Royal Mail director calls for new rules to establish 'collective DC' pensions

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The Royal Mail’s HR director has written to MPs on the work and pensions select committee outlining a legislative workaround for the company to set up a ‘collective defined contribution’ pension scheme.

Royal Mail’s defined benefit scheme closed on March 31. The company proposes replacing this with a new combined arrangement pooling defined contribution risk between members and the company, with a separate defined benefit style pot running alongside it to pay a lump sum at the point of retirement.

After a hearing at the work and pensions select committee, Royal Mail HR director Jon Millidge has written to chair Frank Field outlining potential legislative changes that would assist the scheme.

Millidge writes: “We believe we have identified a possible route to enabling a CDC scheme through the 2011 Pensions Act power to amend the ‘money purchase’ definition in the 1993 Pension Schemes Act. Our proposal would enable such a pension scheme to be treated for legislative purposes as ‘money purchase’ and so exempt from the various “defined benefit” employer funding and debt requirements which would otherwise apply to a plan which pays pensions from its own assets, rather than backing each member’s pension with an annuity.”

Millidge adds that, what the legislative workaround, employers need confidence that CDC schemes can pay members for life without being treated as DB arrangements.

Clarity will also be needed on lifetime and annual allowance treatment, he says, and how combining the DB and DC elements would work from a tax free lump sum perspective.