23rd MarchIs the planned Royal Mail scheme the answer to our pension woes?
By Margaret Taylor @MagsTaylorHT
WORK and pensions secretary Amber Rudd was pretty glowing when she announced on Monday that the Government had finally given its backing to a new kind of pension scheme that will initially be used only by Royal Mail.
Collective defined contribution schemes (CDCs) could, she gushed, “deliver improved returns for millions”.
“Introducing a completely new pension scheme to the market is yet another revolutionary reform in this government’s quest to transform the retirement saving culture in this country,” she said.
“These pioneering proposals should deliver improved investment returns for workers and savers while cutting costs and red tape for British job creators.
“The new type of pension is currently used in Denmark and the Netherlands - two countries widely recognised as having among the best pension systems in the world.
“Any steps that result in better saving returns for workers are something to celebrate and I look forward to working with industry to enhance the prospects of millions of workers.”
The announcement ostensibly brings to fruition a plan that was mooted in 2017 as a means of breaking a 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 that proposal.
CDCs, which offer at least some of the certainty associated with defined benefit pensions while removing some of the risk that comes with defined contribution ones, were accepted by both sides as a good half-way house.
It is easy to see why. Unlike defined benefit schemes, which promise members a set income for life, CDCs are designed to offer a target income that can be adjusted downwards if markets do not perform according to plan.
Unlike defined contribution schemes, which require savers to take control of managing their individual pots and which the vast majority of people now pay into, CDCs reduce risk by pooling investments, with all members’ money being managed collectively.
The benefits, Ms Rudd said, “are clear”, with members getting “more certainty” in retirement, “regular pay-outs from their scheme” and protection in the eventuality that their employer goes bust.
But, as Aegon pensions director Steven Cameron pointed out, there are also numerous drawbacks to CDCs, not least because the structure is so complex employers may find it difficult to explain them to their staff.
“Critics point to the complexity of explaining the scheme’s benefits to members and their incompatibility with pension freedoms,” he said.
“Individuals are told what their target benefit is but this is not guaranteed and it is likely that actual benefits will be different from the initial target, making planning difficult. Most worryingly, there is a very significant risk that monthly pension income once in payment could fall. There is also the potential for one generation of members to subsidise another.”
Yet despite all the chat around CDCs, for pretty much all pension investors their mooted introduction remains just that: moot. While the Government has given its theoretical backing to the structure, it wants to trial the pension with Royal Mail first before giving other employers the option of rolling the model out to their staff. And, as it will have to introduce legislation before even Royal Mail can create a CDC, it looks like it will be many more years before Ms Rudd’s “pioneering proposals” stand a chance of delivering “improved returns for millions” as promised.
Royal London policy head Steve Webb, who as pensions minister first floated the idea of CDCs in 2014, said: “It is good that the Government is moving forward with the CDC scheme as part of the pension landscape, but the proposed legislation will be very narrow in scope. Even for the Royal Mail it is likely to be several years before a scheme could be up and running.
“If other employers want to use a different model, this could need new primary legislation and we would probably be talking about the mid 2020s before further schemes could be in place. I strongly suspect that the Government has very limited legal resources as civil servants are being diverted to work on Brexit-related legislation, and this is limiting their ability to produce more comprehensive legislation on CDC.”
In the meantime, the members of Royal Mail’s defined benefit scheme, which closed to new entrants back in 2008, were shifted into a cash balance plan last year, a temporary measure that, despite Ms Rudd’s announcement, looks likely to become semi-permanent at the very least.