Mail’s journey to CDC

The Royal Mail’s Collective Defined Contribution (CDC) pension scheme launched last Monday (7 October) after 7 years in the works.

The move was a result of Royal Mail’s defined benefit (DB) pension scheme closing for new members in 2008 and then closing for future accruals in March 2018.

Around the same time, Terry Pullinger was appointed deputy general secretary (postal) for the Communications Workers Union (CWU), a trade body for Royal Mail employees.

He said the closing of the DB scheme had led to a dispute and CWU got First Actuarial involved to find a solution that would “bring back equality and pension provision for all postal workers”.

A number of solutions were explored, including a risk-sharing option.

“The big thing for me was a wage for life that ran alongside your state and occupational pensions. It seemed to me that if DB had proven too difficult, then why had there not been any innovation that still protected that concept?,” Pullinger asked.

He explained that a flexible solution was explored where adjustments could be made annually and pensioners could get paid both a lump sum and a wage in retirement when the scheme performed well.

However, he said that Royal Mail was not prepared to do that, so the Collective Defined Contribution (CDC) scheme option was explored, which the modelling showed was “better than DB and DC” and there were only two occasions where pensions had gone down, and that was during the Great Depression.

Pullinger said: “The important thing was it unified the people and their pension provision and stopped the scheme closing. It seemed to us that even if you had to take a cut on rare occasions, that’s better than the scheme closing down and people going into an inferior savings plan.”

He added that the legislation for CDC was already in place, but no one had pursued it until then. “Because no one had pursued it, nothing had been done with it.”

He noted that Jack Dromey, member of the Labour Party and a former shadow pensions minister, as well as Guy Opperman, former pensions minister, “saw the wisdom of it” and came on board.

Pullinger said that it took an “incredible” amount of time to get legislation in place first with the Department of Work and Pensions (DWP) and then the Pensions Regulator (TPR).

Authorisation granted

In February 2021, Angela Gough joined Royal Mail as head of corporate pensions, and in 2002 secondary legislation passed through parliament allowing the scheme to get authorised.

Gough said: “The authorisation process with The Pensions Regulator was set up and the trustees of the scheme applied for authorisation in 2022 and got it in 2023.

“Since then, there have been some smaller legislative changes that we were waiting for, but essentially, we had everything we needed from a regulation and legislative perspective at the beginning of this year.

In the background, while all that was going on, we built the team; an independent trustee board was appointed; and we set up the in-house administration team. So lots of things going on over the last few years to be ready to launch the scheme now.”

Gough agreed with Pullinger that the government had always been supportive of CDC as an idea but said the process “took a while” to come to fruition.

“There was always good support from the government, from DWP, and then the Pension Regulator picked that up when the legislation was in place to allow CDC schemes to be authorised. It was the trustees’ application to the regulator for authorisation, but we supported them where we could and I think they have built up a really good relationship with the regulator,” she said.

She stressed that it was important to keep everyone “motivated” as the process took “longer than anyone expected it to”.

She said: “Keeping everybody motivated when there was a series of delays was challenging. But everybody agreed on what we were working towards and knew we’d get there eventually. So that was probably, for me, the biggest challenge.”

Full support and interest

In terms of getting employees on board, Gough said that having full support from both CWU and the Communication Managers Association (CMA) had “been really helpful”.

She said: “It’s been a really good example of us working really well with our unions, especially on things like communications where we’ve worked jointly so we can be confident that all of our employees, who are the union members, are hearing the same message and getting really helpful information rather than potentially contradicting information.”

In terms of how the scheme will track its progress, Gough said there were a couple of measures it will look at.

“I know that the trustees are going to be gathering feedback from people, focus groups, that sort of thing, to give them confidence that their members are understanding everything.”

Gough added that over the summer, the scheme had a “really high” take-up of the lump sum booster. “If members pay a bit extra, we pay a bit extra, and they build up a higher lump sum” and nearly 30% of members took that up, she added.

Over time, she said, Royal Mail will also be looking at how the scheme performs. Gough stressed that while there are different ways that Royal Mail will monitor the scheme, in the first few months “comms are really important”.

Since the Royal Mail CDC scheme launched last week, the government has launched a consultation on multi-employer whole life CDC schemes and consultants disclosed a number of pension schemes that are already interested in the concept, including the Church of England Pensions Board.

Pullinger, who has since left CWU, admitted that when the conversation first came about regarding CDC, there was “quite a hostile” reaction from the industry.

He said: “I’m delighted with the fact that the narrative seems to have changed now and people are openly saying that DC will not provide the outcomes, and we need to start thinking about […] proper pensions again.

He noted that he had hoped CDC would drive innovation so there could be other designs, based on collective schemes that “don’t have to be the one we’ve done”.

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