The Royal Mail aims to launch the UK’s first occupational collective defined contribution (CDC) scheme next year, if government regulations on the new vehicle are published as planned this autumn.
Previously, there was no provision for CDCs in the UK, but the necessary primary legislation to make them possible – the Pensions Act 2021 – became law earlier this year.
A Department for Work and Pensions (DWP) consultation on draft secondary regulations has just closed, with feedback currently being analysed.
Over the past three years, Royal Mail has been a key player in the development of a CDC model, exchanging input with the DWP in a two-way process.
“It was worth the time and effort to do this, as we’ve had a lot of support from pensions minister Guy Opperman, the DWP and MPs in developing our plan,” Angela Gough, head of corporate pensions, Royal Mail, told IPE. “We’re hopeful that all the work we’ve done with government and regulators means future plans can be set up more quickly and easily.”
The Royal Mail Pension Plan, a defined benefit (DB) scheme, now with £11.4bn in assets and 124,000 members, had closed to accrual of career salary benefits in March 2018 because future benefits would have become unaffordable.
The company’s pensions team – advised by Willis Towers Watson and Aon – held detailed discussions with the Communication Workers Union (CWU), advised by First Actuarial, and agreed to develop a scheme that was sustainable, affordable by the company, and secure for members.
Gough told IPE the whole process had been “inspirational” in terms of the teamwork between the company and the union in designing a strong scheme.
“We have also been keen to learn from other CDC models,” she added. “We wanted to design a plan with minimum intergenerational unfairness, and we believe it addresses that.”
“We wanted to design a plan with minimum intergenerational unfairness, and we believe it addresses that”
Angela Gough, head of corporate pensions, Royal Mail
CDC pension schemes are used in countries including Canada, Denmark and especially the Netherlands.
The new pension scheme will be made up of a CDC section and a cash lump sum section (similar to the existing DB cash lump fund, currently worth £1.2bn), with virtually all employees in both.
Members will contribute 6%, and the Royal Mail 13.6%, of pensionable pay.
Members will accrue 1/80 pensionable pay each year in the CDC section, and 3/80 in the cash fund. The benefits will be a guaranteed minimum lump sum from the cash fund plus a wage in retirement, which will fluctuate depending on investment returns and demographics.
“We won’t be using capital buffers to help reduce the unpredictability of income levels, as buffers can place unfair burdens on particular cohorts of members,” Gough told IPE.
The pension fund’s high-level investment strategy, agreed between management and unions, is to target global equity returns with lower volatility.
Royal Mail is also planning to provide an additional DC nursery scheme with a lower level of contributions for those with less than a year’s service, or who are opting out. But like the existing schemes, neither will be compulsory.
The company has communicated with members through its in-house TV programme and magazine: besides explaining how the new scheme will work, the messages included updates on legislative progress.
Formal consultation with staff and unions on the proposed new scheme has already started, and it will be followed by a co-ordinated communications programme closer to launch.