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MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

09 Jan 2020, 13:57

https://www.myroyalmail.com/news/2020/0 ... tep-closer

The Pension Schemes Bill, which includes legislation to allow the introduction of a Collective Defined Contribution (CDC) pension scheme, has been introduced in the House of Lords.

If the Bill is passed, this will enable CDC pension schemes under UK law for the first time. Royal Mail and CWU have worked together to lobby Government to introduce this legislation.

The Bill puts us one step closer towards making CDC a reality for Royal Mail and its people. We will continue to work closely with CWU on this important issue.

There are a number of steps that still need to take place before CDC pensions are allowed under UK law. We will keep you up to date on progress.

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

10 Jan 2020, 05:58

https://www.unbiased.co.uk/news/financi ... on-schemes

UK steps closer to introducing CDC pension schemes

The Pension Schemes Bill now moving through Parliament will enable the creation of a new breed of pension scheme. ‘Collective Defined Contribution’ schemes may offer members and employers a better balance between security and affordability. Article by Nick Green.

A new kind of pension could begin to improve retirement outcomes for UK workers, once the latest piece of pensions legislation is passed. Collective Defined Contribution (CDC) schemes would merge some elements of defined benefit schemes with the basic principle of defined contribution schemes, creating a ‘hybrid scheme’ that combines employer affordability with greater security and simplicity for members.

The Pension Schemes Bill was originally announced in the Queen’s Speech of 14 October 2019, but has now formally entered the parliamentary process. CDC pension schemes are only a part of it, but one that could change the whole landscape of workplace pensions – in some cases for the better, and in some perhaps for the worse.

What is a CDC pension scheme?

Currently used in a number of countries including Canada, Denmark and The Netherlands, CDC schemes are a variation on the standard defined contribution pension scheme. Both involve a ‘money purchase’ arrangement, whereby the scheme member and the employer both pay into a pension pot that grows over time. The key difference is that, with a CDC scheme, this pot is shared between all scheme members, instead of each member saving into their own individual pot.

Primary legislation to introduce CDC schemes was first put in place in 2015, but other government business since then has delayed its completion. The 2015 Act allows for two types of CDC scheme, called ‘defined ambition’ (or DB-) and ‘defined contribution collective benefits’ (or DC+). As the name implies, DB- schemes would have something in common with defined benefit (DB) schemes, in that certain retirement benefits would be guaranteed (though not to the same extent). DC+ schemes would offer no such guarantees, but the ‘plus’ element refers to the presumed greater stability of the investment pot.

What are the advantages of a CDC pension scheme?

The main advantage claimed for CDC schemes is that the investment risk is spread across all members. This has the effect of reducing volatility (the amount by which the pot’s value fluctuates with changes in the market). A 2013 study by AON Hewitt estimated that CDC schemes (if in place) would have delivered a steady 28 per cent of salary over the past 50 years, whereas DC schemes varied between 17 per cent and 61 per cent. The maximum returns are therefore lower with CDC, but very low returns become less likely.

There is another significant upside when members near retirement. With an ordinary DC scheme, a pension saver will usually move their investments from volatile equities into more stable bonds, to guard against a sudden dip in value just before they access their pension pot. However, this also tends to reduce growth opportunities in the final few years. With CDC this moving of assets becomes unnecessary, since the shared pot is always invested for growth.

Similarly, members of ordinary DC schemes will use their pot to buy either an annuity or a drawdown product, and there is a risk that the market can fall just before they make their decision. A CDC scheme would not be vulnerable to this risk, since benefits would not depend on a single decision made at one point in time.

How would benefits be paid from a CDC pension scheme?

No CDC schemes currently exist in the UK, so how exactly they would pay out is open to conjecture. However, based on foreign examples, it’s likely that a CDC scheme would pay a regular income from the member’s retirement age, based on a ‘target amount’. The amount would not be guaranteed like an annuity, however, and might end up being less than the target amount. The payouts could also fall over time, even if some schemes attempt to increase payments to keep pace with inflation.

The aim would be for payouts to continue until the end of the member’s life, but again this might not be guaranteed with all schemes. However, the risk of running out of money is likely to be lower than when using drawdown.

It seems unlikely that a CDC scheme would offer anything comparable with drawdown (where a member can take flexible amounts from their pension pot). However, if benefits are below a certain level (e.g. if the member was only in the scheme for a short time) then some schemes may offer a lump sum instead of regular payouts.

Could a member transfer out of a CDC pension scheme?

A healthy CDC pension scheme would pay out to anyone with accrued benefits, even if that person had moved on to another employer. However, people switching jobs often want to transfer their old pension savings into their new employer’s scheme, and it’s likely that many would wish to do this with CDC schemes too. Any CDC scheme should be able to transfer accrued benefits to another scheme (CDC or even DC) without too much trouble, just as a DB pension can be transferred currently. Such transfers would however be subject to strict regulation, and would probable come with a requirement to take financial advice.

Could CDC schemes replace defined benefit pensions?

If CDC schemes become widespread in the UK, then a likely effect will be the faster decline of DB (final salary) schemes. One of the reasons the government is keen to push through the Pension Schemes Bill is the number of crises involving DB pension schemes, in particular Royal Mail. Following the dispute over the closure of its DB scheme, the Royal Mail and its union expressed a wish to move to a CDC pension scheme for its 140,000 employees. However, it cannot do so until the legislation for such schemes is in place.

All employers must now offer some form of workplace pension. CDC schemes would generally be much more attractive for employers than DB schemes, as DB schemes can place a huge burden on a company’s balance sheet, while with CDC schemes there is no such employer liability. Benefits are paid out of the scheme’s central fund, which is funded by employer and employee contributions, so even if the fund is exhausted the company’s other assets are safe. In short, a CDC scheme won’t bankrupt the company.

Many public sector jobs will probably continue to operate taxpayer-funded DB schemes. However, private sector employers would have plenty of reasons for choosing CDC schemes instead.

What are the drawbacks of CDC pension schemes?

The pros and cons of CDC schemes depend on what you compare them to – and whether you’re a member or an employer. Compared to DB schemes, for example, they’re clearly less attractive to members, as the income they offer is not guaranteed and may fall, even after payments have commenced. Conversely, they are more attractive for employers, since there is no chance of creative a pensions ‘black hole’ that could eat up their company.

How do CDC schemes fare when compared to standard DC schemes? For members, there is the advantage of lower investment risk and potentially more certainty over retirement income. They are also simpler to understand and do not require such high-pressure decision making at the point of retirement. Against that, there is less potential for stellar growth. As for employers, being able to offer a CDC scheme may be a good recruitment and retention tool (if not as strong a draw as a DB scheme would be).

Employers will also need to take care that their CDC schemes are set up fairly. Concerns have already been raised that younger members’ contributions could be used to pay older members’ benefits. Such fears will need to be allayed, by putting appropriate safeguards in place, if UK workers are to feel comfortable paying into such schemes.

When could the UK have CDC pension schemes?

After a five-year delay, the secondary legislation for CDC schemes is finally moving through Parliament, though as yet there is no firm date for Royal Assent. The UK’s first CDC scheme will be Royal Mail’s, and this will be a fascinating case study as to how this new-style pension will be received by UK workers, and how successful these schemes can be in practice.

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

12 Jan 2020, 08:14

Who exactly is going to make sure the investment strategy is right? RM have consistently failed to ensure that funding is adequate, probably deliberately, which has lead to the demise of decent schemes. What happens if it doesn't work and people are on the verge of retirement when they find out too late? Are the government going to bail people out when their pension payments drop, or even stop, if the scheme fails? It doesn't mention the discrimination towards delivery staff who probably wont make it to the older age that this scheme is designed to start paying out. Are we going to see a raft of legal cases brought by those people, as nothing RM offers by way of employment compares to the daily grind suffered by those in delivery? Just a few thoughts. :hmmmm

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

12 Jan 2020, 09:23

How will the value of the CDC work I wonder? Is it revalued up or down once a year and remains at that figure till the next year. Or could the payments vary from month to month?

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

12 Jan 2020, 09:53

heapsy wrote:Who exactly is going to make sure the investment strategy is right? RM have consistently failed to ensure that funding is adequate, probably deliberately, which has lead to the demise of decent schemes. What happens if it doesn't work and people are on the verge of retirement when they find out too late? Are the government going to bail people out when their pension payments drop, or even stop, if the scheme fails? It doesn't mention the discrimination towards delivery staff who probably wont make it to the older age that this scheme is designed to start paying out. Are we going to see a raft of legal cases brought by those people, as nothing RM offers by way of employment compares to the daily grind suffered by those in delivery? Just a few thoughts. :hmmmm

CDC schemes will be treated the same as individual DC schemes, the employer just pays in an agreed percentage of pay, just as they would with a normal DC scheme. There is no liability on the employer to pay any shortfall in our pensions, they go down instead!

In a way I think CDC is a bit like drawing down a normal individual DC pot. The money is invested and you take out a certain amount each year. If the value of your investments go down you either:

Take out a smaller amount to allow for that reduction; or
You take out the same amount and potentially let your pot decrease quicker.

CDC pensions take the first option.

In practice the investments held with CDC are going to go up and down just as your investments in your own AVC's or ISA's, etc might. Broadly speaking, CDC will be investing in the same things, so it's not unreasonable to see similar peaks and troughs.

There won't be any government intervention as the Pension Protection Fund only applies to DB schemes that meet certain criteria, and CDC isn't a DB scheme. It's a Collective Defined Contribution scheme.

The RM CDC pension will be run on a trustee basis in a similar way to the RMPP, ultimately it'll be up to the trustees(whoever they're going to be?) to ensure there's enough money in the pot to pay our pensions.

I don't think there's much chance of anyone winning any legal case against RM for increasing the pension age for this new scheme. At the end of the day, we all choose to work for RM and we all have the choice to leave and get another job.

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

12 Jan 2020, 09:54

FAB wrote:How will the value of the CDC work I wonder? Is it revalued up or down once a year and remains at that figure till the next year. Or could the payments vary from month to month?

The plan is yearly, as shown in the anticipated CDC design booklet: https://www.royalmailgroup.com/media/10 ... ooklet.pdf

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

12 Jan 2020, 10:52

Extract from above;
"However, if benefits are below a certain level (e.g. if the member was only in the scheme for a short time) then some schemes may offer a lump sum instead of regular payouts."

I have been a member of the DC scheme for 7 years. (part time). I plan work a couple of years beyond state pension age meaning I will only be in the CDC scheme for a "Short time". I would take the option of the lump sum as, understandably, the regular payments would not be significant.
Also the option of adding 1% employee/employer is appealing.
However i understand the scheme has not been ratified yet.

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

12 Jan 2020, 12:13

In practice the CDC benefits we accrue will have a 'total value' in a similar way to how DB benefits have a 'total value'. Although the way it's worked out is likely to be slightly different, i.e a multiple of lower than 20, or maybe a more complicated method?.

With small CDC pots, I suspect there may be 2 options available if membership is very short:

1. Take your 'total value' as a cash payment with the first 25% being tax free. Similar to what applies to small individual DC pots now. More info.
2. Transfer your 'total value' into another DC pension scheme for future access via drawdown or annuity purchase.

Bearing in mind that your 'total value' will be a proportion of the entire CDC investment funds, based on your pensionable pay, length of CDC membership and value of the entire collective pot.

It's planned that the second option above, could also be taken by anyone not wanting to take their accrued CDC pension benefits, even if they're in it a number of years.

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

18 Jan 2020, 23:50

From a selfish point of view, I hope the scheme does not come in till Dec 2020! I prefer the cash balance. But for most people a pension is much better than just cash. Cash, once it is gone is gone.
So a pension is what you need. So I hope you get your CDC pension.

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

30 Jan 2020, 16:36

https://www.myroyalmail.com/news/2020/01/pension-update

Pension Schemes Bill progressing through Parliament

The Pension Schemes Bill, which was announced in the Queen’s Speech in December for the second time, has started its progress through Parliament. It had its second reading in the House of Lords on Tuesday.

If passed, this Bill will enable Collective Defined Contribution (CDC) pension schemes under UK law for the first time.

A CDC pension is a key part of the new pension scheme agreed between CWU and Royal Mail in March 2018. We have been working closely and jointly with our unions at all levels on this and will continue to do so.

Baroness Stedman-Scott (Parliamentary Under-Secretary, Department for Work and Pensions) said: ‘I put on the record our thanks for the constructive and supportive way in which both Royal Mail and the Communication Workers Union have engaged in developing these measures.

‘It is right for us to support employers and unions working together to bring about such a positive outcome.’

The Bill has to have readings in both the House of Lords and House of Commons before it can become UK law. We will keep you updated on the progress of this important legislation.

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

30 Jan 2020, 16:59

Personally I hope it does not come in before Dec, I like the cash bal scheme, as I am about to retire, although I appreciate a pension is the best for every one as cash runs out!

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

30 Jan 2020, 17:02

For anyone who is interested there are 12 stages a bill has to go through for it to become law. This latest one is only the second!

https://www.parliament.uk/about/how/laws/passage-bill/

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

30 Jan 2020, 17:05

More comments on it..
https://www.retireeasy.co.uk/news/pensi ... w-kid-town

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

30 Jan 2020, 17:47

RobertT wrote:For anyone who is interested there are 12 stages a bill has to go through for it to become law. This latest one is only the second!

https://www.parliament.uk/about/how/laws/passage-bill/


So Robert what about the timescale - I think you mentioned the possibility that the CDC scheme could be introduced "sometime in the second half of 2020".
Any change to that estimate?

MRM.COM : The Pension Schemes Bill has been introduced in the House of Lords

30 Jan 2020, 18:55

rogersh wrote:
RobertT wrote:For anyone who is interested there are 12 stages a bill has to go through for it to become law. This latest one is only the second!
https://www.parliament.uk/about/how/laws/passage-bill/

So Robert what about the timescale - I think you mentioned the possibility that the CDC scheme could be introduced "sometime in the second half of 2020".
Any change to that estimate?

Officially there is no timescale as to when CDC will become law and the RM scheme can be implemented. So I'm not sure any of my observations are particularly valid more anyone else's.

But CDC does seem to have cross party support - it was also in the Labour manifesto in the recent general election.
So that suggests to me that there won't be any party political bickering as there might be with other proposed new laws.

If you click on the red and green circles(1,2,C,R,3) on the link I provided, you will see in more detail what each stage entails.

It was never going to be a quick process, but it is slowly moving forward. So I still think that if things go as quickly as they can, the second half of 2020 is still a possibility.

But then again I could turn out to be totally wrong.

Only time will tell.

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