Anticipated CDC pension design

[RobertT]

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Anticipated Collective DC (“CDC”) pension design

Royal Mail and CWU’s agreement on pensions combines two elements of benefit:
- A Collective Defined Contribution ("CDC") pension; and
- A Defined Benefit Lump Sum on retirement

This booklet sets out a summary of the anticipated design of our CDC pension arrangement. It is subject always to CDC legislation being enacted in appropriate form and to the rules of the arrangement once established.

1. Legal Framework

-1.1 legal Structure

The new Plan would be governed and operated by Trustees according to a Trust Deed and Rules. The CDC Pension Section (“the Section”) would provide employees with a pension (a “wage in retirement”). The Section would sit within a statutory definition of CDC (a subset of “money purchase” benefits for pensions regulatory purposes) and be approved/registered as a CDC Section by the Pensions Regulator.

The Trustees would appoint a Plan Actuary, primarily to advise on the valuations used to determine annual pension increases and member option terms.

-1.2 Other Section

RMG would also open a Defined Benefit Lump Sum (“LS”) Section under the same Plan, to provide risk benefits (see Section 2.5 below) and a ‘tax-free cash’ lump sum as a Pension Commencement Lump Sum supported by the CDC pension. The assets of the two sections would be entirely segregated, with no facility for cross subsidy between the two.

2 - Benefit Structure

-2.1 Section Membership

RMG employees to be automatically enrolled in the Plan once they have achieved 12 months’ continuous service with RMG.

-2.2 Contributions

The contributions into the CDC Section will be fixed at 15.2% of active members’ pensionable pay (“pp”), of which 11.2% of pp is payable by RMG and 4.0% of pp is payable by the active member1 . As with other money purchase schemes, these will be set out in a Schedule of Payments.

The Section would have no recourse to the sponsoring employer or to members for additional funding of past or future service pensions. Given the DC nature of the Section, pensions would be determined as the amounts which are funded by the assets; adverse or favourable pension funding conditions would directly determine the level of member pensions via the Pension Adjustment Mechanism described in Section 5.

-2.3 CDC Pension Calculation

The CDC Section will provide pensions for members payable for life calculated as follows:

An annual CDC pension block credited at a rate of 1/80th of pp in each year of service, irrespective of age (so leading in aggregate to a ‘career average’-type pension) and subject to adjustment as set out below;
Payable from a normal retirement age of 67, with other retirement options as described below.

Increases, or decreases, for all members (i.e. actives, deferred and pensioners) calculated by reference to the valuation position of the Section, as determined each year in line with the Pension Adjustment Mechanism.

Contingent CDC pensions would be payable to qualifying dependants on the member’s death (as below) equal to 50% of the member’s pension (with increases / decreases on same basis as above)

-2.4 Member Options

Subject to employer policy from time to time, members would have the following options.

Retire early on an actuarially equivalent reduced pension.

For members still in RMG service beyond 67, continue to build up pension (and receive the same increases / cuts over that period as other members) beyond 67 until they leave RMG.

Take a transfer value to another HMRC registered pension plan. The transfer value amount would be determined as the member’s share of the Section’s total assets. This share would be determined on a basis consistent with that used to determine the annual increases/decreases, but updated to allow for Section asset return and other experience to the date of transfer.

Full commutation (on cost neutral terms) for small lump sums or on serious ill-health would be allowed on transfer value (ie share of fund) terms.

For any member options above which require an actuarially equivalent conversion of the default CDC pension, the terms (‘factors’) will be determined by the Plan Actuary. They would be cost neutral on the “central” (or “best”) estimate valuation basis, with allowance if appropriate for any differences in expected demographics for the members taking the option.

-2.5 Death & Ill Health Benefits

On ill-health, the CDC pension would be payable early without reduction (with no allowance for prospective service) but on the same increase/decrease basis as other CDC pensions.

On death, a CDC pension would be payable to qualifying dependant(s) equal to 50% of the member’s pension (with no allowance for prospective service) on the same increase/decrease basis as other CDC pensions.

As stated at 1.2 above, lump sum death benefits are paid from the LS Section. Ill-health benefits are paid separately under insurance cover.

3. Key Investment Principles

-3.1 Investment governance structure

Investment decisions can be considered to be in two tiers, for which the governance structure would be as follows:
1. Split of assets into return-seeking and low-risk assets, which would be determined based on the valuation liability profile as specified in the Section’s Rules in accordance with 3.2 below.

2. Determination of the assets within the return-seeking and low-risk portfolios, which would be determined by the Trustees in conjunction with their Investment adviser in accordance with the mechanism specified in the Section’s Rules summarised in 3.3 below.

-3.2 Specified split of invested assets into Return-Seeking and Low-Risk

The CDC Section’s overall split of assets between Return-Seeking Assets and Low-Risk Assets (as defined in Section 3.3 below) is to be calculated based on the Section’s liability maturity profile and using the valuation assumptions. The invested assets backing each Section member’s pension liabilities are to be split as follows:

100% in Return-Seeking Assets supporting pensions for members until age 67,

Switching uniformly from this position over a 23 year time frame to

100% in Low-Risk Assets supporting pensions for members from age 90 onwards.

The Section’s overall split of assets is to be the weighted average of the above holdings for the Section membership. This aggregate approach means that the Section’s investment policy is resilient to structural changes in the membership profile and the RMG workforce.

The above split is that required for invested assets, after excluding any cash holdings required for liquidity as advised as necessary by the Investment Adviser.

-3.3 Return Seeking and Low-Risk Components

The Return-Seeking Asset holdings are to target a good level of returns over the long term, and then the blend to a combination with Low-Risk Assets is to provide more stable support for members’ pensions once in payment.

The Return-Seeking Assets are a diversified growth portfolio, chosen so that:

the expected median level of returns is within a specified margin of that on a diversified global (currency hedged) equity portfolio, and
the volatility of returns is advised by the Trustees’ Investment Adviser to be as low as can reasonably and efficiently be achieved.

The Low-Risk Assets are an appropriate mixture of bonds and other low-risk assets which the Trustees’ Investment Adviser advises carry a ‘low risk’ (to be defined), and have an appropriate duration and nature given the remaining duration and expected level of price inflation linkage of the Section’s liabilities.

4. Valuation Methodology

-4.1 No surplus or deficit

The Pension Adjustment Mechanism described in 5 below means that the Sustainable Level of Increases are automatically rebalanced annually so that the earned pension blocks are equal in value (on the basis of the assumptions being used) to the assets of the Section. Following each valuation, on the assumptions used (including assumed future increases or cuts) there would therefore be no funding deficit or surplus as at the valuation date.

-4.2 Annual actuarial valuation

The annual actuarial valuation would be carried out on an ‘accrued basis’, comparing the value of assets held with the value of pensions already earned. The purpose of the valuation is to determine the future Sustainable Level of Increases and, in particular, the next pension increase.

-4.3 Central estimate assumptions

Pension liabilities would be valued by the Plan Actuary using “central” (or “best”) estimate assumptions, i.e. with no intended bias for prudence or optimism. Future asset returns (“discount rates”) would allow for the investment strategy’s specification of future changes in the allocation of assets supporting the earned pensions.

In addition, an expense reserve would be built up within the assets, to meet operational expenses from an assumed future date of closure to new Section accumulations.

Assets would be valued at market price.

-4.4 Assumptions set by the Plan Actuary subject to benchmarking

The valuation assumptions would be set by the Plan Actuary, subject to the requirements that:

i. They are the Plan Actuary’s “central” (or “best”) estimate assumptions, i.e. with no intended bias for prudence or optimism.
ii. For any assumptions which require a large amount of subjective judgement, without an industry standard as a reference point, the Plan Actuary must take into account the views of:

the Plan’s investment advisers (for financial assumptions),
an actuary nominated by RMG’s recognised unions, should they choose to do so,
an actuary nominated by RMG, should they choose to do so, and
the view of an external expert, independent of the Plan Actuary, who will be chosen by the Plan Actuary (in consultation with the Trustees).

These parties will be asked to provide a brief report on a triennial basis (or more frequently as required) in order to provide benchmarking for the assumptions. Initially, the only assumption expected to be benchmarked is the estimated future returns on the assets (‘discount rate’).

iii. The Plan Actuary must provide the Trustees with a justification for each assumption, with reference to the assumption used in the previous year and, where relevant, the benchmarking. A summary of the key assumptions and justifications will then be communicated to members and published when the resulting increase is announced

5. Pension Adjustment Mechanism

-5.1 Pension Adjustment Mechanism

In each year, the same increase / decrease will apply to all members under the Pension Adjustment Mechanism. The annual Pension Adjustment Mechanism is in summary:

The annual valuation exercise would compare the current amount of assets (excluding the reserve for future operational expenses) to the cost of funding payment of the accumulated pensions over the remaining life of the Section if they were to receive no further increases (the “Parity” funding level).

If the Section is above Parity, there is “headroom” funding for increases. The rate of increase is calculated as the long-term margin above or below the valuation’s assumed CPI-inflation curve at the rate which on the valuation assumptions is funded by the assets (the “Sustainable Level of Increases”). This is then applied to the latest year’s CPI inflation rate (taken at an appropriate measurement date), in order to determine the increase to be applied this year to all pensions earned before the valuation date.

In this “above Parity” scenario, the increase is subject to a floor of nil. This is to avoid cutting pensions when there is funding for increases (even if price inflation has been low or negative).

If the Section is below Parity, a pension cut is required as described in 5.2.

-5.2 Parity Programmes

If the Section is below Parity, there is no funding for increases, and a pension cut is required to bring the Section back to Parity.

A cut of 5% or less would be applied as a single action. A cut of over 5% would be applied over a “Parity Programme”, which would run for a period of up to three years as required, as follows:

Cuts of up to 5% would be applied as early as possible. Cuts of over 5% pa would only apply if required to return the Plan to Parity within three years of the funding loss that led to required cuts.

If there is subsequent positive experience before the Parity Programme has been completed, the Programme is then revised to reduce the cuts to what is necessary (if anything), in accordance with the original principles for its determination.

If there is subsequent negative experience before the Parity Programme has been completed, this subsequent experience will require additional cuts. These cuts would be determined by reference to the same principles, over and above the cuts budgeted for in the existing Parity Programme. Existing cut amounts would, however, never be re-spread. This means that negative experience is always addressed within three years of it occurring.

As for increases, cuts are applied to all pensions earned up to the valuation date before the cut’s application (i.e. the valuation on which the increases or cuts are based). This includes pensions which are earned during the Parity Programme.

During a Parity Programme, there are planned cuts that have not yet been applied. For the purpose of valuation calculations (whether for the annual valuation, transfer values, or allocation of funds on wind up), the Plan Actuary will assume that the remaining planned cuts (where still required) will be applied. On this basis, the funding level remains at 100%.

6. Communications

-6.1 Annual pension statement

The Trustees would announce the pension increase / decrease to all members (active, deferred and pensioner) on an annual basis, and also provide members with annual pension statements showing their pension amount earned to date and reconciling that with the previous year’s pension, i.e.:

Pension amount last year + this year’s increase, or: – this year’s cut + pension earned over the year (for actives) = Pension amount this year

-6.2 Inherent variability of outcomes

Member communications will need to illustrate the potential variability of future pension amounts. The Trustees would need to explain to members that future pension increases could be different to the current level, and pensions could be cut. The Trustees would also need to clearly explain that the eventual pensions could be higher or lower than the illustrative outcomes depending on the future experience of the Section.

Members receiving pensions (whether pensioners or dependants) would receive a statement of their pension and a reminder of its variable nature.

The model and assumptions made to produce the illustrations would be subject to oversight from the Pensions Regulator and legislative requirements.

7. Operational Features

-7.1 Public Disclosure

The following documents would be published (subject to requirements of CDC legislation):

Explanation of pension increase mechanism

Statement of Investment Principles

Annual valuation reports used to determine Pension Adjustments, including details of central estimate assumptions adopted in annual actuarial valuations and justification for key changes in assumptions since the previous valuation

Information on the model used to assess the outcomes used for the member benefit illustrations.

Other disclosure requirements would apply as per the existing disclosure regime for occupational DC plans.

-7.2 Expenses and charge cap

The operational and investment expenses charged to the Section would be subject to the existing IDC charge cap.

Investment expenses would be met out of the Section’s assets.

While the Section is open to new accumulations, operational expenses would typically be met out of the contribution receipts. If the Section were to close to new accumulations, expenses would need to be met out of the Section assets. A reserve would be built up within the assets while the Section is open, to meet potential post-closure expenses. Actuarial modelling over a 30 year period has indicated that this would not materially affect the level of increases in the Section either while open or from a closure in year 30.

-7.3 Termination

In the event of termination of the Plan or other trigger points (e.g. announced change in legislative or accounting treatment), the Section would convert to IDC (with pensions in payment converting to income drawdown funds) such that members thereafter would have a choice between external annuitisation, transfer to another CDC plan (if available) or transfer to an IDC plan. Each member’s IDC fund would be determined as their share of the CDC assets (after meeting expenses) on the valuation basis.

[nataddick]

Thanks Robert - it has little impact on me personally but I have skim read the document and there are so many ‘new’ technical terms being introduced here that need to be understood before anyone can draw any meaningful (sorry to use a Brexit term) conclusion!

[RobertT]

I think this guide is intended for the pensions industry and those people who will be dealing with the specifics of the CDC legislation, rather than the RM workforce. Hence the jargon and technical stuff.

But it does seem to answer(pending legislation & individual scheme rules) some questions that have been raised on these forums.

[heapsy]

Notice it says "target figure". I'll bet anybody that the scheme doesn't reach the 1/80th per year target.
It didn't seem to mention either, that we will all be in the same section. It only mentions "pensionable pay".

[RobertT]

Notice it says "target figure". I'll bet anybody that the scheme doesn't reach the 1/80th per year target.

You old cynic!

The aim is 1/80th of pensionable pay plus inflationary increases each year.

In practice there's bound to be good and bad years, that's the nature of the scheme. It's success will, I assume, be measured over the longer term average.
Ultimately time will tell what happens in practice.

It didn't seem to mention either, that we will all be in the same section. It only mentions "pensionable pay".

Does it need to, considering it isn't really meant for the workforce?

Unless something changes, the definition of pensionable pay is basic pay plus pensionable allowances, and no LED.

[renrag40]

I’ve just read an article on the pension age website about the cdc legislation. It looks like it is unlikely that any CDC scheme will be up and running before well into 2022 at the earliest. Which is fine by me. I would much prefer 19.6% going into my pension pot as at present rather than the 15.2% under the proposed CDC scheme.

[heapsy]

Tbh I'm hoping it's delayed. I could do with my AVCs building up more. I know it's selfish to a degree, but at my age, I cannot see me getting many years in the new scheme. I also don't really fancy having a later NRA on any of my pension. And lastly, I don't trust RM to invest the money wisely, they didn't manage to get anything right in the past, which is why we are in this mess. Do you have the link to the article? Thanks in advance.

[RobertT]

I’ve just read an article on the pension age website about the cdc legislation. It looks like it is unlikely that any CDC scheme will be up and running before well into 2022 at the earliest. Which is fine by me. I would much prefer 19.6% going into my pension pot as at present rather than the 15.2% under the proposed CDC scheme.

Is this the article you're referring to: https://www.pensionsage.com/pa/Pension- ... Assent.php

It doesn't specifically say that CDC will not happen until 'well into 2022'. That comment relates to funding powers of DB schemes, which is one of the other elements of the Pensions Bill.

But ultimately it's all still up in the air to some degree and we'll just have to wait and see when our scheme is actually implemented.

The total contribution levels agreed by RM and CWU for the CDC scheme was the same as the current 19.6%.
Which will be 15.2% into CDC itself and the remainder into the Defined Benefit Lump Sum Scheme.

[renrag40]

I’ve just read an article on the pension age website about the cdc legislation. It looks like it is unlikely that any CDC scheme will be up and running before well into 2022 at the earliest. Which is fine by me. I would much prefer 19.6% going into my pension pot as at present rather than the 15.2% under the proposed CDC scheme.

Is this the article you're referring to: https://www.pensionsage.com/pa/Pension- ... Assent.php

It doesn't specifically say that CDC will not happen until 'well into 2022'. That comment relates to funding powers of DB schemes, which is one of the other elements of the Pensions Bill.

But ultimately it's all still up in the air to some degree and we'll just have to wait and see when our scheme is actually implemented.

The total contribution levels agreed by RM and CWU for the CDC scheme was the same as the current 19.6%.
Which will be 15.2% into CDC itself and the remainder into the Defined Benefit Lump Sum Scheme.

Yep. That’s the article.
As the head of research at LCP states “although this feels like the end of a long journey, in reality it is more like half time”.
"To put a new Act of Parliament into effect requires a large amount of secondary legislation, codes of practice and guidance and this needs time to be drafted, consulted on and implemented.

"We expect to see a phased implementation of the new Pension Schemes Act, with the scheme funding powers almost certainly not biting until well into 2022.

"There will be much for the pensions industry to do in terms of engaging with this process to make sure that everything is fit for purpose”.
That doesn’t sound to me like RMs CDC scheme will be in operation any time soon.
I was trying to think back to the closing of the DB scheme and the notice period that was given...... but I can’t remember that far back...... most of the time I can’t remember what happened last week never mind 13 years ago. I would have thought that a certain length of time must have been given...... any idea Bobby T?

[RobertT]

In theory I think the secondary legislation, etc shouldn't take as long as the primary. And obviously the different elements of the Bill will take different lengths of time to be implemented. So CDC could happen before Dashboards or vice versa, for example.

The RM CDC scheme might be in place towards the end of this year if things go reasonably smoothly from now on, or it might not?
I'm not sure anyone really knows!

The final salary scheme was closed 13 years ago and for members at the time was replaced by another DB scheme in the form of CARE.
I don't recall the notice period but do remember we got a DVD explaining it. I may still have some paperwork somewhere giving more info?

When RM did actually give notice of their intention to close the DB RMPP, we got one of those red A4 booklets around Christmas 2016, for intended closure on 1st April 2018.
It subsequently closed to future accrual on that date, but stayed open in the form of the DBCBS.

On both occasions and for the 2014 changes, there was a consultation period which by law should be at least 60 days.

I'm sure we'll get some kind of notice period before CDC starts. But as it's already a done deal and we already know it's going to happen, I'm not expecting it to be too far in advance and don't see why it should need to comply with any specific rules.

[mr hil.]

According to RM they expect to have the CDC up and running in the second half of the next financial year, so that is anytime after October 2021