DWP working with Royal Mail on CDC pension scheme

DWP working with Royal Mail on CDC pension scheme

The Department for Work and Pensions (DWP) is working with Royal Mail on what would be needed to introduce a collective defined contribution (CDC) scheme.

The postal company will close its defined benefit (DB) pension fund to future accrual on 31 March, after it reached an agreement in principle with its trade union in February to create this specific type of pension fund.

A spokesperson at the DWP told FTAdviser: "We are engaging with Royal Mail to better understand their pension proposals.

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"However any changes to legislation would be in the interests of savers and the wider pensions industry."

Royal Mail said the new pension fund will consist of a defined benefit cash balance scheme and an improved defined contribution (DC) plan.

Collective defined contribution schemes differ from defined benefit pensions in the sense they do not guarantee certain incomes in retirement.

Instead, CDC have a target amount they will pay out, based on a long term, mixed risk investment plan.

These schemes also differ from the traditional DC plans, since they do not produce individual pension pots.

Instead they invest savings in a larger collective pot, which provides an income to individuals during their retirement.

The Pension Schemes Act 2015 created by the coalition government defined CDC as a distinct pension category, but secondary legislation to bring them into effect was never introduced.

According to the Communication Workers Union (CWU), which represents members of the Royal Mail scheme, the new pension arrangement will cover the company's 80,000 DB members as well as its 40,000 DC members, and will combine a cash balance DB scheme with a CDC plan.

Under the cash balance plan, Royal Mail will contribute 13.6 per cent of pensionable pay towards members' retirement lump sums, and a further 2 per cent for other member benefits, including death in service and ill-health.

Members will continue to contribute 6 per cent of pensionable pay towards their retirement lump sums, and workers in the DC plan with a minimum of five years' service will have the option of joining the DB cash scheme.

Henry Tapper, pensions expert and founder of Pension Playpen, and member of a working group called Friends of CDC, said that he "would be surprised if the government did not help the Royal Mail to set up a CDC scheme in the near future," in light of the progress made between the company and the union.

He said: "We are still unclear to what extent this will need further legislation."

In an event recently organised by Friends of CDC, which was attended civil servants, occupational scheme managers, unions, insurers and pension consultants, this was one of the main topics discussed.

Mr Tapper said: "The conclusion was that CDC would best be written as an extension of DC legislation rather than a subset of DB legislation or as a defined ambition plan.

"It was agreed that the immediate focus should be on enabling Royal Mail to get its plan over the line but that this should not preclude other types of CDC scheme to develop, perhaps within master trusts, perhaps as 'transfer-in' plans – consolidating pots from the £400bn non-workplace pension market."