Collective schemes spark interest beyond Royal Mail

Collective schemes spark interest beyond Royal Mail

Several companies interested in setting up collective defined contribution (CDC) schemes after Royal Mail revived the prospect of them being introduced to the UK.

Alex Waite, a partner at consultancy firm LCP, told FTAdviser he had received several inquiries from clients which had "expressed interest" in this type of schemes.

One of these clients – a former public sector company with a defined benefit (DB) scheme closed to future accrual – was considering setting up a CDC if new legislation was introduced.

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Mr Waite said: "It’s a company with a benefits structure close to the public sector, and they are looking how they can modernise it.

"It is frustrating that there isn’t any natural legislation for a middle ground [between DB and defined contribution (DC)]."

Bob Scott, partner at LCP, agreed: "DB schemes have been overregulated and are quite expensive, and DC is inefficient.

"A good default is missing for people, and CDC could help."

CDC schemes differ from DB pensions because they do not guarantee a particular incomes in retirement.

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

These schemes also differ from DC plans because they do not produce individual pension pots. Instead they invest savings in a large collective pot which provides an income in retirement.

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

Royal Mail is currently working with the Department for Work and Pensions on the changes needed to introduce CDC schemes in the UK.

Earlier this year Royal Mail reached an agreement with the Communication Workers Union which means a CDC scheme will replace its DB one, which closed at the end of March.

In the meantime Royal Mail workers have approved this deal, which also includes the creation of a DB lump sum vehicle alongside the CDC scheme.

With these two pension arrangements, the company would expect to contribute 13.6 per cent of members' pensionable pay, and members would contribute 6 per cent.