‘Significant milestone’ for CDC as Royal Mail’s scheme launches

The launch of Royal Mail’s Collective Defined Contribution (CDC) pension scheme represents a “significant” milestone for the UK pensions industry, according to experts.

The Royal Mail CDC scheme launched today for over 100,000 of the group’s employees, offering a cash lump sum and an income in retirement.

Royal Mail, the Communications Workers Union (CWU) and Unite CMA have all worked together to design and implement a scheme that would provide the right pension arrangement for its people and the company. It was agreed from the onset that any scheme had to provide one pension for all employees with at least 12 months’ service.

It had to be affordable for Royal Mail and its people and would provide an income in retirement, it announced this morning.

The Collective Plan pools members’ contributions and provides everyone with both an income in retirement and a lump sum.

The key benefits of the Collective Plan include:

• an automatic income for life, in addition to a cash lump sum, making it easier for people to manage their money in retirement;
• employees pay 6% of pensionable pay into the collective pot each payday, as Royal Mail tops that up with a contribution of 13.6% (most of this money is invested in the Collective Plan to pay for benefits and running costs — 0.3% of it pays the insurer that provides the ill-health benefits);
• one plan for everyone – every employee with at least a year’s service is eligible to join.

Angela Gough, director of group pensions at Royal Mail, said: “The Collective Plan is the future of pensions at Royal Mail and we believe it is the right scheme for our people and our company.”

She said the launch heralds an “exciting development” for Royal Mail and for the UK pensions industry.

“We have worked hard with our unions, the government, the Pensions Regulator, and the trustee of the Collective Plan to make it possible and we are delighted to have reached this point,” she added.

Venetia Trayhurn, chair of trustees of the Royal Mail Collective Pension Plan, noted that with over 100,000 members at launch, the Collective Plan would “immediately become one of the biggest single-employer, private-sector schemes in the UK”.

Significant milestone

The industry has welcomed the launch of the Royal Mail’s scheme saying it marks a “significant” milestone for the pensions industry.

Chintan Gandhi, partner and head of collective DC at Aon, highlighted that the scheme has been “over seven years in the making”.

He said: “Using this as a stepping-stone, we see tremendous value in the government moving on to the swift introduction of scalable whole-life multi-employer CDC schemes. We believe these have the significant potential to help over 30 million workers in the UK build up a pension – including the self-employed.”

Steven Taylor, head of CDC at LCP, added that the savers, employers and government hope for CDC to be “something of a panacea” helping to simultaneously solve many problems across the economy.

He highlighted that for savers this could mean more “bang for their buck” in retirement. He added that while scheme designs vary, previous LCP research has estimated CDC can potentially offer members up to 50% higher expected pensions per pound contributed than traditional DC schemes that annuitise.

He said the “secret” to this is investment pooling and collectivisation, which means schemes can more comfortably invest for the long term than most members could on their own.

Taylor acknowledged that some of these benefits can be replicated using drawdown products. However, he said that CDC could be preferable for large segments of the population, especially those who do not want to make complex decisions about managing their savings deep into retirement.

“The long-term investment approach also makes CDC schemes natural buyers of productive finance assets that government would love to see in the hands of UK pension schemes,“ he noted.

Helen Draper, partner at LCP, agreed with Taylor and said that given the wider benefits to the UK economy in terms of investment in productive finance, making CDC schemes accessible to a wider population of UK pension savers “should be a priority”.

She said: “We expect the government to shortly unveil new regulations that would enable the wider roll-out of these schemes, potentially creating a real shift in the pensions landscape.”

Paul Waters, head of DC for Hymans Robertson, agreed with others that CDC provides great value by delivering higher pensions for lots of savers alongside increased certainty their pension won’t run out in retirement, which is “desperately needed”.

However, Waters stressed that the launch of the Royal Mail’s CDC scheme is “just the beginning”.

He explained: “The Royal Mail’s scheme was designed around specific objectives and the way it’s been set up will not be the best path for all schemes thinking about CDC. Other employers will have their own individual objectives and profile of members, which means a range of different types of design will be needed to cater appropriately for different groups.

“As an industry we need to develop a broad range of DC risk-sharing options to deliver the greatest benefit to future members.”

Hari Mann, co-chair of the CDC working forum at the Royal Society of Arts, said the launch of Royal Mail’s scheme brings confidence that CDC is “no longer a theory” and something that is “actually happening” in the UK.

Mann added that it is a big step, and there are other large employers that have been waiting on Royal Mail to see if it can make it happen.

“Now we will see similar schemes to Royal Mail start to emerge, but the next big step is for the government to bring about the consultation on multi-employer and industry-wide schemes to enable a much larger pool or organisations to take advantage of CDC.”

Mann expects that once the legislation is in place, CDC will become a “very important” part of UK pensions.

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