Royal Mail CDC scheme closer to reality as consultation launches – Law & Regulation

The Royal Mail Collective Pension Plan, which is the first known example of these new type of pension funds coming to fruition following the provisions passed in the Pension Schemes Act 2021, will consist of the a CDC section and a cash lump sum section.

A Department for Work and Pensions consultation into the authorisation process for CDC schemes closed earlier in September.

In a CDC scheme, contribution rates for employers and employees are set in advance, and members pool investment and longevity risk. CDC schemes provide income in retirement, though the rate of increase varies and pension reductions are possible in certain circumstances.

In a joint statement, Mick Jeavons, Royal Mail Group chief financial officer, Terry Pullinger, deputy general secretary at the Communication Workers Union, and Gary Sassoon-Hales, Unite CMA national representative, said: “Together, we have worked hard over the past few years to design an exciting new pension plan for our people and, with consultation under way, we are pleased to see the Royal Mail Collective Pension Plan take a step closer to launch.

“We all believe that you [members] will be best served by this plan, which would provide a lump sum and a wage in retirement in a way that is sustainable and affordable for the business and members.”

Scheme will be an opt-out arrangement

On a website set up to provide information for current and prospective members, Royal Mail explained that for most workers its collective plan would be an opt-out arrangement, with those opting against joining generally being enrolled into Nest.

The scheme aims to give members an annual income equal to 1/80 of their pensionable pay for every year in work, the website explained.

“These amounts build up over the years. They’d also be adjusted each year, depending on how well the plan’s investments are performing and how much the plan expects to pay out to members,” it stated

Royal Mail explained that these adjustments will balance the cost of paying incomes and the plan’s investments.

“So rather than giving you a guaranteed amount, what you get can be increased or reduced. Once you take your income, normally at age 67, the plan carries on adjusting it each year,” it stated.

The postal company makes it clear, however, that there will be years where incomes will go down — a defining feature of CDC schemes that experts have previously warned may not be properly understood by members.

It explained that the new scheme and its investments were subjected to tests using two models, which aim to determine how likely it might be that the plan would be unable to give increases, or have to reduce incomes.

The first model will be retrospective, looking at what would have happened had the scheme been set up in the past and using information about how the economy and life expectancy have changed over the past 90 years. The second model aims to project forward, evaluating these same considerations for the next 90 years.

Both models suggest that over the next 30 years members will see increases that “will be bigger than the rate of inflation and some years they’ll be smaller”.

“Incomes would average 1/80 of pensionable pay for every year someone works. Increases on top of that are likely to mean that incomes keep up with inflation, though in some years pension income may fall,” it stated.

If there is not enough money to pay incomes, these will go down, Royal Mail explained. The company will not put in more money to cover the difference.

The scheme will also include a cash lump sum section, which if accessed at the retirement age of 67 will be equal to at least 3/80 of the member’s pensionable pay for every year in work. 

Investments for the lump sum are not the same as those for income, meaning that increases resulting from good investment performance will differ between sections.

How much will it cost?

Members will contribute 6 per cent of pensionable pay, the same as the rate currently used for the Royal Mail Pension Plan, and the highest saving rate in the Royal Mail Defined Contribution Plan.

Royal Mail will pay a fixed rate of 13.6 per cent, most of which would be invested to cover benefits and running costs, with some set aside for the insurer that provides ill-health benefits.

“Overall, Royal Mail expects to pay a bit more into the collective plan than it pays into the current plans,” the website explained.

At the moment, the postal company is paying more for members of the defined benefit scheme than for individuals in the DC one, it stated.

With the new scheme, Royal Mail will contribute the same rate for every member. “We and the unions agree that this makes the collective plan fairer,” it added.

Though it will not contribute more if trustees determine that the income part of the plan does not have enough money, Royal Mail would increase its contributions should the lump sum part of the plan not have enough money to pay out benefits members have built up.

Members will be able to choose a “lump sum booster”, paying an extra 1 per cent of pensionable pay, which Royal Mail would match.