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

Is the emerging CDC a response to: 

  • Declining access to (and number of) DB pension schemes? 
  • Desire by employers to reduce or eliminate large long-term pension liabilities implied by running final salary pensions as a growing negative balance sheet item? 
  • Concern that DC pensions open less engaged savers to the prospect of under-saving for retirement? 

The answer could be Yes to all of the above. But nevertheless, despite the fact that CDCs are already in quite wide use in Denmark (enrolment into a CDC is compulsory there for employees) and the Netherlands (it has 260 CDC schemes operating today), the concept might not have made it over the North Sea but for The Royal Mail working in close concert with the Communication Workers Union to create the necessity for it.

Royal Mail Pension Plan

Let me explain. Like many large DB schemes, the Royal Mail Pension Plan closed to new members in 2008 as the firm detected that rising DB liabilities were looking unaffordable longer term.

By April 2012, the company managed to pass responsibility for historic pension liabilities from the RMPP to the Government.

Then, following consultation with RMPP members in early 2017, it announced its decision to close the RMPP to future accruals in March 2018.

Following this announcement from October 2017, The Royal Mail and the CWU began negotiating on behalf of postal workers for future pensions, pay and conditions, all mediated by The Advisory, Conciliation and Arbitration Service. 

By late November 2017, the ACAS report recommended both sides commit to the introduction of a single CDC pension scheme and won their joint agreement to this settlement. Aiming for a “best of both worlds” solution, the scheme holds out the prospect of a target pension for life, plus a tax-free cash sum on retirement - all for a fixed cost from both employer and employee. 

With a following wind, posties will get a pension of one eightieth of each year’s salary, plus CPI increases. As the Royal Mail provides one in every 90 jobs in the UK, this is a significant swing of the pendulum away from their current DC scheme back in the direction of DB.

In addition, the power of ‘longevity pooling’ and ‘collective security’ will work together to deliver the prospect of higher median retirement incomes, largely because of lower volatility. A 2009 Government Actuary’s Department study found that the median improvement in outcome offered by CDC “is as high as 39 per cent for some members.”

A 2012 paper by the Royal Society of Arts (RSA) indicated a 37 per cent boost to retirement income outcomes through CDC.

 Royal Mail bosses also like the idea of the CDC because it passes risk of the pension under performing through to the employee member.

In other words, if we have another financial shock along the lines of the Great Recession, the employer does not need to add the resulting liabilities in red on their balance sheet and have to start borrowing more to keep guarantees in place. Instead, what trustees must do is adjust the benefit accordingly. 


Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. According to Adrian Boulding, why is the Royal Mail suited to setting up a Collective Defined Contribution scheme?

  2. According to Adrian Boulding, why are they suited to employers with a large number of employees?

  3. Which of the following is NOT a reason for the increasing interest in CDC schemes?

  4. What prompted the Royal Mail to commit to the introduction of a CDC scheme?

  5. Why will the Royal Mail CDC scheme be likely to deliver higher median retirement incomes?

  6. Why do Royal Mail bosses like the prospect of a CDC?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • 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

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