Royal Mail’s version of the CDC pension is unfair to younger members

According to Guy Opperman, the pensions minister, companies with defined benefit pensions are interested in collective defined contribution pensions, which Royal Mail is introducing for its 140,000 employees (“Collective schemes threat to final salary pensions”, October 19).

CDC pensions aim to sit between DB — an employer guaranteeing a pension based on salary and years service — and individual defined contribution. A CDC scheme sets a “target pension”, raised or lowered in line with the value of overall assets. CDC may have some (modest) benefits versus DC, but only if the precise structure is scrupulously fair. Royal Mail’s version is anything but fair, and is designed to raid younger members’ savings to pay older members’ pensions.

Fairness requires that a younger CDC member, with, say, 40 years investment returns to retirement, should receive a higher pension than an older member saving the same amount with, say, just 10 years investment returns to retirement. But Royal Mail’s CDC ignores the time value of money and has the same target pension for all members — 1/80th of salary — regardless of age. Older members can receive this “average” target pension with just a few years investment returns only by using the younger members’ savings, so their pension is less than the “fair” pension. And Royal Mail is closing the existing DC pension, so younger employees cannot avoid CDC by staying in DC.

Meanwhile, Royal Mail’s CDC will hold 100 per cent equities for members up to age 67, with no explanation of what happens, especially to younger members, when this huge bet fails.

John Ralfe
John Ralfe Consulting,
Nottingham, UK