Prospects are glowing for collective defined contribution schemes

  • Describe how Collective Defined Contribution schemes might work
  • List how CDC schemes might be useful for the Royal Mail
  • Describe why it might raise retirement income over the longer term
Prospects are glowing for collective defined contribution schemes

The likelihood of the new Collective Defined Contribution scheme rules being enshrined in new pensions legislation in 2019 are now very high, as the idea which gained traction towards the end of Sir Steve Webb’s time as Pensions Minister back in late 2014, is now a leading candidate for a Pensions Bill in the Queen’s Speech next May. 

The issue that dogged all Steve Webb’s attempts to get CDC taken seriously over four years ago was the nagging doubt that any employers would want such a hybrid scheme.

Apparently several expressed that view in private inside Department of Work & Pensions buildings and showed no overt enthusiasm for the new concept in public. But that was then. Now there is a new reality.

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We have one massive employer – Royal Mail – in the starting blocks and ready to go with CDC.

So, the issue moves from whether anyone wants CDC, to which types of businesses would CDC be most suitable for – and of course an adviser needs a recommended scheme to be suitable for both the employer and its employees.

A quick look at employee review site Indeed reveals that postmen apparently work long hours, do a lot of standing in their job, get only short breaks, suffer from dreadful managers and bad weather.

Years of service

Despite all that, lots of postmen and women put in many years of service. My local postie has been putting the letters through our front door since before we moved in over 20 years ago now.

This is probably the key to suitability. A business where many staff stay for the long term will have enough people present through different economic cycles that they can genuinely spread the experience of good and bad times across the membership - a key part of CDC.

Key points

  • Collective defined contribution schemes are becoming more of a reality
  • The Royal Mail has agreed with staff to set up a CDC scheme as a successor to its defined benefit scheme
  • There needs to be clear communication with members about performance and fees

And staff that rub along well with each other – another factor revealed in those Royal Mail reviews – will be much happier that they all get a broadly average return, without worrying too much about whether they were a receiver or giver of cross-subsidies.

Initially at least, they will also need to be large employers to spread the extra costs of high quality trusteeship and actuarial valuations over enough members without needing high charges.

For reasons that I do not understand, the government currently proposes that master trusts will be specifically excluded from operating CDC schemes. So, for now at least, there’s no point in small employers planning to club together into one multi-employer CDC scheme.

The DWP has now thrown its full weight behind CDCs – producing a detailed consultation paper framing the legislation needed for CDC and in particular the new Royal Mail scheme.

They are clearly staking an early claim for space in the post-Brexit legislative calendar.  Insiders suggest we could even make the first CDC scheme live in 2020.

So, if a new type of workplace pension is being introduced into the UK, why is this still needed now that we have the freedom to move between Defined Benefit (DB) and Defined Contribution (DC) schemes, especially as auto-enrolment is such a success in getting nearly 10m people saving, albeit largely at the prescribed minimum contribution levels and investing in low-risk default funds?