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Royal Mail wants to create a CDC pension - are they really that great?

28 Jul 2018, 20:17 ... hat-great/

THE Work and Pensions Select Committee could hardly have been more glowing when it published its report into collective defined contribution (CDC) schemes earlier this month.

While the report itself noted that CDC schemes could “transform the UK private pensions landscape”, committee chairman Frank Field – the veteran Labour MP – went one step further, suggesting that the structures would likely be as revolutionary as the creation of the welfare state.

“The idea of a new Beveridge has been overused and under-delivered during most of the welfare state’s life,” he mused. “But the report published by the select committee offers that opportunity for pensions: how to combine decades of individual pension ownership and provision with collective security.”

First mooted last year as a means of breaking the stand-off between Royal Mail – which wanted to close its defined benefit scheme in favour of a money purchase one – and the Communication Workers Union, which opposed the plan, CDCs are seen as offering a half-way house in terms of pension provision.

Unlike defined benefit schemes, which promise members a set income for life, CDCs are designed to offer a target income that can be adjusted as and when economic circumstances require. Unlike defined contribution schemes, which require savers to take control of managing their individual pots, CDCs pool investments, with all members’ money being managed collectively.

So while CDCs would not come with the cast-iron guarantee of a defined benefit pension, they would remove much of the risk associated with a defined contribution one.

The select committee said this would benefit employees because it would offer “the potential for better pensions than from standard defined contribution saving” while it would enable employers to offer their workers decent pensions without having to take on large potential liabilities.

Unsurprisingly, the TUC is also a CDC fan, with its pensions officer Tim Sharp noting that the schemes are likely to “improve the retirement prospects of hundreds of thousands of working people”.

Noting that “a stock market dip just before retirement can decimate a [defined contribution] member’s savings”, Mr Sharp said that “collective pensions would reduce the risk of a pensions lottery”.

The problem is, as CDCs, which have been available in the Netherlands for some time, have never actually been used in the UK, there is currently no legislation to govern how they would operate, meaning for now Royal Mail – or any other business keen to use them - cannot proceed.

Pensions consultant John Ralfe believes that coming up with that legislation will not be as easy as is being made out.

“The trouble with CDC is that nobody has bothered to sit down and work out in any detailed way what the nuts and bolts are,” he said. “If you’re a new employee and there’s a defined contribution pension you’ll be given a two- or three-page explanation of how it works.

“You may or may not understand it but at least there’s something there – no one has done that for CDC. What we’ve got is a lot of arm waving and a lot of theory but no practice.”

Worse still, Mr Ralfe believes that far from taking risk away from individual savers, CDCs only serve to muddy the waters of where the risk lies, with younger scheme members likely to bear a heavier burden than older ones. This is because each new generation of members would take on the investment risk posed not only to their own pension but to that of each existing generation of members already in the scheme.

“In a CDC plan you don’t have individual pots so it is difficult, nay impossible, to work out which members are bearing the risk and which members get the reward,” he said “The phrase collective has a rosy glow about it but if what it boils down to is a transfer from young to old that isn’t right.”

Despite this, Mr Sharp at the TUC believes the Government must now “move quickly to put rules in place allowing collective pensions, not just at Royal Mail but any workplace where members and employers want them”.

The problem is, with Royal Mail’s pensioners moving across to a bog-standard defined contribution scheme in April and no other company so far showing an interest in the structures, it is hard to see where the impetus for legislative change is going to come from.

For the foreseeable future at least that means businesses with defined benefit schemes will have to keep finding ways of funding them, while members of defined contribution ones will have to become better versed at managing them.

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