Government fires starting pistol for collective DC schemes

[TrueBlueTerrier]

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The Department for Work and Pensions (DWP) published a consultation on implementing collective defined contribution (CDC) schemes which closed on 16 January. This came following a request from Royal Mail for UK legislation to be amended to allow CDC schemes. Unlike traditional pure defined contribution (DC) schemes, where the member bears the bulk of the risks, and defined benefit (DB) schemes, where the employer takes on the risks, CDC schemes allow risks to be shared between members.

In February 2018, Royal Mail and the Communication Workers Union (CWU) were the first to announce that they had agreed to work towards replacing their current DB and DC schemes with a CDC scheme for around 142,000 employees. However, this was subject to the proviso that the Government would need to legislate to allow for such schemes.

Even though the Pension Schemes Act 2015 contains legislation which could be used to provide for CDC schemes, these provisions would significantly change the existing pension regime, therefore the Government has decided that new primary and secondary legislation is required instead.

CDC benefits are intended to be a form of money purchase (MP) benefit, so that it will be clear to employers that they will not have to fund any shortfall in benefits that might arise. Consequently, CDC schemes would not be eligible for entry into the Pension Protection Fund (PPF) in the event of employer insolvency. Similarly, CDC schemes will be required to communicate clearly with members to ensure they understand that the level of benefits is not guaranteed and will depend on various factors, including the performance of scheme assets. The Government intends that they will be trust-based private sector schemes and no changes to the categorisation of existing schemes will occur, so CDC schemes will be for new benefits only.

Initially, the regulatory framework will just allow for CDC schemes of the broad form and nature of the one proposed by Royal Mail, however, the intention is that the DWP could modify the framework in light of future experience without an Act of Parliament being required.

The DWP intends that CDC schemes will be occupational trust-based schemes and will be subject to an assurance and regulatory regime similar to that for master trusts. They will, therefore, be scrutinised by the Pensions Regulator (TPR) before they are authorised. As with master trusts, the costs of authorisation would be met by the scheme.

The authorisation process would look at various matters including the scheme’s continuity strategy, its financial sustainability, the robustness of its systems & processes, and whether individuals significantly involved in its running are ‘fit and proper’. It would also consider the level of target benefits relative to contributions, how benefit adjustments are carried out, how transfer values are determined, and how communications explain to members what they might expect from the scheme. Legislation will include provisions enabling additional requirements to be added later if necessary.

Before a CDC scheme can approach TPR for authorisation, an independent actuary will be required to peer-review the actuarial assumptions underlying the scheme’s design. Once authorised, a CDC scheme will be required to appoint a scheme actuary to carry out annual valuations to assess whether benefits should be adjusted (up or down), and to test the scheme’s overall sustainability.

The DWP considers that such adjustments should apply across the entire scheme membership (i.e. to accrued pensions as well as pensions in payment) and should be the result of a mechanism set out in the scheme rules, not trustee discretion.

Although the DWP believe that the current Trustee Knowledge and Understanding (TKU) requirements should suffice for CDC schemes, it is minded that TPR is likely to consider the collective expertise and experience of the proposed trustees as part of the authorisation process.

As they will be a form of MP benefit, the DWP proposes that CDC schemes will be subject to the same charge cap applying to standard MP schemes. Even though the cap will be set at the same level (i.e. 0.75% p.a. on funds under management), it will apply to the scheme as a whole instead of to an individual member’s pot.

Transfer values are also an area for consideration as the DWP acknowledges that the existing basis for calculating transfer values might need to be amended for CDC benefits.

CDC schemes would be a new addition to the pensions landscape. Although the DWP intends to legislate as soon as possible, it might be some time before the necessary framework is in place. It also remains to be seen how much demand there is amongst employers to use a CDC scheme for their pension provision.

[arnold cheshire]

So how does it work?

[RobertT]

So how does it work?

In simple terms, the plan is that CDC works in a similar way to a DB scheme. Each year we'll be accruing a pension of 1/80th of our pensionable pay and a lump sum of 3/80ths.

Based on current basic full time pay of £432.92 per week, that would add up to a pension of £281.40 and a lump sum of £844.20 for each year of membership.

The main difference between DB and CDC is how the benefits increase, or not, as the case may be!

DB schemes usually always increase while you're a member. It's often with earnings or inflation (either RPI or CPI) during an employees active membership, depending on exact scheme rules. And with inflation during deferment and in payment, meaning they always keep up with the cost of living.
If there's a shortfall in the funding of the scheme, it's usually up to the employer to put more money in, unless it's agreed the workforce add more too. Or else the scheme might close altogether.
In our case the government/tax payer are now responsible for our pre 2012 benefits.

With CDC, the aim is also that our pensions will increase each year, but that is just the target!
In practice there will be an annual 'stock take' to determine whether they(during accrual, deferment & payment) will increase or not. If the investments don't perform well enough our pensions could potentially go down.

Stock markets can fluctuate quite wildly in the short term by anything up to 40-50% in one year. So any decreases in our benefits would be smoothed. In effect, the good years would pay for the bad.

The lump sum element(DBLSS) would be invested separately and would provide a guaranteed amount of ours and RM's contributions combined, with the addition of investment growth. And once that's been added, it's guaranteed too.

This booklet will provide some basic info, and this thread gives a more detailed idea of what a RM CDC plan will look like.

[arnold cheshire]

Thanks Robert T

[Woody Guthrie]

The main difference between DB and CDC is how the benefits increase, or not, as the case may be!

Surely the main difference between a DB pension and a CDC pension is the lack of employer liability for any deficit.
There are not many collective pensions in the last 40 years that have not been in deficit at some point and needed extra funding of some sorts from the employer.
Big difference with this one is that this is no longer an option.

[RobertT]

r

The main difference between DB and CDC is how the benefits increase, or not, as the case may be!

Surely the main difference between a DB pension and a CDC pension is the lack of employer liability for any deficit.
There are not many collective pensions in the last 40 years that have not been in deficit at some point and needed extra funding of some sorts from the employer.
Big difference with this one is that this is no longer an option.

Exactly, which I then went on to explain, admittedly without mentioning the word deficit, that our pensions will reduce if the investments don't perform adequately.

[Woody Guthrie]

To be honest I think the idea is to address any deficit on a yearly basis so that a large and unmanageable structural deficit of the kind we've seen isn't allowed to be built up but the problem with that is that there may be serious problems especially in the early years if we have poor or negative investment returns for 2 or 3 years in a row.

Looking at the pension landscape in the Netherlands there are a few major differences. First of all private pensions are a much lower percentage of retirement income so there's less at risk and secondly there has been considerable merging of CDC schemes over there which has given the schemes better outcomes through economies of scale and de-risked the schemes to a certain extent from individual company restructuring/job losses.

What RM could do with is some of the other big employers still running DB schemes coming on board or thinking big and outside the box...a shiny new large public sector CDC scheme!!!

[RobertT]

To be honest I think the idea is to address any deficit on a yearly basis so that a large and unmanageable structural deficit of the kind we've seen isn't allowed to be built up but the problem with that is that there may be serious problems especially in the early years if we have poor or negative investment returns for 2 or 3 years in a row.

Yes! They are planning on having yearly valuations to make sure the scheme is on track.

In practice longer term projections will be taken into account, so a paper deficit doesn't automatically mean an immediate drop in benefits.
I do agree that a market drop over the first few years of CDC could cause problems.

Looking at the pension landscape in the Netherlands there are a few major differences. First of all private pensions are a much lower percentage of retirement income so there's less at risk and secondly there has been considerable merging of CDC schemes over there which has given the schemes better outcomes through economies of scale and de-risked the schemes to a certain extent from individual company restructuring/job losses.

What RM could do with is some of the other big employers still running DB schemes coming on board or thinking big and outside the box...a shiny new large public sector CDC scheme!!!

At the moment RM has around 140,000 employees, which is big enough for economies of scale that CDC needs.
I would agree again, that as the workforce reduces(which it's bound to do), the future of CDC is probably much bigger than RM.

[BELIAL]

CDC schemes are exactly the same as the now discredited "with profit endowment schemes" if anyone knows of an example that achieved its "TARGET' come forward.
You'll be lucky if you get your contributions back . Cheers Terry hope you don't choke on your reward,

[arnold cheshire]

CDC schemes are exactly the same as the now discredited "with profit endowment schemes" if anyone knows of an example that achieved its "TARGET' come forward.
You'll be lucky if you get your contributions back . Cheers Terry hope you don't choke on your reward,

So we might has well stop paying in?

[RobertT]

CDC schemes are exactly the same as the now discredited "with profit endowment schemes" if anyone knows of an example that achieved its "TARGET' come forward.
You'll be lucky if you get your contributions back . Cheers Terry hope you don't choke on your reward,

CDC is similar to with profits!
But the proposed RM plan also has the Defined Benefit Lump Sum Scheme, which guarantees you a lump sum of least 3/80ths of your pensionable pay per year. Plus annual bonuses which aim to at least keep pace with inflation.

So based on just employee contributions and current full time basic pay of £432.92 per week:

DBLSS accrues at the rate of 3/80ths of pay per year = £844
CDC accrues at the rate of 1/80ths of pay per year = £281
Net employee contributions(after tax relief & PSE) = £919 (£1,350 gross)

* Total gross contributions of 19.6% of pensionable pay(RM, employee and taxman) = £4,412

In practice and if I've done the maths correctly, the money in the CDC element would have to go down by around 73% for you to break even, let alone make an overall loss, and that's not factoring in any investment gains at all!

So we might has well stop paying in?

Would you rather have an extra £919 in your pocket each year, or £4,412 going into your pension/lump sum.

[arnold cheshire]

CDC schemes are exactly the same as the now discredited "with profit endowment schemes" if anyone knows of an example that achieved its "TARGET' come forward.
You'll be lucky if you get your contributions back . Cheers Terry hope you don't choke on your reward,

CDC is similar to with profits!
But the proposed RM plan also has the Defined Benefit Lump Sum Scheme, which guarantees you a lump sum of least 3/80ths of your pensionable pay per year. Plus annual bonuses which aim to at least keep pace with inflation.

So based on just employee contributions and current full time basic pay of £432.92 per week:

DBLSS accrues at the rate of 3/80ths of pay per year = £844
CDC accrues at the rate of 1/80ths of pay per year = £281
Net employee contributions(after tax relief & PSE) = £919 (£1,350 gross)

* Total gross contributions of 19.6% of pensionable pay(RM, employee and taxman) = £4,412

In practice and if I've done the maths correctly, the money in the CDC element would have to go down by around 73% for you to break even, let alone make an overall loss, and that's not factoring in any investment gains at all!

So we might has well stop paying in?

Would you rather have an extra £919 in your pocket each year, or £4,412 going into your pension/lump sum.

Thanks Robert T it's a lot of money to refuse . I'd rather have the £4400 going in

[Vickihamill1]

How long do you have to be in the scheme to get the full benefits?
People saying we’re getting £280 pensionable pay? That’s 10k a year

[arnold cheshire]

How long do you have to be in the scheme to get the full benefits?
People saying we’re getting £280 pensionable pay? That’s 10k a year

I'm not sure you understand

[BELIAL]

With this CDC scheme you are GUARANTEED NOTHING from your pension savings. "the returns from your investments may go up and down"