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Collective defined contribution (CDC) pension schemes are “the most intergenerationally fair” type of pension if buffers are not used, Royal Mail has said.
Speaking at the Westminster Business Forum, Royal Mail chief risk and governance officer, Jon Millidge, stated that he felt the firm’s CDC plan had been miscommunicated to the industry.
There were claims that CDC schemes could be intergenerationally unfair, as the Dutch model uses buffers which are built up in financially positive years to be used in worse financial times.
However, Millidge made it clear that the Royal Mail scheme used a different method to counter the issue.
He said: “When we started talking to the pension industry about CDC, I think there was some miscommunication.
“Being clear with people about what CDC is and why is was different form the Dutch CDC schemes has been one of the key learnings of it.
“One of those key differences is the use of buffers where in the Dutch model they put in these buffers. That is not something that’s a feature of our scheme, our scheme always has a balancing mechanism that keeps everything balanced, we don’t keep money back for a rainy day.
“If there’s a problem you deal with it there and then and if there’s surpluses you deal with that there and then.”
Millidge warned that CDC schemes that may adopt the buffer system could cause issues between generations, as those paying for a buffer in good years may not feel the benefit in the bad years.
He continued: “The buffers we see from the Dutch would mean there is big restrictions on how benefits would be paid out.
“Certainly, if we were looking at a buffer in our scheme then the first generation into that scheme would have to be paying for the buffer that they’re not necessarily going to get the benefit from.
“We couldn’t work out why everyone was saying a CDC scheme is intergenerationally unfair, it’s not, it’s the most intergenerationally fair mechanism.
“Your exposure, if you’re part of a DC scheme, is from when you start saving until you start decumulating, while with a CDC scheme its from the day you start saving till the day that you die you are exposed to those economic cycles, which brings in much greater fairness.”
The government has said that the Pensions Bill will include legislation for CDC schemes, although it is unclear when it will be brought before parliament.
Royal Mail and its union, the Communication Workers Union, are the first organisations to attempt to plan and adopt a CDC scheme in the UK, and have been working closely with the government on forming the framework.
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