Watershed moment for CDC

[RobertT]

https://www.myroyalmail.com/news/2019/0 ... hed-moment" onclick="window.open(this.href);return false;

The link includes a video!

Positive step forward as Government commits to legislate for CDC pensions

The Government has published its response to the consultation on Collective Defined Contribution (CDC) pension schemes. It has committed to bringing forward legislation to enable CDC pension schemes at the earliest opportunity.

We welcome this response. It brings us one step closer to introducing a CDC pension for Royal Mail employees as soon as possible.

This consultation follows an agreement reached between Royal Mail and the CWU in February 2018 to pursue a CDC pension. We both agreed that a CDC pension would meet our mutual objectives of providing sustainable, affordable and secure future retirement arrangements for all employees.

We believe that the CDC scheme is a fair proposal that compares favourably with the retirement benefits offered in our industry and by other large UK employers.

With a CDC pension, employer and member contributions into the pension scheme are pooled, and this collective pot is then invested. CDC pension plans pay members an income in retirement, rather than members having to buy an insurance product (known as an annuity) or investing their money in another way. While there is an expected level of benefit that the employee will receive in retirement, this is not guaranteed.

Jon Millidge, chief risk and governance officer, said: ‘This is very welcome progress. Royal Mail and CWU have been campaigning together to bring about this legislation, building a cross-party alliance of supporters in both Houses of Parliament as well as working with Government. We now look ahead to the next stage, and ultimately, delivering the UK’s first CDC pension.’

Terry Pullinger, deputy general secretary (Postal) at CWU, said: ‘The pensions industry desperately needs innovation if we are to enable people to retire with dignity and security. An occupational wage in retirement scheme design running alongside one’s state pension has proven to enable those objectives.

‘DB is the gold standard of that design and should be maintained wherever possible, however where it cannot, there have to be more options than simply DC schemes. The CWU is proud, along with Royal Mail, of being at the forefront of such innovation and will be delighted to prove that CDC options will prove to be a watershed moment in pension provision and benefit working people way beyond our own membership.’

What happens next?

The next step is likely to be in the Queen’s Speech, where the Government formally announces what bills it intends to bring forward.

We will update colleagues on progress as we move towards implementation and write to you with more scheme details in due course.

[leolion855]

think ill be opting out, this has balls up written through it like a stick of rock.

[arnold cheshire]

think ill be opting out, this has balls up written through it like a stick of rock.

Yes I don't want any part in it

[Burghboy]

think ill be opting out, this has balls up written through it like a stick of rock.

so what do you get instead if you opt out?

[leolion855]

think ill be opting out, this has balls up written through it like a stick of rock.

so what do you get instead if you opt out?

nothing, you just take all your wages home and you can arrange your own pension.

[Burghboy]

think ill be opting out, this has balls up written through it like a stick of rock.

so what do you get instead if you opt out?

nothing, you just take all your wages home and you can arrange your own pension.

So you'd lose out on Royal Mails contributions? Why would you even consider that?

[RobertT]

You actually miss out on a lot of contributions from RM and the tax man.

Based on current full time pay of £432.92 per week, what will be going into your CDC pension will be:

Your contributions(6%) - £25.97 gross per week or £17.68 net, factoring in tax relief and PSE. The other £8.29 being paid by the taxman.
RM's contributions(13.6%) - £59.74.

So by opting out you'll have an extra £17.68 in your pocket each week, but you'll be turning down another £68.03 in 'free money'.

[leolion855]

But you risk that the whole scheme will collapse because its not an individual policy everybody is putting in and taking out, then in the future when rm have reduced the staffing levels there will be more people taking out than putting in, and like it says it doesn't give a guaranteed income in retirement it may change each month what you get (if anything)

Thats how i read it anyway.

[RobertT]

Have a look at the booklet RM sent to you about a year ago now, it tells you how the scheme will accrue. Also look at the anticipated CDC design to see how it will work in terms of investment, etc.

It's true there's no guarantees with CDC, but the whole point is there will be an audit each year to make sure there's enough in the pot to pay everyone's pension. If there's not, that's when they'll decide to decrease benefits. But the aim is there will actually be increases each year!

[leolion855]

booklet was before my time so ill check it out thanks

[heapsy]

But you risk that the whole scheme will collapse because its not an individual policy everybody is putting in and taking out, then in the future when rm have reduced the staffing levels there will be more people taking out than putting in, and like it says it doesn't give a guaranteed income in retirement it may change each month what you get (if anything)

Thats how i read it anyway.

You do make a very interesting point here. As RM reduce head count, how will the funding be sustained?
If you take myself as an example. I'm 52 this year, with 30 years service as of last year. I'm looking to retire at 60 from RM. I will probably have around 6/7 years in the new scheme, but even if I defer until 67, will draw my pension for 15/17 years. I can't see the scheme lasting beyond a few years tbh, as there will be many out there like me. Someone say 15 years younger, will have more years in the scheme, but their State pension age will not be that many years behind mine. (67) If RM fail to invest properly then the scheme will not be sustainable. They have an extremely poor record on this, and I don't see their attitude to risk being any different.

[RobertT]

It's mentioned in the consultation decision document that RM wouldn't even be entertaining CDC, if there was the slightest chance they would be liable for any deficits that may occur. So what's RM's attitude to risk got to do with it? It's the schemes trustees that will be making the decisions! And the CWU want an employee presence on that trustee board too!

There's no liability on RM with CDC(but there is with the DBLSS), they just pay in their allotted contribution and that's it! There's no chance it being in deficit like the old final salary scheme was, because our pensions would be reduced instead. So why would they have a low attitude to risk?
Infact the whole point is that there will be a high level of equity investment, because that's how you make money grow over the long term! And that's what this scheme is based around!

If there's a surplus after each yearly 'stock take', our pensions might increase, if there's a deficit they might go down. But other things will be taken into account aswell, like any changes in life expectancy, and not just investment returns.

There could be an issue with economies of scale as the workforce declines, which could make the scheme less efficient in terms of buying and selling funds, etc. But the whole point of CDC is that there's always going to be enough in the pot to pay for peoples pensions, however many members there are and however much their pensions are worth. The fact there might be 20,000 less employee in 10 years time(or whatever it might be), shouldn't really be a problem.

Edit:

The issues of benefits going up or down is mentioned in the consultation response document, where it says:

RM’s published scheme outline also discusses a ‘parity programme’ to stagger severe reductions to benefits of 5% or more as a way of reducing volatility in the scheme4. In the RM’s design, a cut of 5% or less would be applied as a single reduction. A reduction of over 5% would be applied via a “Parity Programme”, which would run for a period of up to three years as required. Reductions would be applied to all pensions credited up to the valuation date before the application of the reduction (i.e. the valuation on which the increases or reductions are based), including pensions which are credited during the Parity Programme.

Therefore, there would be planned cuts that have not yet been applied during this period. The scheme Actuary would assume that the remaining planned reductions (where still required) would be applied, meaning that the funding level would therefore remain at 100%. Once factored into the scheme’s funding profile, year two and three reductions will be imposed as a new baseline for benefit levels. Any improvement in fund value leading to increases in benefit level would then be calculated from this new parity programme baseline to ensure that balance is maintained in the scheme.

We are aware that significant volatility in annual benefit levels may be difficult for some people to manage and can therefore see merit in RM’s parity programme approach to staggering significant benefit reductions, which will allow members an opportunity to plan for this impact. Provided the funding level remains at 100% according to an actuarial valuation, we are content with RM’s approach.

However the plan is that benefits will actually increase by CPI +1% per year!

Also concerning the possibility of the scheme running out of money, or even RM no longer paying any money in:

It is essential that CDC schemes are sustainable without continuing employer contributions. It would defeat the purpose of a CDC scheme as a long-term pooled investment if it was forced to wind-up immediately on closure to ongoing contributions. Because CDC benefits will be classified as money purchase benefits, CDC schemes will not have recourse to the Pension Protection Fund, and it is therefore vitally important that a scheme can continue in the absence of a contributing employer, in order to protect younger members of the scheme.

We will therefore require all CDC schemes to demonstrate that they would be sustainable without ongoing employer contributions as a part of the Pensions Regulator’s authorisation and oversight process.

There's lots of other important CDC info to be gleaned from the document, such as the ability to transfer out to an individual DC scheme, etc. It's long read and there's quite a lot of jargon, but if you want to know how the scheme is actually going to work , then it's well worth your time.

[arnold cheshire]

When I say opt out I mean pay into the DC scheme with your own pot.

[RobertT]

When I say opt out I mean pay into the DC scheme with your own pot.

Sorry to be the bearer of bad tidings but, unless something changes, there won't be the option to pay into the DC plan instead. If you want RM's contributions it's going to be CDC or nothing!
The alternative would be to pay into a personal pension using just your own money. Or obviously not bother with pensions at all.

[arnold cheshire]

When I say opt out I mean pay into the DC scheme with your own pot.

Sorry to be the bearer of bad tidings but, unless something changes, there won't be the option to pay into the DC plan instead. If you want RM's contributions it's going to be CDC or nothing!
The alternative would be to pay into a personal pension using just your own money. Or obviously not bother with pensions at all.

Om thanks Robert T