Royal Mail CDC – proof of concept or the real deal?


I am always amazed at the churlishness of the pension industry towards innovation. Here’s John Lawson suggesting that the Royal Mail should be spending £400m a year to satisfy his curiosity.

Let’s be clear, you do not spend £400m a year on anything unless you are totally convinced it is the right thing to do (unless you are an insurance company “re-platforming”).

In answering the question I posed in the title, I have first to question what the insurance company means by “real life” and “mathematical theory”.

Real life

We all live in bubbles to a greater or lesser degree. But if your job is delivering letters to people at 7am in the morning in February (when I’m writing), life must seem super real. It’s cold, it’s tough and one of the things that keeps you going is that you will be getting enough money at the end of your working career , to stop pushing a cart around, or sorting or driving a van.

The Royal Mail pension scheme is a deadly serious enterprise.

“Real life” is not hypothecating on twitter.

Mathematical theory

All insurance and pension projections are based on mathematical theory. How those projections match up to outcomes is a matter of speculation whether we are talking about Royal Mail’s ability to meet the targets for their pensions or Aviva’s Statutory Money Purchase Illustrations.

Here is the mathematical theory behind the Royal Mail’s wage for life pension scheme, which will commence as soon as Government can help organise it.

I hear a lot of grumbling about pension contributions not being big enough. The Royal mail will be paying 13.6% of postal worker’s pay into this Wage in Retirement CDC scheme and postal workers will be paying a further 6%.

The £400m that Royal Mail will be spending is real life money not mathematical theory.

A disintermediated pension

It is up to the people who manage Royal Mail pensions to ensure that as much of the £400m as possible ends up in the hands of the real life postal workers for whom it is intended. So beware insurers, pension consultants, third party administrators, lawyers, accountants and actuaries – there is a chance that the management costs of this DC upgrade could be radically lower than any pension scheme ever run in this country.

That is so long as we don’t see the Wage for Life arrangement having to shell out on worthless intermediation.

So long as the Wage for Life scheme is as simple as the scheme design above, the chances are that it will run at a fraction of the cost of any workplace pension and deliver much better outcomes.

Of course the outcomes aren’t just a matter of keeping the costs down, they will – as all DC schemes will – depend on market conditions and of course on the skill of the investment managers. The Trustees of the new Royal Mail Wage for Life scheme, will have plenty of opportunity to search out the best in investment management.

Turning round the fortunes of Royal Mail

Royal Mail is poised to return to the FTSE 100, after adding £2bn to its market capitalisation in the last four months. Shareholders have been rewarded by more than a 50% increase in the value of their stock.

Royal Mail was booted out of the FTSE 100 last year as the share price plummeted on fears of a pension strike. That strike was averted by good work from Royal Mail and CWU and investors have flocked back.

In the real world, shareholders, management and staff stand to gain a great deal from sorting out pensions.

More than a proof of concept of a mathematical theory

You only get one shot at this. The “Wage for Retirement solution pioneered by Royal Mail has the chance to radically reshape the three principal DC markets in the UK

  1. Large single employers DC plans
  2. Multi-employer workplace DC plans
  3. Non workplace retirement savings plans.

Note the deliberate avoidance of the word “pension” in any of the three. Insurers like Aviva have the privilege of managing many of the plans in all three sectors but – along with other providers, do not offer a wage for life integrated into any of these plans.

In the real life of postal workers, the loss of such pensions from the closure of the Royal Mail DB plan, has meant that around 100,000 of the 142,000 postal workers have lost the right to a wage for life. The proposals give them back that right.

John Lawson, and others who point to the upcoming Royal Mail wage for life scheme had better get the message. This pension plan is very real and poses an existential threat to their meagre ambition for the rest of us.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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