Royal Mail lays out law changes for pension deal

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By Maria Espadinha

Royal Mail is proposing that the government enables the creation of collective defined contribution (CDC) schemes through an amendment to the money purchase scheme definition, instead of creating a whole new range of secondary legislation.


In a letter to the chair of the Work and Pensions select committee, Frank Field, Jon Millidge, group HR director of Royal Mail, said the postal company is currently exploring how to “introduce a collective scheme with the minimum set of legislative changes, given the constraints on parliamentary time”.

CDC schemes differ from defined benefit pensions in the sense they do not guarantee certain incomes in retirement.

Instead, CDC have a target amount they will pay out, based on a long term, mixed risk investment plan.

These schemes also differ from the traditional defined contribution plans, since they do not produce individual pension pots. Instead they invest savings in a larger collective pot, which provides an income to individuals during their retirement.

The Pension Schemes Act 2015 created by the coalition government defined CDC as a distinct pension category, but secondary legislation to bring them into effect was never introduced.

Mr Millidge said that the company is engaging with the Department for Work and Pensions (DWP) on the changes needed to introduce CDC schemes in the UK, which was also previously confirmed by pensions minister Guy Opperman.

He said: “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 DB 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.”

Royal Mail reached an agreement with its union, Communication Workers Union (CWU), in February, which foresees the creation of a CDC scheme to replace its defined benefit (DB), which closed at the end of March.

In the meantime, Royal Mail workers have approved this deal, which also includes the creation of a DB lump sum vehicle alongside the CDC scheme.

With these two pension arrangements, the company would expect to contribute 13.6 per cent of members' pensionable pay, and members would contribute 6 per cent.