Summary
Royal Mail deal could transform the pensions landscape
We congratulate Royal Mail and the Communication Workers Union on their ground-breaking agreement to pursue the creation of a collective defined contribution (CDC) pension scheme. As well as being a model of constructive industrial relations, it opens the door for CDC to move from abstract idea to practical reality. This could transform the UK private pensions landscape.
Potential benefits to employers and savers
That landscape is currently split. Defined benefit (DB) pensions are in decline as employers seek to reduce their exposure to ongoing funding obligations. Defined contribution (DC) saving is, by contrast, growing fast under automatic enrolment. DC pensions are more manageable for employers, but require individuals to shoulder the burdens of investment risk, volatility, uncertain life expectancy and purchasing a suitable pension income product on retirement.
CDC pensions, which are prominent features of highly successful pensions systems in Denmark and the Netherlands, offer advantages in the middle ground. These schemes offer a regular retirement income but in the form of a target benefit rather than a guarantee. Changes in the funding position of the scheme are addressed by adjusting the benefit rather than calling on extra contributions from the employer. CDC may well appeal to companies who want to offer good pensions to their staff without the risk of large long-term pension liabilities on their balance sheets. The prospect of a regular and relatively reliable income in retirement may be welcomed by those staff. Through the pooling of risk between scheme members, CDC may well also provide more generous pensions on average than standard DC saving. CDC would therefore be a good choice for some employers and some savers. To offer more good choices is entirely consistent with both pension freedoms and promoting retirement saving.
Legislating for CDC
The Government has indicated that it will seek to enable CDC for Royal Mail in a way which will allow other companies to follow suit. We very much welcome this and recommend the Government does so using its existing powers under the Pensions Act 2011. This method would have the added benefit of assuring employers that they will not face subsequent additional deficit funding obligations.
We further recommend the Government consult on the technical regulations necessary to create a CDC system to a swift timetable set out in response to this report. CDC schemes should be governed by a board of trustees and both authorised and supervised by a proactive Pensions Regulator. They should be required to publish their benefit calculation rules and funding position and strategy at least annually.
The consultation should also cover:
- benefit adjustment and risk sharing policies, including how to achieve intergenerational fairness within CDC schemes;
- the regime for transfers out of CDC, including whether they should be permitted once pensions are in payment and whether members transferring out should have to take financial advice; and
- whether CDC scheme trustees should be required to have a specific qualification.
The future of CDC
The initial impetus for CDC has come from a large employer and a major trade union seeking an alternative pension model. But establishing CDC schemes opens the possibility of more diverse and ambitious provision of collective pensions, across industries and professions and to self-employed and gig economy workers. We recommend that the regulations governing CDC should accommodate mutual, multi-employer and standalone schemes. The Government should seek to encourage such innovation, and its great potential gains, in establishing a framework for a new wave of collective pensions in the UK.
Published: 16 July 2018