Comment: Postal workers' desire for collective DC is extraordinary

[TrueBlueTerrier]

http://citywire.co.uk/new-model-adviser ... y/a1088719" onclick="window.open(this.href);return false;

Late in December, a mediator brokered a breakthrough in the year-long dispute between Royal Mail and its 140,000 staff. It was a dispute that threatened to bring postal workers out on strike following a ballot organised by their principal union, the Communication Workers Union (CWU).

Strike action, which received 87% support, was principally over the Royal Mail’s proposals to change members’ pensions. Initially Royal Mail’s proposal had been to include all staff in a defined contribution (DC) plan using Zurich’s DC platform. This would have been a continuation of an existing arrangement for new joiners. But, more controversially, it would have replaced future accrual into Royal Mail’s defined benefit (DB) plan for longer-serving employees.

Return to sender

This DC proposal was rejected. The union put forward its own proposals for a DB scheme that would have offered members pensions with the guaranteed pension replaced by a discretionary benefit.

This was rejected by Royal Mail as still putting too much strain on its balance sheet. The accounting standard for pensions treated the discretion little differently to the guarantees.

Instead, Royal Mail suggested a closed DB cash balance scheme only for employees currently in the DB scheme. This did not offer a pension but a cash lump sum. This was rejected by union members who were holding out for a pension or, as the union called it, ‘a wage for life’.

Special delivery

A strike seemed inevitable until, at the 11th hour, a compromise was reached. This was to adopt an open collective defined contribution (CDC) scheme for all 140,000 staff. It would consist of a DC for staff and employer but would pay a ‘wage for life’ dependent on what was in the collective pot.

The critical difference between this agreement and what had been proposed using the Zurich platform was that all staff would be invested in one pot. This would pay out pensions based on the contributions and the performance of the fund.

The pension would not be insured as an annuity but paid from the collective pot with longevity protection provided from the mutual pool. For Royal Mail to continue to sponsor some risk, the tax-free cash entitlement would continue to be provided by a cash-balance DB plan.

Matter of trust

This compromise has stunned pension experts for a number of reasons. First, the high percentage of strike action support over this. Second, that members were happy to leave the investment of their collective pot to experts. And finally, that the rules for delivering a non-guaranteed ‘wage for life’ have yet to be written.

The point of going to CDC is to provide an expectation of a good pension, without the costly burden of DB guarantees, or the volatility of individual DC outcomes.

The decision has profound implications for regulators, not least the Financial Conduct Authority. It now has empirical evidence that more than 100,000 postmen and women could do without freedom in return for a pension they can trust.

That they would rather trust a CDC plan that might go up and down in retirement, rather than a guaranteed pension, may come as a shock to both the Pensions Regulator and the Pension Protection Fund.

Many of these 140,000 workers are those excluded from advice, which concerns the financial advice market review. As recent events in Port Talbot have shown, there is already a capacity crunch for good advisers.

The adoption of a non-advised collective solution should not give such advisers sleepless nights. In fact, CDC should allow advisers to focus on those with complex financial needs who need advice the most.

We may have reached the high-water mark for the pension freedoms. If Royal Mail and CWU get their way and postal workers regroup in a ‘no-frills pension scheme’, perhaps others will follow.

[jetblack]

This compromise has stunned pension experts for a number of reasons. First, the high percentage of strike action support over this. Second, that members were happy to leave the investment of their collective pot to experts. And finally, that the rules for delivering a non-guaranteed ‘wage for life’ have yet to be written.

Not this particular postie, no Sir.

It now has empirical evidence that more than 100,000 postmen and women could do without freedom in return for a pension they can trust.

Where is this empirical evidence ? We haven't had the vote on it yet.

That they would rather trust a CDC plan that might go up and down in retirement, rather than a guaranteed pension, may come as a shock to both the Pensions Regulator and the Pension Protection Fund.

If true it would come as a shock to myself also.

When it comes to money trust no-one.

[Spedley]

It now has empirical evidence that more than 100,000 postmen and women could do without freedom in return for a pension they can trust.

Not quite sure what this means?

That they would rather trust a CDC plan that might go up and down in retirement, rather than a guaranteed pension, may come as a shock to both the Pensions Regulator and the Pension Protection Fund.

My understanding is that there is a fixed minimum guaranteed portion of the pension and the remaining is dependent on the performance of the fund. Is that not right?

[fishtank]

There are two points to remember about this ambition scheme.

1. Only the lump sum carries any kind of guarantee.

2. Unlike the DB scheme the risk is carried by all...including pensioners. There will be no more " this is my pension and always will be". You could in theory retire on £200 p/w and 5 years later be on £180 p/w.

[cloherty1976]

There are two points to remember about this ambition scheme.

1. Only the lump sum carries any kind of guarantee.

2. Unlike the DB scheme the risk is carried by all...including pensioners. There will be no more " this is my pension and always will be". You could in theory retire on £200 p/w and 5 years later be on £180 p/w.

Remember like all investments you will only find out there true value when you draw it.

[fishtank]

There are two points to remember about this ambition scheme.

1. Only the lump sum carries any kind of guarantee.

2. Unlike the DB scheme the risk is carried by all...including pensioners. There will be no more " this is my pension and always will be". You could in theory retire on £200 p/w and 5 years later be on £180 p/w.

Remember like all investments you will only find out there true value when you draw it.

That's the point though.
You won't know, your pension on the day you retire may not stay the same, it could go up or down after retirement.
You'll only really know how much you've had when you've had it in more ways than one.

[cloherty1976]

There are two points to remember about this ambition scheme.

1. Only the lump sum carries any kind of guarantee.

2. Unlike the DB scheme the risk is carried by all...including pensioners. There will be no more " this is my pension and always will be". You could in theory retire on £200 p/w and 5 years later be on £180 p/w.

Remember like all investments you will only find out there true value when you draw it.

That's the point though.
You won't know, your pension on the day you retire may not stay the same, it could go up or down after retirement.
You'll only really know how much you've had when you've had it in more ways than one.

Exactly I should have said when you die or your spouse dies and maybe your kids can add it up.
Harsh but true

[Schiff]

There are two points to remember about this ambition scheme.

1. Only the lump sum carries any kind of guarantee.

2. Unlike the DB scheme the risk is carried by all...including pensioners. There will be no more " this is my pension and always will be". You could in theory retire on £200 p/w and 5 years later be on £180 p/w.

Exactly. This pension scheme carries just as much risk to the individuals within the scheme as an ordinary DC scheme without any of the flexibility and control usually associated with having your own personal pension pot. No wonder the writer of the article quoted in the OP finds the union's enthusiasm for the scheme to be extraordinary.

[claystones]

Does anyone think people aged 55 should draw there pension out now with all the uncertainty

[heapsy]

Does anyone think people aged 55 should draw there pension out now with all the uncertainty

NO. Why would you when the changes being made, do not affect the pension already built up?