Royal Mail CDC pensions 'could outperform DB as well as DC'

[TrueBlueTerrier]

https://www.johnslabourblog.org/2022/01 ... could.html

Recently I completed a research project into Pension Provision for Housing Association staff. In the project I mentioned the pros and cons on the new CDC (Collective Defined Contribution) schemes that have very recently been allowed to operate in the UK. I came across this video and article by CWU union who are very supportive of CDC for Royal Mail.

"Latest actuarial modelling suggests the new Royal Mail CDC/DB pensions scheme could provide returns some 70 per cent higher than current Defined Contribution schemes and CDC schemes could even outperform Defined Benefit, says our DGSP Terry Pullinger in his video update to members today (7/10/20).

Work done by Wills Towers Watson Actuaries suggests “that the CDC scheme, on average, would produce 70 per cent more for an individual than a DC scheme and 40 per cent more, currently, than a DB scheme,” Terry explains, adding: “Now that is massive news and will certainly shake up the pension world.”

Defined benefit pensions schemes are, he reminds us, still considered “the ‘gold standard with guaranteed outcomes,” but adds that Wills Towers Watson’s performance modelling, “which has gone on ever since we created this scheme, even through the Covid period” suggests that CDC schemes “would on average actually produce a better benefit.”

Today sees the Pension Schemes Bill return to the House of Commons for its Second Reading, after which it moves into its final Stages and, providing it progresses, will then receive Royal Assent and pass into law.

Opposition to the Bill is not expected, although MPs will, no doubt, be looking carefully at the legislation and ensuring that it meets all of the usual stringent tests for new legislation.

If the progress of the Bill continues as currently scheduled – and it will become the Pension Schemes Act once it has received Her Majesty’s formal approval – Terry anticipates that the Royal Mail CDC Scheme would likely be introduced into the company “at some point next year” and “bring all our members into one ‘wage in retirement scheme.”

CWU members are warmly praised by our DGSP, who thanks them for the tremendous support” they gave to the union’s 2017 Four Pillars campaign, which was so powerful that it forced Royal Mail and the CWU into designing a new and unique on-going agreement on pensions that still offered a wage in retirement, and that led to this ground-breaking development.

Back in 2017, Royal Mail workers in the company’s DB scheme were faced with the prospect of being transferred into the DC scheme. DC schemes were once seen as the answer to reducing DB provision, but time had suggested that the outcomes for DC members would be insufficient to sustain dignity in retirement.

“So we were insistent that there must be another way,” explains Terry, “and we refused to accept that the only answer was a lump sum paid out when you retire, which wasn’t producing the best results and was insufficient to sustain people through their old age.”

Eventually, as a key aspect of the Four Pillars agreement, both the CWU and the business agreed to find a better solution, he continues: “We both got on the same page to develop the art of the possible.

“How to create such a pension scheme.”

With help and expert assistance from First Actuarial, who have aways been a great support to the CWU, and other unions, as well as Wills Towers Watson and others who support Royal Mail, the principle of a CDC scheme – a collective, shared-risk scheme – was agreed and a specific, Royal Mail CDC scheme was designed – and robustly modelled.

The scheme would replicate the old DB scheme in design, producing a wage in retirement generated via CDC and a guaranteed lump sum.

Although CDC in different forms is used in other countries, such as Canada, Denmark and the Netherlands, no scheme of its type has previously existed in the UK and so legislation was required.

“I know that it’s through the collective strength of CWU members that we’ve managed to achieve that,” insists Terry, who makes the further point that, as well as being beneficial to Royal Mail workers, the precedent set could also be “a game changer for many working people.”

For workers in other companies, “this could make a massive difference to their lives and certainly to what their retirement might look like,” he suggests, adding: “Hopefully it will encourage other employers to move away from DC and into this type of scheme, CDC, so that people can get back to having a Wage in Retirement and dignity in retirement.”

The CWU does not support any sense that CDC should replace DB schemes and believes that DB schemes are the ‘gold standard’ and will remain so until time suggests otherwise.

However, for CWU members, the modelling is excellent news that supports our view that we have found a way to give our members a genuine pensions that produces a wage in retirement.

After describing the current situation as “a big moment, a massive moment,” Terry gave a “massive thank you to all of our members who backed this union unanimously,” and that this is clear evidence that we only get what we deserve if we negotiate from a position of strength.

“It’s been a long time waiting, but we’re getting closer and closer,” he added.

[renrag40]

Does Pullingers gushing enthusiasm extend to him joining this exciting adventure into the unknown?
Or will he be content to carry on receiving his pension contributions paid into his gold plated Defined Benefit pension gratefully provided by his adoring union membership?

[freespeech]

I'm looking to take retirement in the next 3-4 years. I suspect that will give me two or three years in the new scheme. Are there any better alternatives I could use in that time with the same contributions? Given the RM contribution I guess not?

[RobertT]

Does Pullingers gushing enthusiasm extend to him joining this exciting adventure into the unknown?
Or will he be content to carry on receiving his pension contributions paid into his gold plated Defined Benefit pension gratefully provided by his adoring union membership?

The next stage of legislation/regulation, due to be finalised in August, only applies to single employer schemes, and is only really suitable for companies employing a minimum of 5,000 anyway.
So I doubt whether the CWU could set up a CDC scheme at the moment even if they wanted to.

I think their scheme changed from final salary to average salary a few years ago, and I don't know what state it's in as far as surpluses or deficits are concerned. But perhaps by the time multi employer CDC schemes are allowed, it might be time for them to go down the CDC road too?

[RobertT]

I'm looking to take retirement in the next 3-4 years. I suspect that will give me two or three years in the new scheme. Are there any better alternatives I could use in that time with the same contributions? Given the RM contribution I guess not?

Nowhere else is going to give you the 'free money' you'll get from RM's contributions plus the benefit of tax relief and salary sacrifice(PSE).
Any decision to choose a different route would mean your money having to work substantially harder to make up for that loss. Realistically that's not going to happen!

Personally I would expect my net weekly contribution into CDC to be around £20, with another £70 coming from RM and the taxman. That's a lot to give away!

The general rule is always join your workplace pension scheme and always pay in at least what it takes to get the maximum employer contribution.
I can't see a compelling reason why that wouldn't be the case with CDC!

[NWpostie]

Assuming you take your pension at 60 maybe even the NRA 65 pension then leave the company, the CDC would be frozen until NRA 67, would it still get invested with what you have paid in or based on how many years you have been in the scheme ?

[RobertT]

Assuming you take your pension at 60 maybe even the NRA 65 pension then leave the company, the CDC would be frozen until NRA 67, would it still get invested with what you have paid in or based on how many years you have been in the scheme ?

Both!

Based on current full time pay of £458 per week, each year we'll accrue about £300 per year in pension, plus £900 in lump sum. So for example if you pay in for 5 years, you'll have a pension of £1,500 and a lump sum of £4,500.

The idea is that our pensions will increase with inflation each year, meaning the amounts I quote should be higher, but that will only happen if the investments increase accordingly.

If the investments go down, our pensions could also go down.

That will apply to all members whether they're employed, have left RM & have preserved pensions or are retired and receiving their benefits.

The following is taken from here: https://www.myroyalmail.com/collective-plan

Can my income fall when I am receiving my pension? If it can, how much could it fall? And how much notice would I get?
Increases and decreases to incomes apply in the same way to all members whether they are building up benefits; they have left Royal Mail but not yet taken their benefits; or they are receiving their income in retirement. So, yes, incomes can fall during retirement.

Increases or decreases would happen once a year (it is expected that they will happen on 1 April) and the Trustees would write to you at least six weeks before this to let you know what the change will be.

Because increases are spread out over the future lifetime of the plan, even significant falls in the value of the investments wouldn’t necessarily mean that incomes will be reduced. For example, if the Plan could afford increases to incomes of 3% one year but the value of investments then fell by 20%, that might mean that a lower increase of 2% could be afforded the following year. But a decrease wouldn’t necessarily be needed. Please note that this example is illustrative in nature and has been simplified - actual Plan experience could differ.

In some circumstances, a decrease may be needed to balance the expected value of the benefits with the assets in the income section. If that happened, a decrease of up to 5% would be made on 1 April (with at least six weeks’ notice). If a decrease of more than 5% was needed, this would be spread over 2 or 3 years.

[posted]

I’m currently on the DC scheme which I’m very happy with how it’s performed over the last 11 years.

Just been going over the CDC numbers again since receiving this new update about the launch.
Very rough calcs with basic assumptions, let me know where I’ve gone wrong...

I would pay in 6% of my salary each year.
What I would get back at retirement is ~4/80ths (1/80 pension + 3/80 lump sum) of my salary, or 5%. Doesn’t seem great deal.
If I opted out, Granted I would be missing out on death in service lump sum (well, my family would!). There’s an undefined targeted increase to the pension income element, which could go down, and similar to lump sum which can’t go down.

But aside from that, I could just opt out of the CDC plan, take my 6% as net pay and invest in a private pension (for which I would get tax relief). Over a ~20 year cycle invested in a decent fund, that 6% could potentially outperform the CDC and delver a better return.

Bare in mind, the CDC would only pay ~1/80th for life, the remains 3/80ths would be a one off lump sum.

[Jaggs]

I’m currently on the DC scheme which I’m very happy with how it’s performed over the last 11 years.

Just been going over the CDC numbers again since receiving this new update about the launch.
Very rough calcs with basic assumptions, let me know where I’ve gone wrong...

I would pay in 6% of my salary each year.
What I would get back at retirement is ~4/80ths (1/80 pension + 3/80 lump sum) of my salary, or 5%. Doesn’t seem great deal.
If I opted out, Granted I would be missing out on death in service lump sum (well, my family would!). There’s an undefined targeted increase to the pension income element, which could go down, and similar to lump sum which can’t go down.

But aside from that, I could just opt out of the CDC plan, take my 6% as net pay and invest in a private pension (for which I would get tax relief). Over a ~20 year cycle invested in a decent fund, that 6% could potentially outperform the CDC and delver a better return.

Bare in mind, the CDC would only pay ~1/80th for life, the remains 3/80ths would be a one off lump sum.

I've been meaning to do some sums on this myself so your post has spurred me to do them

6% of salary invested over 20 years with an after inflation return of 7% would give you a pension pot of roughly £60,000 in today's money. So you could take £15,000 as a lump sum and have £45,000 to provide you with an income which say you took 5% in the first year of retirement would be £2,250

If you stayed in the CDC over the same time period they would hope to provide you with a tax free lump sum of £17,862 and an annual income of £5,954. If the pension plan were getting the sorts of returns I've used in the first scenario I would hope they would make some increases to that aswell

[posted]

Typing from iPad so not sure if screenshot has attached.

I crunched some basic numbers, using RMG example of £25k salary and 12 years of contributions.
I’ve assumed salary increases of 2.5% each year and the compounded growth of each discrete year on the contributions of a very modest 3%.

From what I gather, over 12 years, you contribute £20k.
After 12 years, you get back £20k in the first year (1st year pension + lump sum)

[RobertT]

A few points I'd like to add to the above posts:

The accrual rate for the CDC scheme is a pension of 1/80th and a lump sum of 3/80ths of pensionable pay for each year you're a member.
Based on current full time pay of £458 per week, that's roughly a pension of £300 and a lump sum of £900 per year of CDC membership.

The aim is inflationary increases to benefits each year.

Weekly gross contribution of £27.50(based on £458), but factoring in tax relief and PSE, that reduces to an actual net cost of £18.70 using current NIC's rates. *Those rates will change in April!

If you opt out you will have an extra £18.70 in your pocket, which you then put in a personal pension and gain tax relief, giving you £23.37. You're down on the deal already and you haven't factored in RM's 13.6% contribution yet!

A 7% return above inflation would be tough to achieve over the longer term and I would say isn't very realistic! I'm not sure the professionals can do that over 20, 30, 40 years!

I note that Nest hasn't been mentioned as the other option – it's DC with employer contributions!
Nor has paying into CDC, taking the free money and then transferring out at a later date.

A personal pension pot of £60k might sound like a lot, but it won't last very long if that's all you've got to live on for any length of time.

I can understand people being wary of CDC and comparing the alternative options is good. But you also have to decide what you want from a pension.

CDC aims to offer benefits similar to a DB scheme, in a lump sum upfront and a pension for life, plus death benefits. A personal pension has got different choices – basically annuity or drawdown. Annuities are poor value for money and for most people with relatively small DC pots, drawdown won't last for life.

What's right for one person won't necessarily be right for another, but generally speaking I think a personal pension works best alongside a DB scheme rather than instead of it.
Obviously CDC isn't DB, but if it works as it should, then it's the closest thing we're going to get to it while working for RM.

The usual advice is always join any workplace pension and always pay in whatever it takes to get the maximum employer contribution, i don't really see why that would be different with CDC. A full timer on £458 would be giving up about £3,240 per year from RM by opting out altogether. Over the long term that's a lot of money to turn your back on.

Ideally I think people should aim to do both, CDC and a personal pension. Although that's obviously easier said than done from a financial point of view.

[Jaggs]

A few points I'd like to add to the above posts:

The accrual rate for the CDC scheme is a pension of 1/80th and a lump sum of 3/80ths of pensionable pay for each year you're a member.
Based on current full time pay of £458 per week, that's roughly a pension of £300 and a lump sum of £900 per year of CDC membership.

The aim is inflationary increases to benefits each year.

Weekly gross contribution of £27.50(based on £458), but factoring in tax relief and PSE, that reduces to an actual net cost of £18.70 using current NIC's rates. *Those rates will change in April!

If you opt out you will have an extra £18.70 in your pocket, which you then put in a personal pension and gain tax relief, giving you £23.37. You're down on the deal already and you haven't factored in RM's 13.6% contribution yet!

A 7% return above inflation would be tough to achieve over the longer term and I would say isn't very realistic! I'm not sure the professionals can do that over 20, 30, 40 years!

I note that Nest hasn't been mentioned as the other option – it's DC with employer contributions!
Nor has paying into CDC, taking the free money and then transferring out at a later date.

A personal pension pot of £60k might sound like a lot, but it won't last very long if that's all you've got to live on for any length of time.

I can understand people being wary of CDC and comparing the alternative options is good. But you also have to decide what you want from a pension.

CDC aims to offer benefits similar to a DB scheme, in a lump sum upfront and a pension for life, plus death benefits. A personal pension has got different choices – basically annuity or drawdown. Annuities are poor value for money and for most people with relatively small DC pots, drawdown won't last for life.

What's right for one person won't necessarily be right for another, but generally speaking I think a personal pension works best alongside a DB scheme rather than instead of it.
Obviously CDC isn't DB, but if it works as it should, then it's the closest thing we're going to get to it while working for RM.

The usual advice is always join any workplace pension and always pay in whatever it takes to get the maximum employer contribution, i don't really see why that would be different with CDC. A full timer on £458 would be giving up about £3,240 per year from RM by opting out altogether. Over the long term that's a lot of money to turn your back on.

Ideally I think people should aim to do both, CDC and a personal pension. Although that's obviously easier said than done from a financial point of view.

You're right about the 7% return being very unlikely. I wanted to use a figure that gave a slightly exaggerated outcome for the scenario of investing 6% yourself rather than through the scheme.

The option to transfer out of the CDC scheme near retirement is one that would possibly interest me but I don't think the terms they would offer would be all that generous

[posted]

I note that Nest hasn't been mentioned as the other option – it's DC with employer contributions!
Nor has paying into CDC, taking the free money and then transferring out at a later date.

I didn't even know that was a thing, let a lone a possible option. Are RMG obliged to offer it or is it only for Employers (with minimum criteria) that don't already have some sort of pension arrangements on offer?
Will look into it.

I joined the DC scheme in Dec 2010.
Taking a very simplistic view - by just recording the 'share price' on December of each year - I've tracked the performance. There of course fees which I think work out 0.2% of fund value.
Hopefully it's self explanatory. I've also attempted to include Inflation measure for same period.

InkedCapture - Copy_LI.jpg

My gross contribution (which includes AVCs) over that period is £41,800. I can't remember when we started PSE but just considering tax alone, this has cost me ~£33k
The current value of the pot is £165k (obviously dipped because of current GeoPolitical events but it was around £175k last month)

[RobertT]

I note that Nest hasn't been mentioned as the other option – it's DC with employer contributions!
Nor has paying into CDC, taking the free money and then transferring out at a later date.

I didn't even know that was a thing, let a lone a possible option. Are RMG obliged to offer it or is it only for Employers (with minimum criteria) that don't already have some sort of pension arrangements on offer?
Will look into it.

Nest was mentioned in the booklet we got a few months ago.
It's for those with less than 12 months RM service or who don't want to join CDC. Details can be found here: https://www.myroyalmail.com/collective-plan/who
The contributions are the legal minimum, but it's still 'free money' and should (in my opinion) form part of any decision to go DC instead.

My gross contribution (which includes AVCs) over that period is £41,800. I can't remember when we started PSE but just considering tax alone, this has cost me ~£33k

PSE started in August 2015.

The current value of the pot is £165k (obviously dipped because of current GeoPolitical events but it was around £175k last month)

It sounds like you've done well.
I don't want to be too negative but that has coincided with a prolonged bull market and most people have probably done well. I know I have.

[posted]

thank @RobertT.

Yes, I take this as a sweet term on the market since 2008 and to be honest I have ~30 years until retirement so I expect gains to be averaged out over that period as we go through cycles.

Thanks for info on Nest. Looks like RMG will only contribute 3%.
Rules me out. CDC it is for me then and I'll continue adding AVcs when it starts and look out for what they do about Transfer Ins and Transfer Outs