Yesterday’s article got a lot of interest and a number of people have asked for the technical details behind the CWU’s headlines; but first the headlines!
All 130,000 Royal Mail staff could have access to DB accrual going forward
Members would be entitled to lower core guaranteed benefits
Additional benefits, beyond statutory minima would be conditional on fund performance
The statement of investment principles would be set firmly to “growth”, the fund would invest in equities.
The scheme would be set up under a new trust and would not impact on the existing DB and DC schemes (other than the loss of future contributions).
Is this a CDC scheme?
The proposal for the Royal Mail developed with the CWU is for a new scheme for future accrual which incorporates as many elements of defined ambition (or CDC) as are possible within the current legislative framework.
The scheme aims to provide a basic level of benefits on a CARE basis. There are is no guaranteed revaluation on these benefits but the scheme has a target to pay full RPI revaluation if funds allow.
The position is payment is similar with only statutory increases guaranteed but full RPI targeted.
There are other risk reducing measures such as a pension age moving with State Pension Age.
The exact way in which the scheme would be treated for PPF and accounting purposes would depend on the detailed legal framework but the significant margin between target and guaranteed benefits means that many of the problems with traditional defined benefit schemes are avoided.
There are two key components necessary to make the scheme work:
- members need to accept and understand that they may receive less than the targeted benefits,
- and the investment strategy, set in a clear Statement of Investment Principles needs to commit the scheme to significant investment in growth assets.
In extreme situations, the scheme does contract into a low level DB arrangement – within the current legal framework, it is not possible for it to contract into pure DC.
So there is a small residual risk with the employer. For members, modelling indicates that worst case outcomes over the last 20 years (that is no benefit increases) would result in benefits better than a DC scheme with similar contributions used to buy an annuity at retirement.
The CWU believe that a key requirement of any pension arrangement is that it provides a predictable and meaningful income in retirement – this principle informed their working name for the scheme – the Wage in Retirement Scheme – with the necessary pensions acronym
– a WINNER.