Royal Mail experience shows CDC is a good news pension story

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Con Keating says the Royal Mail pension story is a rare piece of pension good news. And there are a number of major listed firms watching developments in CDC closely.

After what seems like an eternity, there is a good news pension story: Royal Mail. Since the Communications Workers Union and Royal Mail reached agreement on their proposed new pension scheme, the share price has soared. It is now expected to re-join the FTSE 100 index, by a comfortable margin. The share price has risen from around £3.60 to £5.60 recently, an increase of some £2bn.

This is a little surprising as the scheme design is new. It is collective defined contribution (CDC), and still needs some further tweaks to legislation for its implementation.

The pensions minister's submission in evidence to the parliamentary work and pensions committee's inquiry is not encouraging in that regard: "In the circumstances, it is not the government's intention to proceed with the wholesale rewriting of pensions legislation needed to provide for CDC pensions through the commencement of the 2015 act". And: "As the government made clear at that time, this act would only be commenced alongside the introduction of a comprehensive set of secondary legislation."

Clearly the market does not believe this, and the pensions minister would be well-advised that ignoring or fighting the financial markets is not usually a good idea. This is particularly true when it is only minor tweaks and reassurances that are required to implement the DC+ version of CDC; tweaks to existing DC legislation, not the 2015 act, which was clearly written with DB-lite in mind. With the prospect of further tightening of DB legislation and additional regulatory powers being enacted in the wake of Carillion, actions which are likely to further alienate both the corporate sector and financial markets, this does not seem an auspicious time for inaction.

The major concern for DC+ is the "bridge problem", a concern that there should be no possibility of recharacterization of DC+ schemes as being DB, which could or would bring with it liabilities, and accounting, and risk management issues for the sponsor, as well as PPF levies for the scheme.

There are, I am told, a number of major listed companies with large existing DC schemes who would like to offer CDC as an enhancement to their DC scheme members, and are watching developments closely. The Royal Mail case provides them with a further incentive to offer this. It also shows that this may constitute market sensitive information, and provide grounds for reticence in disclosure at this time. It is noteworthy that all of the analysis and simulation of CDC has focussed on the benefits to members, which are substantial, and none has explicitly considered any gains to the sponsor employer.

The process of adoption of CDC is likely to be rather slow, as befits innovations in a world where prudence is paramount. Contrary to some press reports, the recent Universities UK letter to USS members suggests that CDC may be an option for consideration in the next USS valuation, not the one currently under dispute.

The potential demand for CDC which has passed almost without comment lies in the retail market, where a number of providers of DC and SIPP arrangements have indicated they would like to offer this option to their clientele. The prospects in the world of auto-enrolment are substantial.

One of the real lessons which can be learned from the overseas experiences with CDC, it is that if we build it, people will come. Canada is the prime example in that regard. This is no field of dreams.

Con Keating is head of research at Brighton Rock Group.