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LTB 627/18 Pension Consultation

08 Nov 2018, 13:09

LTB 627/18 Pension Consultation

No. 627/18

7th November 2018



Dear Colleague,

Pension Consultation

Yesterday marked a very important day in our journey to secure our new pension scheme – the first of its kind in the United Kingdom.

This consultation commences with the following encouraging statements of support from key figures:

This is an important innovation…I’m grateful to Royal Mail and the Communication Workers Union for their assistance in getting us to this point. Guy Opperman, Pensions Minister.


The Labour front bench has given wholehearted support to the scheme negotiated by Royal Mail and the CWU. This groundbreaking scheme is one of the most significant developments in pension policy in years and will offer better income in retirement for the employees concerned. Jack Dromey, Shadow Pensions Minister, Labour Front Bench.



This could be the next great pensions revolution and help return the UK’s pension system to among the best pension systems in the world. It could be as seminal a moment as the Beveridge report was for the welfare state. Frank Field and the Work and Pensions Committee.



Against that backdrop, please find attached the Department for Work & Pensions consultation document and press release which was issued yesterday, with comments from Guy Opperman, Jon Millidge and the DGS(P). Colleagues will note that the consultation will run for 12 weeks and then the Government will bring forward the legislation change to enable our scheme.

This is a proud moment for our union and could not have been achieved without the loyal support of our members.

Please ensure the content of this LTB is shared as widely as possible with our Representatives and members.

Any enquiries in relation to this LTB should be addressed to the DGS(P) Department quoting reference 24111a.

Yours sincerely



Terry Pullinger
Deputy General Secretary (Postal)

18LTB627 – Pension Consultation http://emails.cwu.org/t/d-l-njyhhhk-ztkjiuyil-i/

18LTB627 Attachment 1 DWP Consultation Document http://emails.cwu.org/t/d-l-njyhhhk-ztkjiuyil-d/

18LTB627 – Attachment 2 DWP Press Release http://emails.cwu.org/t/d-l-njyhhhk-ztkjiuyil-h/

View Online http://emails.cwu.org/t/d-l-njyhhhk-ztkjiuyil-k/

LTB 627/18 Pension Consultation

10 Nov 2018, 23:56

So a great step forward and possibly could be introduced some time next year...Perhaps.

Still trying to get an understanding of exactly how this will work.

We currently pay into the pot and will get a lump sum. The new scheme everybody pays into the pot and get a pension.

I know its based on contributions and stock market success but I just can't work out how much they would pay, for how long etc.

Interesting times. Any thoughts on how this will work out ??

LTB 627/18 Pension Consultation

11 Nov 2018, 08:24

Hawkey99 wrote:So a great step forward and possibly could be introduced some time next year...Perhaps.

RM pension changes usually happen from 1st April in any given year. Assuming that's the case here, then 2020 is probably the earliest it will be introduced.

Still trying to get an understanding of exactly how this will work.

You're not alone, even some pension industry experts probably don't really know about all the nitty gritty of it. But the forthcoming consultation and legislation should iron things out.
In practice us humble posties probably won't get to know the finer details until we get one of those red booklets(assuming the legislation is forthcoming).

We currently pay into the pot and will get a lump sum. The new scheme everybody pays into the pot and get a pension.

The DBCBS provides a lump sum to take along with our already accrued RMPP(NRA60 & NRA65) benefits, just like AVC's.
CDC/DBLSS aims to provide a pension and a lump sum and will be totally separate from the RMPP.

I know its based on contributions and stock market success but I just can't work out how much they would pay, for how long etc.

Interesting times. Any thoughts on how this will work out ??

All the info is in the booklet we got from RM in February this year and in the booklet we got from the CWU when the agreement was voted in. But here's a brief summary:

The pension will accrue at the rate of 1/80th of pensionable pay. The lump sum(DBLSS) will accrue at 3/80ths of pensionable pay. There will be no Lower Earnings Deduction so all of your pensionable pay will count.

Based on current basic pay of £432.92 per week/£22,511 per year, that would mean for each plan year you would build up a pension of £281 and a lump sum of £844.

So fairly similar to section B of the CSDB scheme from 2008-2018.
* Section C don't automatically build up a lump sum.

However, how it differs is that with the previous scheme our benefits increased automatically with inflation each year.
But CDC will only target increases – nothing is guaranteed and if the investments don't perform adequately, our pensions could actually go down!

In practice stock markets can go up or down by as much as 30-40% some years, but that doesn't mean what we get from our pensions will do the same! Because the aim is that returns will be 'smoothed' over time, so the good years pay for the bad.

It's been quoted that a CDC scheme in Holland reduced it's members pensions by 2% after the stock market turmoil of 2008. But that was a lot less than the markets actually went down by!!! And it meant that the potential inter-generational problems with CDC were evened out.

I'm not sure if there's any figures on how much it's gone up by during the 10 years of mainly positive stock market movement since. But I would hazard a guess that 2% may well have been got back by now?

The targeted returns for CDC and DBLSS are RPI, which at the time of writing is 3.1%. So not unachievable!

Assuming it all works out as it's supposed to, the pension will pay out until your death, followed by a 50% dependants pension.

The Defined Benefit Lump Sum Scheme(DBLSS) will however guarantee a lump sum of at least the accrued amount, plus targeted annual increases. And once those increases are added on, they won't reduce.
So based current basic wages, if you pay into it for 10 years you'll get a lump sum of at least £8,440.

LTB 627/18 Pension Consultation

11 Nov 2018, 10:41

Thanks Robert.

If its introduced in 2020 will it be possible just to take a pension from the amount paid in and not a lump sum.

As you know some have quite a bit in AVCs and another large lump sum could create tax problems.

Thanks

LTB 627/18 Pension Consultation

11 Nov 2018, 11:13

Hawkey99 wrote:If its introduced in 2020 will it be possible just to take a pension from the amount paid in and not a lump sum.

All the CDC literature says it's pension and a lump sum. There is no mention of being able commute the lump sum for a bigger pension or vice versa. But you can pay in an extra 1%(matched by RM) to increase your lump sum.

EDIT:

Taken from My Royal Mail:

Are members forced to take a cash lump sum under the CDC scheme with the Defined Benefit Lump Sum Scheme sitting alongside it?

Royal Mail and the CWU have committed in principle to the future introduction of a CDC scheme - subject to the necessary legislative and regulatory changes - with a Defined Benefit Lump Sum Scheme (DBLSS) sitting alongside it. This means all members would receive a guaranteed lump sum at retirement. At present, 97% of RMPP members choose to take a lump sum at retirement. The DBLSS would provide a lump sum at retirement but it would be up to members whether they take that as cash, or use it to buy an alternative product, such as an annuity.


As you know some have quite a bit in AVCs and another large lump sum could create tax problems.

Again none of the literature afaik says how the lump sum would be treated for tax purposes.

But pension rules in the UK state that you can take 25% of each pension you have tax free.
These things are worked out slightly differently for DB and DC, and CDC may well see another/different calculation.
So as the DBLSS is the lump sum element of the overall CDC pension plan, my opinion is that it will treated as one scheme and the lump sum will be tax free.
Last edited by RobertT on 11 Nov 2018, 19:25, edited 1 time in total.

LTB 627/18 Pension Consultation

11 Nov 2018, 12:02

Interesting.

Are you saying you could pay in an extra 1% now ??

LTB 627/18 Pension Consultation

11 Nov 2018, 12:15

Hawkey99 wrote:Interesting.

Are you saying you could pay in an extra 1% now ??

No, I'm repeating what it says in the 'pension review booklet' from RM about the proposed CDC scheme:

Members would have the option of contributing an extra 1% to the DB lump sum element of the proposed
CDC scheme. The Company would match this contribution with a further 1%

LTB 627/18 Pension Consultation

11 Nov 2018, 13:33

So as the DBLSS is the lump sum element of the overall CDC pension plan, my opinion is that it will treated as one scheme.


It's all conjecture at the moment but I don't think it will.
The intention for the DBLSS is for it to be a defined benefit with a minimum guaranteed value, from a legal point of view it would be much simpler to separate the two schemes rather than create even more levels of legislation to design a hybrid DB/DC mixed system on top of what will already be a complicated hybrid collective DC scheme.

Having a DB element inside a DC scheme would also have implications for the pension protection fund.

LTB 627/18 Pension Consultation

11 Nov 2018, 13:50

From section 3 of the consultation document.

69. If a scheme containing a CDC section is a hybrid scheme (i.e. it contains a section that provides non-money purchase benefits), the non-money purchase section will need to be clearly separate from the CDC section including having segregated assets. We expect that a section which contains employer guarantees will continue to appear as a liability on the employer’s balance sheet and will be considered accordingly within the legislative and regulatory framework. We propose however to make the necessary provision in legislation so that the two sections can be treated in effect as separate schemes.

LTB 627/18 Pension Consultation

11 Nov 2018, 14:33

Woody Guthrie wrote:From section 3 of the consultation document.

69. If a scheme containing a CDC section is a hybrid scheme (i.e. it contains a section that provides non-money purchase benefits), the non-money purchase section will need to be clearly separate from the CDC section including having segregated assets. We expect that a section which contains employer guarantees will continue to appear as a liability on the employer’s balance sheet and will be considered accordingly within the legislative and regulatory framework. We propose however to make the necessary provision in legislation so that the two sections can be treated in effect as separate schemes.

I'm not sure that really answers whether the DBLSS will be tax free or not!

The way i see it is, the DB element would not be 'inside' a DC scheme – it is 'sitting alongside' a CDC scheme!

The ironing out of the various complexities of CDC are what the consultation period and legislation is for!

Personally I doubt if either the CDC or the DBLSS would qualify for the PPF, unless the consultation/legislation decides it meets the criteria for being in it.

I fully expect the DBLSS to be tax free! I don't see how they could come up with a pension scheme that offers a lump sum like most schemes do, that then goes against the rules already in place to allow it to be tax free.
But only time will tell. :thumbup

LTB 627/18 Pension Consultation

11 Nov 2018, 15:26

What it appears to answer Robert is whether you can use the nominal value of a CDC pension to calculate how much of a DB lump sum would be tax free. If the two schemes are separate for all legal purposes as appears to be the intention then obviously you can't.

LTB 627/18 Pension Consultation

11 Nov 2018, 16:01

I fully expect the DBLSS to be tax free! I don't see how they could come up with a pension scheme that offers a lump sum like most schemes do, that then goes against the rules already in place to allow it to be tax free.


If we apply the rules as they stand now ignoring the collective nature of the CDC scheme you could...

a) Take 25% of the value of your CDC pension tax free obviously reducing your pension income.

b) Take 25% of the value of your DBLSS scheme tax free which obviously would be a great deal less.

C) a + b

What you can't do using current tax rules is the best outcome from us, taking 25% of the value of your CDC from your DBLSS scheme tax free because there is no provision for using the value of one pension to offset tax paid on another entirely separate pension.

LTB 627/18 Pension Consultation

11 Nov 2018, 16:15

What about AVC's!

They are totally separate pensions which can be treated as such and therefore you can take 25% of the total as tax free cash.

Or can be used to fund the tax free lump sum from your total RMPP benefits. In fact that's what they are designed to do!

LTB 627/18 Pension Consultation

11 Nov 2018, 16:52

All of the AVC funds are part of RMPP that"s why they"re called Additional Voluntary Contributions therefore obviously you can use them to offset your tax free lump sum.


I think you"re missing the point, the DBLSS and the CDC pension will have to be administered as two entirely separate entities and i'm guessing here but I think they"ll be administered BY two separate entities! :left: In-house with the DBLSS and possibly Zurich for the CDC.

LTB 627/18 Pension Consultation

11 Nov 2018, 17:36

Woody Guthrie wrote:All of the AVC funds are part of RMPP that"s why they"re called Additional Voluntary Contributions therefore obviously you can use them to offset your tax free lump sum.

I think you"re missing the point, the DBLSS and the CDC pension will have to be administered as two entirely separate entities and i'm guessing here but I think they"ll be administered BY two separate entities! :left: In-house with the DBLSS and possibly Zurich for the CDC.

AVC's are administered by Zurich – a separate entity to RM!!!!! They are designed to fund the tax free lump sum when taking our main RMPP benefits.

They can also be taken as separate pots under pension flexibility rules – with only 25% guaranteed to be tax free.

The DBCBS is a similar to AVC's and is designed to fund the tax free lump sum from the main RMPP benefits. But IS part of the RMPP so can't be transferred out separately!
It is currently just linked to our post 2012 pensions, but Cabinet Office approval is needed to link it to our pre 2012 pensions(RMSPS). Assuming CDC doesn't come in before that approval is needed.

CDC/DBLSS will be run by trustees, similar to how the RMPP is run now, with RM ultimately having the responsibility of funding the DBLSS as they're guaranteeing a minimum amount.

Considering the amount of money involved, there will be numerous fund managers investing the money for us.
I believe there are around 30 currently investing our post 2012 pensions for us! Most of which many people will never have heard of. I think there's a list in the annual report and accounts.

Therefore I see no reason why the DBLSS won't have the same or very similar linking to the CDC, as AVC's and the DBCBS do to the RMPP.

I don't believe I'm missing the point at all, infact from your posts, it's more a case of you not understanding how things work.

But like I said earlier, only time will tell.

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