A sight many of us thought we would never see….
It is hugely satisfying that after so long, we can finally say that there is an authorised CDC scheme. Many congratulations to the management of Royal Mail , to its unions and to its advisers for staying the course.
Making a list of it
But the Pension Regulator is not technically publishing a list. A list is a number of connected items or names written or printed consecutively, typically one below the other.
The Royal Mail Collective Pension Plan is one of one, an incredible achievement for Royal Mail, an awful challenge for any other UK corporate looking to “make a list of it”.
In order to make a list of it, the Government is going to have to decide what problem it wants CDC to solve.
- Is it the strain on the corporate balance sheet of maintaining accrual to a Defined Benefit pension plan?
- Is it a systemic issue with public service pay , and the impact of the SCAPE rate on public sector finances and services?
- Is it the perceived inadequacy of workplace DC pensions to replace defined benefit schemes?
- Is it the need to re-assert a default spending option for DC savers facing hard choices as they crystallise their pots.
Royal Mail solved a fifth problem, an industrial dispute in 2017 which was threatening the company’s future. It was created because some visionary people were prepared to agree a solution that was right for both the employer and the staff representatives. Now that solution is ready to be delivered – so what will staff get?
What are the prospects for savers in the Royal Mail Collective Pension Plan?
The RMCPP will in time replace DB accrual and the Royal Mail DC plan as the primary means of providing a pension to staff. Members of RMCPP will accrue a pension as if they were in a DB plan, making contributions in exchange for wage in retirement that lasts as long as they do, The increases in this pension and indeed the pension itself are dependent on the assumptions on assets and liabilities being as planned.
Now it is approved, I look forward to looking at the details again. The plan is not the only retirement benefit to be offered to members
As far as I am aware, the plan is still to fund a cash free lump sum through a cash balance plan that guarantees an amount relating to pay and service. Cash balance plans had a brief period of popularity around the start of auto-enrolment but are now an actuarial curiosity to all but a handful of large corporate pensions.
But with a guaranteed tax free cash sum taken care of, the members of RMCPP can focus purely on the wage the plan will promise them “for life”. The great innovation of the CDC scheme is that the wage is set to be much higher than could be provided by a guaranteed DB scheme, because the underlying fund is not set the task of guaranteeing anything.
If you believe that over time , equities and other real assets will outperform gilts , bonds and cash, then the only other thing to concern you is the sustainability of the sponsor covenant – or to use the language that savers understand – whether there will be an employer to pick up the cost of contributions and of running the scheme.
Royal Mail is one of the largest employers in the land and still manages one of the most valuable monopolies , the universal postal system. But whether it will survive as long as many of its staff, as an entity committed to the RMCPP is open to question.
The RMCPP is a magnificent statement of intent. But the extent to which that intent is realised depends on Royal Mail’s ongoing commitment to maintaining it and the capacity of the members to buy past service through transfers in and improve CDC accrual through AVCs. The reality for many more mature postal workers is that they will have a variety of promises including guaranteed cash, a legacy DB plan, a deferred DC pot as well as limited accrual in the CDC plan.
So the future pension for most postal workers will still involve a lot of decisions. Only those entering service at a young age can look forward to the full CDC pension the plan is designed to give. The idea of CDC as “whole of life” , is another magnificent statement of intent.
What are the prospects of a list?
The Government has made it clear that it sees CDC as the way to close the gap between DB accrual and DC wealth creation.
The given reason for the Pension Regulator’s CDC Code is to ensure permanence of schemes that make it to the list not to encourage more schemes. I am afraid that the CDC Code is actually a barrier to many employers setting up a CDC scheme rather than stay accruing DB or switching from a DC to CDC approach.
There are other reasons, including scepticism that we would ever see a first scheme on the list. However, Royal Mail’s size, source of income , staff culture/ turnover make it highly unusual and maybe unique.
I know of no second candidate for the list.
The recently closed consultation on creating multi-employer CDC schemes was uninspiring. Far from engendering excitement from organisations keen to be on the list, it has generated zero debate.
If the outcome of the consultation is that the establishment of a CDC master trust is commercially viable, then I suspect that there are many employers currently funding both DB accrual and DC schemes (with contributions way above the AE minima) who will consider participating in the CDC scheme. But there are some big “ifs” here.
It may be that a consultancy committed to CDC – WTW, First Actuarial and maybe Aon, will set about it. It may be that Aon . WTW or another funder of a DC master trust feels it can create a CDC section re-purposing existing infrastructure.
It may be that some of the fund managers who have found themselves excluded from the explosion in DC provision, will see CDC as an opportunity and help create such schemes in partnership, so that they can vertically integrate their investment proposition. All of these ideas would become exciting if there was a sense that Royal Mail’s success at getting authorised a CDC scheme would beget a list.
For me, the prospect of a list of CDC schemes is something profoundly to be hoped for. I can see CDC as a means of providing people in their fifties and sixties with a better retirement income than can be achieved by buying an annuity or (mis) managing their own pension.
But for now, there is no regulatory imperative for CDC, insufficient demand either from employers or employees for a better way to turn contributions to pensions and an absence of incentive from Government to make it to the list, for there to be a list any time soon.
Henry, it is ground breaking news, but I don’t see any fanfares celebrating this long awaited TPR approval. I wonder why?
Master trusts with a CDC section should be the future for DC pot members wishing to draw a hassle free growing income in their retirement, But I fear it could take another 10 years before this will become the accepted way to convert pot to pension.
As for TPR’s CDC list, the next candiate surely must be the USS. It would solve at a stroke all the pain, funding arguments and distrust created from the poor management by the various parties involved in recent years.
Congratulations to the RMCPP and its advisors (particularly I believe Hilary Salt and Derek Benstead of First Actuarial) in persevering to become the first approved CDC Scheme.
Henry, I do agree with you questioning Who will be the Next.
There has been a lot of interest in CDC from the group of employers with whom I have the most contact – namely long established not for profit organisations where employees are regarded as significant stakeholders in the Company, and who previously offered DB pension benefits. Most closed their DB Schemes to at least new entrants if not full accrual many years ago. In most cases they moved to money purchase personal pensions insurance policies with contributions rates well in excess of the auto-enrolment requirements. These companies are still trying to deal with the legacy DB scheme and also issues of inter-generational fairness in company resource allocation between the employees who have/had DB pension promises and those who have not. At least some of them have expressed interest in whether it would ultimately be possible to introduce a CDC section into their existing Scheme to help address these issues.