Collective defined contribution (CDC) schemes in the UK have been branded “superfluous” by an academic, which considers that the attributes of this type of pension fund can be achieved by transparent with-profits funds.
Michael Johnson, research fellow at the Centre for Policy Studies, explained in a letter to the Work & Pensions select committee, that Royal Mail's decision to set up the first CDC scheme in the UK for its workers "is a wholly unnecessary adventure, which the company's shareholders have yet to fully appreciate".
CDC schemes differ from defined benefit (DB) pensions because they do not guarantee a particular income 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 defined contribution (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 & Pensions on the changes needed to introduce CDC schemes in the UK.
Mr Johnson argued the attributes of a CDC scheme, notably the "collective pooling of investment and longevity risks, could be provided by transparent with-profits funds," perhaps rebranded, since they share similar performance drivers.
These schemes could receive contributions from both the employee and employer, but would not offer any guarantees.
"The funds would have to be unambiguously deemed as 'money purchase' funds (i.e. DC) from legal and regulatory perspectives and, ideally, incorporate pension funds' regulated consumer protections," he said.
Mr Johnson explained how these funds would work.
"During the period of accumulation, employees’ individual DC pots should be invested in low cost, diversified, default funds, providing economies of scale.
"From private pension age, employees and retirees should then be defaulted into, say, 15 (or 20) years of income drawdown, while remaining invested in low cost default funds.
"Later on in retirement, longevity risk should be pooled by default, in the form of a lifetime annuity, commencing at the age of 75 (or 80).
"Consequently, the collective aspect of the package would increase in later life. The choice to opt out would be available at each stage."
He argued that this approach would combine the benefits of collectivisation with the individualism necessary to make full use of pension freedoms, which some pension experts said CDC schemes won’t be able to comply with.
Mr Johnson said the government-backed provider National Employment Savings Trust (Nest) "could be the host of the employees' individual DC pots and, potentially, the manager of the with-profits funds," since it has systems that are well accustomed to handling large numbers of individuals.
If Nest was established as the fund manager of the with-profits funds, these should then be "overseen by a professional, independent governance body," he said.
A spokesperson at Royal Mail said: "We had detailed discussions with our unions about our future pension arrangements. They had to be sustainable, affordable and secure for members and the company.
"We agreed that CDC would be a progressive option which would meet our objectives. We see CDC as a better way of providing a regular wage in retirement for our people than is otherwise available through DC pensions, but without the increasingly unaffordable guarantees of DB pensions for the employer.
"We want to be able to offer a CDC scheme to our 142,000 strong workforce as soon as possible.”
maria.espadinha@ft.com
