CDC pools launch with the Royal Mail

The UK’s first collective defined contribution (CDC) scheme received the green light this week with the launch of the Royal Mail Collective Pension Plan (RMCPP).

After eight years in the making, 100,000 Royal Mail employees will join a plan that the company says will provide them with “both an income for life in retirement and a lump sum, making it easier to manage their money in retirement”.

Just one day later the UK government announced a consultation on extending CDC which it says would mean millions of workers could benefit from “greater financial security in later life”.

CDC – which pools members’ contributions into a plan that aims to provide an income similar to that of defined benefit (DB) plans but without the guarantee – is only available to single or connected employers. The consultation will consider allowing unconnected multiple employer schemes to set up a CDC.

Part of the government’s motivation for revisiting CDC is an opportunity to drive pension investment towards projects that support the country’s growth plans.

Chancellor Rachel Reeves uses the Canadian pension system as an example, where funds from pooled pension contributions are invested into a wider range of private assets which she says “can benefit the wider economy and boost returns”.

“Extending CDCs could similarly allow for greater return on investment for those saving into the schemes and allow for larger investment in the UK – supporting the government’s growth mission to boost the economy,” Reeves states.

However, RMPCC is entirely unique and pension investment consultants say it may not prove the CDC inspiration Reeves hopes.

The plan was designed as a halfway house between the company’s existing DB scheme, which had become prohibitively expensive for the sponsor, and a DC alternative that was considered inferior by trade unions.

Paul Waters, Head of DC at Hymans Robertson says: “The Royal Mail’s scheme was designed around specific objectives and the way it’s been set up will not be the best path for all schemes thinking about CDC. Other employers will have their own individual objectives and profile of members, which means a range of different types of design will be needed to cater appropriately for different groups.”

This view is shared by independent pension consultant John Ralfe, who notes that while extending CDC is a foregone conclusion since it only requires “tweaks” to existing legislation, he adds that its appeal is limited.

“If you have already gone through the pain of replacing your DB scheme with a DC plan, why would you then switch to CDC? Meanwhile employers that still have DB have much better funding positions than they did when CDC was first touted, making them less likely to consider it.”

He continues: “Extending CDC is not going to make a whole lot of difference. There may be some employers to whom CDC appeals, but the jury is still out and I wouldn’t get too excited about it until we’ve seen half a dozen companies setting up an individual CDC,” Ralfe says.

Among those supporting the CDC consultation is John Ball, Chief Executive of the Church of England Pensions Board, who says the scheme is “scrutinising the detail” to see whether a CDC arrangement “might transform retirement plans for those who work for the Church”.

So far RMPCC has named just BlackRock as its investment manager and has yet to reveal any asset allocations or strategies.