The government has given the go-ahead for a new type of pension scheme that promises to reduce the burden on employers while giving workers a better retirement by pooling the risk of their investment.
Pensions minister Guy Opperman gave the green light yesterday for Royal Mail to launch the UK’s first collective defined contribution (CDC) scheme.
The government said the new scheme would offer less risk to individuals than defined contribution (DC) schemes, while putting less of a burden on employers than defined benefit (DB) schemes.
CDC pensions will be offered to workers at Royal Mail – which has spent the last 18 months drawing up the plans alongside the Communication Workers Union (CWU) – before being rolled out to other companies and sectors.
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However, industry experts said the proposed legislation enabling the move was “very narrow in scope” and left many questions unanswered.
Based on pension schemes widely used in the Netherlands and Denmark, colleagues’ CDC contributions are pooled together and invested in a bid to give members a higher payout.
In common with defined contribution schemes, CDCs pay out from their own assets – protecting members from balance sheet fluctuations, while avoiding employers having to administer schemes on behalf of their employees – while the process of pooling investments aims to reduce members’ individual risk.
Opperman said he was committed to ensuring the government provided more options for employers to ensure pension scheme members could adequately save for retirement and better protect their income in later life.
“CDC schemes will provide employers with new options for managing their pension obligations, with benefits for workers and employers alike,” Opperman said.
He acknowledged CDC schemes were not a “catch-all solution” to concerns around retirement outcomes, but said well-designed and run CDC schemes could offer advantages for some employers.
Jon Millidge, chief risk and governance officer at Royal Mail, said the government approval was “welcome progress”, and the business was looking forward to delivering the first CDC pension.
“Royal Mail and CWU have been campaigning together to bring about this legislation, building a cross-party alliance of supporters in both houses of Parliament, as well as working with government,” said Millidge.
Simon Eagle, director at Willis Towers Watson, who advised Royal Mail on its proposed CDC scheme, said the government was talking about moving “promptly” to allow the model to be adapted for employers of different shapes and sizes.
He said: “Until CDC goes from a theoretical possibility to a lawful option, we won’t know how much demand there might be, but there are good reasons for employers to take a proper look.
“If an employer can’t take pension risk on its balance sheet but wants to set employees up with an efficient retirement income – albeit a variable one – rather than just an investment pot, CDC will be the way to do that.”
But the proposals met with mixed reviews from industry experts. Steve Webb, who was pensions minister when CDC pensions were first proposed, said the new scheme was a positive step, but the proposed legislation “will be very narrow in scope”, meaning wider adoption could be years away.
Webb, who is now director of policy at Royal London, added: “Even for the Royal Mail, it is likely to be several years before a scheme could be up and running. If other employers want to use a different model, this could need new primary legislation and we would probably be talking about the mid 2020s before further schemes could be in place.”
Nathan Long, senior analyst at Hargreaves Lansdown, said the government “rushed this response out” and the proposals left “quite a few questions unaddressed” on how it would look like in the future.
“The government worked quite closely with Royal Mail to deliver this proposal, but it’s just one way to deliver CDCs,” Long said. “People in favour of these schemes will say there are plenty of ways to design it to fit their organisation, but the government don’t seem to have a set framework.”