Royal Mail on the biggest challenges to CDC

[RobertT]

https://www.professionalpensions.com/ne ... lenges-cdc

Royal Mail is set to be the first pension provider to use a CDC model

The capacity for savers to fully grasp the impact of the changes to their defined benefit (DB) pension scheme is the biggest challenge to Royal Mail’s planned collective defined contribution (CDC) model implementation.
Speaking at Professional Pensions Life earlier this week, head of corporate pensions Angela Gough said the key risk was around member understanding of the CDC arrangement.

"The risk is that if members don't understand that it's not guaranteed and if they don't understand that increases can go up and down, especially relative to inflation, then there's a real risk that they don't value that benefit. So, for us, one of the biggest risks is that members understand the scheme properly."

Gough added that Royal Mail had put a huge amount of work into communication to minimise this risk - and was working hard to both minimise the jargon and use really clear language to help members understand the new arrangement.

She added Royal Mail would had already spent extensive time communicating with unions about the changes - and would continue to work with both them as well as the broader industry and regulators going forward to ensure the scheme communications were a success.

The Royal Mail Collective Pension Plan was created as the firm looked to move from a DB scheme yet continue to have a lump sum provided at retirement to satisfy union demands. The scheme is opt-out, with those declining being moved to a standard Nest alternative.

Of the CDC plan, Gough said: "The initial idea was to look for a scheme that would allow members to get an income for life in retirement, but without the DB guarantees that made the former system unsustainable for Royal Mail."

The Royal Mail first devised plans to move employees to a CDC scheme in 2018, even though legislation to cover such an arrangement was not passed until the Pensions Act 2021 was given Royal Assent early last year. Royal Mail completed its consultation process on CDC in February this year, having agreed a 13.6% employer contribution rate in November 2021 and is now awaiting final legislative changes to enable the plan to be implemented.

Of the advantages to a CDC, Gough said: "It's a pension for life, with the pooled longevity that you get not from having to buy an annuity, but what you get from the scheme itself."

Association of Member-Nominated Trustees co-chair Maggie Rodger - also speaking at the event ­- agreed CDC had substantial advantages: "CDC has so many advantages in that if you compare it to defined contribution (DC). I've seen projections that say you could get 70% better returns because you have to share risk. If you compare it to DB, the cost to the employer could be up to 40% less because you end up with the same process while not having to de risk as you as early as you otherwise would."

Of how CDC may evolve in UK pensions landscape, Rodger expressed hope that companies will value their contract with members rather than merely consolidating DC. Rodger also predicted a system in which members can transfer money into a CDC type decumulation process, though admitted that such a process was not currently on the regulatory horizon.