Savers have been stripped of certainty about their incomes in old age following the closure of final salary pension schemes by companies across the UK, but the Royal Mail is due to pioneer a new model intended to provide greater security and stability. The Collective Defined Contribution (CDC) scheme is designed to provide stronger protection against economic shocks – such as a pandemic – and also help people save towards a clear target income.
A Government source said: “This new ‘third way’ for workplace pensions is a win-win for savers – they’ll have the security of an income in retirement and better return on investment – it’s the best of both worlds.”
The widespread demise of final salary pensions means many people have to rely on Defined Contribution (DC) schemes which offer no certainty about income, and savings can be devastated by inflation and the poor performance of investments.
CDC schemes are intended to offer a new way forward. The Government is confident the new model will deliver higher incomes for the same level of contributions as individual DC pensions.
The consultation will nail down the final details about how the new pensions scheme will work, paving the way for companies across the country to offer these to employees.
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A key difference with DC schemes is that both employers and savers will contribute to a pooled fund which will provide members with a regular income.
It is also expected that CDC schemes will be good for employers, providing greater predictability about their costs and obligations.
The Royal Mail is due to lead the way in rolling out a CDC scheme for more than 100,000 employees. Such schemes are well-established in the Denmark and the Netherlands.
Pensions minister Guy Opperman said: “We have seen the positive effect of these schemes in other countries – and it is abundantly clear that when they are well-designed and well-run they have the potential to provide a better retirement outcome for members, and can be resilient to market shocks such as the pandemic.”
Mr Opperman said savers should not face a choice between “security and affordability”.
Matt Rodda, Labour’s shadow pensions minister, described the new model as “potentially exciting”.
He said: “Pensioner poverty has been on the rise and the Government must do much more to secure a decent standard of living for everyone in retirement. Collective Defined Contribution schemes could be a potentially exciting answer to some of the challenges we face in making sure all workers have a decent standard of living in retirement.
“This consultation is an important opportunity the Government must not squander to make sure that schemes are fair, sustainable and accessible to different types of employers.”
The proposals received a guarded welcome from Daniela Silcock of the Pensions Policy Institute.
She said: “Designed effectively, CDC could provide members with greater certainty and potentially higher retirement incomes. However, in order to ensure sustainability, scheme managers need to ensure that members understand the potential benefits as well as the potential risk – for example, contribution rises or benefit cuts during times of economic shock.”
Former Conservative pensions minister Baroness Altmann also sounded a note of caution, saying that in other countries CDC schemes have had problems “because younger members may end up with lower pensions than older ones if the actuarial and investment assumptions prove incorrect”.
She added: “I can see some employers, such as Royal Mail, feel the need to try to replace traditional [final salary] schemes, which are ruinously expensive now, with something better than DC… Time will tell, however, whether these schemes really do deliver better outcomes particularly for the younger members. “The risks of inter-generational unfairness are clear.. The theory is good, whether such schemes work for members in practice will only become clear over many years.”
Angela Gough, head of corporate pensions at the Royal Mail, said: “[We are] committed to delivering the best possible pension arrangements for our people. We believe a Royal Mail Collective Pension Plan pension scheme would meet our objectives of providing sustainable and affordable future retirement arrangements for our people and our Company.
“The DWP consultation puts us one step closer towards making our plan a reality for Royal Mail and its people. We are working closely with CWU [trade union] and others on this important issue.”
Caroline Abrahams of Age UK added: “The move to defined contribution pensions has left individuals shouldering all the risk in the event that something goes wrong with the investments… There is so much that can go wrong, for example falling victim to a scam, and anything that introduces risk pooling into pensions is a step in the right direction.”
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