Royal Mail CDC plan ‘could transform UK landscape’

An influential UK parliamentary committee has thrown its weight behind the introduction of collective defined contribution (CDC) pension schemes in the country.

In a report published this morning, the Work and Pensions Select Committee praised the agreement struck between Royal Mail and the Communication Workers Union (CWU) earlier this year. The two parties agreed a ‘cash balance’ pension scheme to replace the defined benefit (DB) fund, and pledged to lobby for the introduction of CDC legislation.

The committee praised the “ground-breaking” agreement between Royal Mail and the CWU, which it said demonstrated a “remarkable unity of purpose”.

“As well as being a model of constructive industrial relations, it opens the door for CDC to move from abstract idea to practical reality,” the committee said in its report. “This could transform the UK private pensions landscape.”

The UK government should amend existing rules to allow CDC provision, the committee said, rather than pushing for secondary legislation. It also recommended that the UK draw on the experience of the Netherlands to address concerns about intergenerational unfairness from the outset. 

“The initial impetus has come from a major employer and trade union seeking an alternative to traditional defined benefit and defined contribution arrangements respectively,” the committee said.

“But establishing CDC schemes in the UK opens the possibility of more diverse and ambitious provision of collective pensions. These could include industry or profession-wide schemes.

“CDC may also be an opportunity to provide more attractive pension options to self-employed people and gig economy workers. The government should seek to encourage such innovation, and its great potential gains, in establishing a framework for a new wave of collective pensions.”

The committee launched its enquiry into CDC provision late last year, and heard evidence from a range of industry experts from the UK and the Netherlands, as well as Royal Mail and the CWU.

Stringent requirements for trustees and the regulator

Despite its enthusiasm for the CDC concept, the committee warned that any new regime would place “additional demands” on the Pensions Regulator (TPR). Committee chairman Frank Field has previously criticised the regulator over its handling of recent high-profile cases such as Carillion and British Steel.

“Regulatory coherence demands that [TPR’s existing] responsibilities should extend to CDC schemes. This will, however, place additional demands on an organisation which has underperformed in its defined benefit responsibilities,” the committee stated.

The government should assess TPR’s suitability and readiness to oversee CDC schemes, the committee said, and promised to monitor its future performance closely.

In addition, CDC scheme trustees should be required to hold higher levels of qualifications than was currently the case, the MPs argued, a specific new qualification for CDC trustees should be introduced. It also called for the best trustees in this area to be appointed to a trouble-shooting group of “super-trustees”.

Among the Work and Pensions Select Committee’s other recommendations were a call for consultation regarding the best valuation methodology for CDC schemes, whether members should be allowed to transfer out after retirement, and whether those transferring out should be required to take financial advice.

The cross-party committee also highlighted “clear and effective communication” as “vital” to the success of CDC.

“Members need to understand that CDC schemes offer a pension target, not a pension promise,” it said. “We recommend that all CDC schemes be required to publish their rules for calculating and distributing member benefits in a standardised format, provide data for the pensions dashboard… and to report publicly their funding position and strategy at least annually.”