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Pension legislation CDC scheme

12 Jan 2018, 18:47

For Royal Mail to be able to create a CDC scheme, there will need to be legislation introduced in the UK...Does anyone know the time scale involved for this...And what will happen between then and now regarding our pension


Pension legislation CDC scheme

12 Jan 2018, 19:11

I don’t know much about how these things work, but in my opinion there has to be a will to do it on the governments’ part. If they want to enable CDC plans to be introduced, legislation could take a matter of months. If not, it may never happen.
Both RM and the CWU are supposed to be lobbying the powers that be, but whether they take any notice is any ones guess.

I believe there are plans for a transitional scheme, which is pretty much the same as RM’s Cash Balance proposal, barring possible changes to contribution rates?

Pension legislation CDC scheme

12 Jan 2018, 20:50

RobertT wrote:I don’t know much about how these things work, but in my opinion there has to be a will to do it on the governments’ part. If they want to enable CDC plans to be introduced, legislation could take a matter of months. If not, it may never happen.
Both RM and the CWU are supposed to be lobbying the powers that be, but whether they take any notice is any ones guess.

I believe there are plans for a transitional scheme, which is pretty much the same as RM’s Cash Balance proposal, barring possible changes to contribution rates?


If there is a transitional scheme, then that could mean some people having as many as 5 different pensions, with one company. That is going to make pension planning almost impossible. :crazy:

Pension legislation CDC scheme

12 Jan 2018, 21:24

heapsy wrote:If there is a transitional scheme, then that could mean some people having as many as 5 different pensions, with one company. That is going to make pension planning almost impossible. :crazy:

It could effectively be 7 for some people:

NRA60
NRA65
Bonusplan
Flexiplan
Cash Balance
CDC
DC – for those who previuosly opted out of the RMPP or left RM and have returned.

Pension legislation CDC scheme

12 Jan 2018, 22:17

The new scheme does not require new legislation as there is already primary legislation in place, what it needs are regulations which obviously need to be.enshrined in law. The problem is regulations are subject to lobbying from "interested parties".

What might be a sticking point is that what is being proposed is really something unique, a bespoke collective defined "ambition" scheme with a guaranteed minimum return and possibly a defined benefit element. It's not a typical CDC scheme so it may need a set of bespoke regulations to go with it.

Pension legislation CDC scheme

13 Jan 2018, 11:26

Whether it’s regulation, legislation or secondary legislation as Terry Pullinger describes it in his latest video , the successful implementation of any new style pension scheme will need the support of 3 sides:

1. The government.
2. The sponsoring employer(in this case RM).
3. The pensions industry/providers.

CDC schemes were first mooted in the UK about 4 years ago, but didn’t get much further than the ‘let’s talk about the possibility’ stage. Because they are a completely different concept and they don’t automatically fit into current pension regulations in the UK today. And there wasn’t really much appetite for them amongst the 3 sides I mentioned above.
Problems would potentially arise regarding risk sharing between generations and how they can work alongside the pension freedoms allowed from 55, for example.

CDC schemes are common in a few countries like Holland, Denmark and Canada, where they are more usually known as ‘defined ambition’ pensions. They aim to pay out an index linked pension for life, in a similar way a DB scheme or an annuity, but there are no guarantees. So an individuals’ income could vary depending on the returns on the underlying investments.

Without seeing the actual proposals, it’s currently unclear how the RM/CWU scheme would work for its members, let alone alongside the UK’s current pension rules. But Terry does say there will be a DB element, which has got be a good thing.

There is currently an inquiry ongoing concerning CDC pensions by the Work and Pensions Committee, which I assume RM and/or the CWU have made representations to.

We’ll have to wait and see what happens.

Pension legislation CDC scheme

13 Jan 2018, 14:59

RobertT wrote:
heapsy wrote:If there is a transitional scheme, then that could mean some people having as many as 5 different pensions, with one company. That is going to make pension planning almost impossible. :crazy:

It could effectively be 7 for some people:

NRA60
NRA65
Bonusplan
Flexiplan
Cash Balance
CDC
DC – for those who previuosly opted out of the RMPP or left RM and have returned.


I didn't actually count Bonus Plan or Flexiplan. I started paying in to those just over two years ago. For some, it will be a bit of a mine field to negotiate.

Pension legislation CDC scheme

13 Jan 2018, 18:05

The whole pensions merry go round is now becoming convoluted.

Pension legislation CDC scheme

13 Jan 2018, 20:01

I know they shut pension schemes down because they become too expensive to run. But once no more contributions are going into it from either us or RM but with money still being out of course to pensioners. How in the long term can that be sustained particularly if they either play safe with investments or get burnt?

Pension legislation CDC scheme

13 Jan 2018, 20:40

with money still being out of course to pensioners. How in the long term can that be sustained


It's actually a dangerous game, the only way to pay pensioners is to sell assets and that opens the scheme up to something called de- investment risk. It's a real problem for closed pension schemes. The more assets you sell the smaller any potential investment growth the fund has, it's called circling the drain.

Pension legislation CDC scheme

14 Jan 2018, 08:31

Ultimately it’s about having enough in the pot to pay out the liabilities. The problem is that those liabilities are an unknown quantity to some degree, because nobody knows for sure how well the investments are going to perform, what the rate of inflation will be and how long people are going to live.
The actuaries will be able to use both historic data and long term forecasts, but in practice nobody can see into the future with any degree of certainty.

The problem as Fishtank suggests, is that over time that pot of money will be slowly reducing as people take their pensions and so the returns on the investments will also be going down – not necessarily in percentage terms, but in actual money! Therefore what’s left in pot will have to perform better to keep up.

So unless the scheme is fully funded(which again is an unknown quantity), and preferably in surplus to take into account of unwanted surprises in the future, many DB schemes will potentially struggle to pay their liabilities as the number of members reduces.

Pension legislation CDC scheme

14 Jan 2018, 09:15

The other problem is that these closed funds are not a pot of money as most people would think but a mixture of assets, corporate bonds, government gilts, share portfolios and even physical properties. A fund may place a nominal value on these assets but like anything else when you have to sell them they're only worth what someone is willing to pay for them. Most closed schemes de-risk their investments into safer assets but safer assets produce less investment returns and if as expected we see a glut of closed DB schemes trying to de-invest over the next 20-30 years it could potentially end up as a fire sale with many schemes struggling to stay afloat without government intervention.

It's going to be interesting to see what they do with ours.

Pension legislation CDC scheme

14 Jan 2018, 10:29

In practice many DB schemes including the RMPP have already de-risked to a large degree, hence the assets being heavily weighted towards bonds and gilts rather than equities.

But of course one of the main problems with DB schemes is the length of time people can be members of them. Let’s say a postie joined RM in March 2008 aged 20, just before the RMPP closed to new entrants.
He could be a member either as an employee, a deferred member or a pensioner for 60+ years, and all that time his pension will be increasing. Then there could be a spouses pension to pay out aswell.
It’s a huge burden for any pension scheme and the RMPP has thousands of members!

And people wonder why companies don’t want to provide DB schemes anymore!

It certainly is going to be interesting to see what happens to ours, but I would say that many of us won't still be around to see the end outcome!

Pension legislation CDC scheme

14 Jan 2018, 11:13

There was a similar example of this a couple of years back in a national newspapers finance section. A member of the the confederate forces from the American civil war, married aged 80. He married an 18 year old. SHE finally died in 1976 and the US government had to pay a war pension until she died. It was only $50 a month, but it must have cost a bit. An exaggerated example of cost, but you can see the potential problem.

Pension legislation CDC scheme

14 Jan 2018, 11:53

Going back to the original subject of this thread, there is also another variant of a CDC scheme called a Collective Individual Defined Contribution(CIDC) scheme. Which may fit better into the current pension rules in the UK, which I alluded to in a previous post.

https://www.ipe.com/countries/uk/uk-aca ... 76.article

A leading UK pensions academic has argued for lawmakers to consider introducing “collective individual” defined contribution (CIDC) schemes.

Professor David Blake , director of the Pensions Institute at Cass Business School, is one of a number of experts to have submitted evidence to the UK’s Work and Pensions Select Committee’s inquiry into collective defined contribution (CDC) pension schemes , also known as defined ambition plans.

The select committee, formed by members of the lower house of the UK parliament and chaired by Frank Field, launched its inquiry last November to assess the merits or otherwise of introducing CDC schemes.

Such structures are currently not allowed in the UK, but have been debated in recent years. CDC was put forward by a mediator as a potential solution to a dispute between Royal Mail and workers’ union CWU late last year.

However, CIDC schemes would be better suited to the immediate needs of the UK’s system, according to Blake.

In his submission to the Committee, he said said: “CIDC schemes maintain individual accounts, they are better able to deal with sudden cash withdrawals than CDC schemes, yet are still able to exploit economies of scale to the full which lowers costs, such as through automatic enrolment and the pooling of investment and longevity risks.”

According to Blake, CIDC schemes include three key features that are specific to each individual member and make them easy to understand:

The CIDC scheme maintains individual accounts for all members in the accumulation phase, so it is easy to value each individual’s pension pot;
The contribution rate is set to be actuarially fair to each member, implying a direct relationship between the contributions that an individual pays into the scheme, and the pension they eventually receive. This contrasts with CDC schemes, in which contributions are averaged on a collective basis to meet a target average salary pension;
Each individual has their own de-risking investment strategy in the lead up to retirement.
Professor Blake recommended that the government examine the feasibility of establishing CIDC schemes, for both the accumulation and decumulation phases.

He said: “Such schemes would be compatible not only with the defined ambition agenda, they would also be compatible with the new pension flexibilities following the 2014 Budget, while at the same time exploiting economies of scale to the full, and allowing a high degree of risk pooling.”

The deadline for written submissions to the inquiry has been extended to 31 January, after which there will be a call for oral evidence.

The committee is expected to publish its report in the spring.

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