Does the “CDC” scheme have a future beyond Royal Mail?

The question is what the other half of the job will look like.

Time will tell whether there weill be further applications to provide staff with CDC benefits, but for now we know that Royal Mail are pressing ahead – which is a huge achievment on its part. The Pensions Regulator confirmed yesterday that it was on track to being receiving applications for schemes to be set up from August 1st and I hope there is, as some consultants are saying, a pipeline.

The tortuous proceess to get this far is justified by the DWP in that this type of scheme is genuinely new and cannot be considered a tweak to DB or DC models. Guy Opperman’s view is that we are establishing a new kind of pension for the UK and this cannot be hurried.

Consequently, it has taken not just primary legislation in the Pension Schemes Act 2021 but considerable secondary legislation by way of the CDC code – which will now be set before parliament.

So what is the driver for change? Why will employers want to pay application fees of £78,000 per section, establish a new board of trustees, model benefits and apply for a viability certificate having created a CALP (a kind of reserve in case things go wrong)?

There are two reasons, one stated – one not.

The stated reason is that there is a need from staff for greater certainty about what pension they would get, than can be supplied by a DC scheme (with ongoing DB accrual being deemed to be too expensive). This is why Royal Mail is setting up a CDC scheme. Royal Mail have repeatedly said that CDC is a DC+ benefit.

The unstated reason is that some open DB schemes are now costing sponsors so much that the only way that any king of pension accrual can be entertained going forward is on the non-guaranteed CDC basis. This could be called DB-.

CDC has an identity crisis, is it levelling up towards a defined benefit or dumbing down towards a defined cost?

Of course nobody is talking about using CDC as a negotiating tool in disputes. But there are enough pension disputes to make CDC a potent tool, once it is in place. The RMT’s proposed strikes later this month are partially about pension benefits. Our universities  are  still in the mire of industrial action from teachers who will not mark examinations because of benefits lost and contribution increases.

And once precedents are set (Royal Mail’s CDC was born out of dispute resoluton at ACAS). it is easier for CDC to be used to replace future DB accrual and ultimately as an alternative to achieved accrual. Will we see enhanced pensions being offered by DB sponsors to members who exchange DB ofr CDC pensions? Even asking the question seems like swearing in church, but if CDC is worth the while of setting up, it has to do something for both member and sponsor.

No doubt the Pensions Regulator has considered this, so no doubt has the DWP. But no-one has , as yet dared moot CDC as a means of reducing the inequality between public and private sector pension accrual. The Treasury has been silent about CDC, but I suspect they are watching on with interest.

So what about the DC saver?

Frankly, keen as I am to see large employers level up their DC arrangements, I can see better ways of doing it than offering a CDC scheme. My argument is that for members who choose to get their pension from an invested fund, there is already scope to do this within the pooled fund permitted links regulations. We are not that far away from the world of unit-linked or with-profits annuities which appear to me the yet untrodden investment pathway.

I call the member option of a CDC fund – retail CDC and I’m keen to discuss the views of  those regulating occupational schemes and those charged with the development of investment pathways, as to the viability of “decumulation only” fund solutions.

Does the CDC scheme have a future?

The answer is “yes” but that “yes” is conditional on employers, regulators and unions accepting that the cost of DB guarantees is so limiting the operation of sponsors as to threatening not just pensions but jobs and even the enterprise value of the sponsoring organisation.

As yet I see no sign of CDC being used as a means of settling labour disputes , indeed it seems to be getting little institutional traction. At last month’s PLSA investment conference not a session was devoted to it, it hardly got a mention throughout the two days of debate. Even though it is the logical way to include patient capital in a retirement scheme, I heard no asset manager calling for CDC to be taken up, nor any consultant calling for CDC to reintroduce growth orientated investment strategies into the current defenive approach to pension scheme asset allocation.

Could there be a CDC mastertrust? Maybe but I see this as unlikely. And it would be much more  DB- than the DC+ . Small employers looking to accrue pensions on a CDC basis are likely to want to do so together, given the cost of applying to and maintaining compliance with the CDC code, but this looks a very niche market. Most small schemes are consolidating with a view to buyout – see Stoneport et al.

I may (and I hope I am ) proved wrong when it becomes possible to apply for schemes (in just a few weeks) but somehow I doubt that many employers will take on the CDC code without a more compelling reason than magnaminity. Right now – CDC looks like a latent alternative to DB awaiting another employment crisis. Meanwhile the job of offering members better returns than annuities without the uncertainties of drawdown- remains a retail matter.

How far tPR are from the world of retail pensions is evidenced by the respondents to the CDC schemes consultation.

Peter Williams on behalf of Aon

Peter Williams (Chair of ACA Pension Schemes Committee) on behalf of Association of Consulting Actuaries

Association of Pension Lawyers

Association of Professional Pension Trustees

Philip Bennett, Visiting Professor of Pensions Law at Durham University

Adrian Boulding

Dave Ward and Terry Pullinger on behalf of Communication Workers Union


Eversheds Sutherland

First Actuarial LLP

Kathryn Fleming on behalf of Hymans Robertson LLP


Iain McLellan on behalf of Isio

Steven Taylor on behalf of Lane Clark & Peacock LLP

Matthew Hall on behalf of Railpen


Royal Mail Group and the prospective trustees of the Royal Mail Collective Pension Plan

David Pitt-Watson and Dr Harinder Mann co-chairs of the RSA (Royal Society of Arts) CDC Pensions Forum

The Society of Pension Professionals

Squire Patton Boggs (UK) LLP (Organisation only)

Willis Towers Watson

About henry tapper

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