Royal Mail ready to launch first U.K. collective DC plan

[TrueBlueTerrier]

https://www.pionline.com/defined-contri ... ve-dc-plan

The Royal Mail Group Ltd. is getting closer to the launch of its long-awaited collective defined contribution plan, which will be U.K.'s first such plan, as the government unveiled a final set of CDC requirements on July 19.

Sponsors of defined benefit funds in the U.K. such as Royal Mail, which have been grappling with the increasing costs of running a pension fund will soon be able to switch to a more affordable alternative.

That alternative is a CDC plan, a bridge between a DB fund and a pure DC plan, in which lifelong income is secured by pooling participant assets and investments in both accumulation and decumulation phases of the retirement journey, with participants bearing the investment and longevity risks instead of the plan sponsor.

"Our goal was to create a plan that was affordable, sustainable and secure for the members and for the business," said Angela Gough, London-based head of corporate pensions at Royal Mail.

The government expects CDC plans such as Royal Mail's to be cheaper for employers because they won't require sponsors to guarantee how much participants will receive each year.

The benefits paid out in CDC plans will instead be influenced by asset returns and could be reduced or increased depending on plan participants living longer or shorter than expected, Ms. Gough said.

Single-employer and connected industrywide multiemployer pension fund sponsors could implement new CDC plans in the U.K. soon, now that the government unveiled the final set of CDC regulations.

The Royal Mail's situation is unique because its CDC plan design — first developed in 2018 to replace its DB fund by plan executives in conjunction with The Communication Workers Union representing Royal Mail employees — was already endorsed by the U.K. government as one that could be replicated by other plan sponsors.

Royal Mail is expecting to launch its plan in 2022, once the U.K. draft regulation is incorporated into the U.K. law and it receives authorization from the regulator.

The new regulations, which outline the requirements and are expected to be adopted into the law in the fall, were a missing piece for Royal Mail to move closer to overhauling its retirement arrangements. The passage of the Pension Schemes Act 2021 earlier this year already provided a legal framework for CDC plans to operate.

"We are expecting that the authorization regime will be fairly similar to the (DC) master trusts' (one). We have already had conversations with The Pensions Regulator (about) what they need from us. We know they are already thinking about it," Ms. Gough said, adding that the company is already starting preparatory work on the application "so hopefully it won't be a very drawn-out process."


‘CDC is the best fit'

Ms. Gough said Royal Mail did not change its plan design in the past three years. Other avenues such as outsourcing to an insurance company or to a DC or a DB master trust — options that have increased and evolved in the U.K. market since 2018 — still wouldn't offer the features that Royal Mail sought. "We genuinely believe that CDC is the best fit," Ms. Gough said, because plan participants will not have to make complicated choices at retirement and because there is potential for higher investment returns in both accumulation and decumulation phases compared with DC plans.

"CDC allows members to pool longevity risk, which is really powerful," she said, adding that CDC plans can help achieve an income for life without having to opt for a more conservative investment strategy or without paying a premium to an insurance company.

"One of the really powerful (aspects) of CDC is obviously that the members don't have to derisk as quickly. So, the (new) asset allocation broadly is that the scheme will be held in return-seeking portfolio for longer," she said.

Ms. Gough added that DC master trusts don't "automatically provide a wage in retirement."

Royal Mail also couldn't have designed a DB plan with the same level of benefits affordable to the company because the costs of continuing to run the DB fund, which was frozen in 2018, would "dramatically" increase over the years, she said. "Going back to March 2018, the Royal Mail Pension Plan closed to the accrual of career salary benefit and that happened because if it remained open in its previous form, annual contributions by Royal Mail would have risen to unaffordable levels," she said. Simultaneously, in 2018, a cash balance fund replaced the £10 billion ($13.9 billion) pension fund as a transitional arrangement, which currently offers participants a cash lump sum at a 19.6% rate of pensionable pay. Royal Mail also operates a pure defined contribution plan with a 10% combined employer-employee contribution rate.

The Collective Pension Plan, as the Royal Mail's CDC plan will be known when it launches in 2022, will replace both plans.

When the decision to freeze the DB plan was made, annual cash contributions were forecast to increase from about £400 million a year to about £1.3 billion a year.

Royal Mail's CDC plan will feature income in a retirement element and a cash balance element that provides a lump sum. In the new CDC plan, Royal Mail will contribute 13.6% of pensionable pay into the new plan and participants will pay 6%. Participants will build a CDC retirement income of 1/80th of their pensionable pay for every year of work, Ms. Gough said. The lump sum element will be set at 3/80th of pensionable pay.

Depending on the period when participants accrue benefits in the new plan, the retirement outcome could go down or up due to the investment performance and longevity, she said. But she said: "The basic amount (that participants) build up is the same for the same service and the same salary."

Before the new plan launches, Ms. Gough said Royal Mail will appoint a trustee board that will set asset allocation and launch an official procurement for money managers that will run assets.

When the new plan launches, Ms. Gough said Royal Mail's current pure DC participants will migrate to the new CDC plan alongside former DB participants currently accruing benefits in the cash balance fund.

"Everybody within our cash balance arrangement will automatically join the plan and within our defined contribution, everyone with a year of service with a certain contribution rate will join as well,'' she said, adding that Royal Mail expects about 120,000 to automatically join the collective pension plan.

For participants with less than one year of service or those who want to opt out of the CDC plan, Royal Mail will still set up a "nursery scheme," she said. The vehicle will be a new pure DC arrangement. But employees with shorter service will still automatically join the collective DC plan after a year of service.

[Schiff]

https://www.pionline.com/defined-contri ... ve-dc-plan


For participants with less than one year of service or those who want to opt out of the CDC plan, Royal Mail will still set up a "nursery scheme," she said. The vehicle will be a new pure DC arrangement. But employees with shorter service will still automatically join the collective DC plan after a year of service.

This is both a new and welcome development.

[RobertT]

I was just about to comment on that myself!

I assume a 'nursery scheme' would be at the minimum level of contributions legally allowed? Which is currently no less than a total of 8%, of which 5% must be from the employee.

So 8% into a DC scheme or 19.6% into CDC!

[Schiff]

I was just about to comment on that myself!

I assume a 'nursery scheme' would be at the minimum level of contributions legally allowed? Which is currently no less than a total of 8%, of which 5% must be from the employee.

So 8% into a DC scheme or 19.6% into CDC!

Until today you had assumed that there wouldn't be a DC scheme running alongside the CDC. I certainly wouldn't assume that contributions would be restricted to the minimum. As long as the DC scheme isn't going to cost RM more money then why shouldn't there be similar contribution levels after a year of service?

I will be waiting for the full rules of both schemes, including how transfers from the CDC scheme will be valued and implemented along with the contribution rates for the DC scheme before making my choice.

[RobertT]

Until today all the literature said everyone will be put into CDC and all existing schemes would close, so as you say this is a new development!

I think the word 'nursery' is a clue here!
Personally I see it as a way of RM offering DC to those who want it and I can understand why some would, but encouraging most to join CDC due to, in my opinion, the higher contributions.

The more that join CDC, the more economical and successful it's likely to be, so I can't see RM offering both at the same cost to them.
The current maximum going into the RMDCP is 16%, compared to 19.6% into the DBCBS, with 19.6% also going into CDC.

But we'll have to wait and see!

I would hope everyone will weigh up the pros and cons properly, just as they should with anything else. As someone who doesn't expect to in CDC/DC for long, I will definitely be considering all my options!

[Jefferson Starfish]

Robert, considering the contributions into the CDC scheme will be a lot higher than the minimum required, does this nursery DC plan even have to provide that 8% level, let alone 16% or 19.6%?

Is it a case of RM are giving a good percentage with CDC therefore if you choose to opt out they can pay whatever they choose into a DC plan.

Are they basically just placating those who want a DC scheme?

[RobertT]

To be honest I'm not 100% sure what happens when a company offers 2 different schemes, I don't know if they both have to provide at least that 8% minimum, or just one of them.
I would assume both do, but perhaps a bit of research is needed.

Personally I can't see the 'nursery DC' scheme offering anywhere near the same percentage as the current RMDCP, let alone CDC. Although I can understand why people want it to.

The whole process of introducing CDC has already taken 3.5 years and one of the main driving forces of its potential success is a high membership, meaning economies of scale, etc.
So I think RM will want as many to join as possible.
Although there'll always be some who opt out.

I don't expect to be in CDC for more than 18 months at the most and it could be lot less. So I have already thought that transferring out to a DC scheme might be better than waiting until 67 for a very small pension and lump sum. Obviously pending valuations, etc.
Paying into a new DC scheme instead has therefore got to be considered too, and the higher the percentage, the more appealing it will be for me and I'm sure for others.

But in my mind, having a DC alternative offering a high percentage will persuade more not to join CDC and would be counter productive to the success of the scheme.

It's an interesting development that I'm sure many will be keeping their eye on.

[Woody Guthrie]

The only reason not to offer the same contribution rate would be to try to coerce members into joining the CDC scheme.

There may be legal implications involved in that so they may be forced into offering similar contribution rates. If you make a decision to offer two schemes I'm not sure how ethical it would be to have one on markedly inferior terms simply to pressure people into joining another scheme entirely. That sounds... dubious at best.

We'll find out pretty soon I suppose.

[RobertT]

There are examples of companies offering both DB and DC schemes to their employees.

The DB offering usually has the lower employer contribution rates due to the nature of the scheme and the potential for deficits which the company would be liable for.

There is no chance of deficits with either CDC or DC, so in theory rates should be similar. But 'nursery' suggests a starter scheme with starter contributions, to me.

It's created another talking point on here, if nothing else.

[Woody Guthrie]

I think the use of the word "nursery" is that its primary function is to be used as a holding pen for new entrants rather than place them directly into the CDC scheme and have them potentially leave after 6 months.

In a scheme designed specifically for that you could offer a lower rate because the intention would be to move everyone into the CDC scheme and therefore parity of contributions.

However Royal Mail may have made a huge mistake by suggesting it could be used as an alternative if people want to opt out, setting up alternative long term pension schemes where one is potentially offering substantially more than the other is a legal minefield.

I think it will pretty much mirror the existing scheme with a minimum level for the first 12 months and then a series of contribution levels for anyone who wishes to stay in the scheme... but it's only guesswork.

[RobertT]

I think the use of the word "nursery" is that its primary function is to be used as a holding pen for new entrants rather than place them directly into the CDC scheme and have them potentially leave after 6 months.

But from the literature I've read, it doesn't sound as if there's anything stopping me with 30+ years service, joining CDC on day 1 and then leaving RM a week later.

However Royal Mail may have made a huge mistake by suggesting it could be used as an alternative if people want to opt out, setting up alternative long term pension schemes where one is potentially offering substantially more than the other is a legal minefield.

Personally I don't really see it as a legal minefield at all!
You either join CDC and get X, or you join DC and get Y.
It's a choice you make for yourself.

[Woody Guthrie]

Most people who leave RM do so in the first twelve months Robert, that's the point I was making and the reason for the nursery scheme.

It's why in the old pre-auto-enrolment days you couldn't join the DB pension until after 12 months service.

[RobertT]

Most people who leave RM do so in the first twelve months Robert, that's the point I was making and the reason for the nursery scheme.

Do they?
They might across the company as a whole, I wouldn't know, but they certainly don't where I work.

I wonder then why there's a 4 year limit on current RMDCP members joining the DBCBS?

It's why in the old pre-auto-enrolment days you couldn't join the DB pension until after 12 months service.

I'm not quite sure when you're referring to as the 'pre auto enrolment days'?
The only qualifying criteria I can remember, was the need to be aged 18 or over, although what you refer to might be before my time?

I joined POPS as it was then known, now section C, on my first day!

[heapsy]

Presumably this new alternative DC offering will have no defined NRA except being taken no earlier than 55. Maybe that is why RM are offering it. Perhaps they've realised that some wont be in the new scheme long, such as those who have years in the NRA60 pension and who hope to go at 60.

[RobertT]

Presumably this new alternative DC offering will have no defined NRA except being taken no earlier than 55.

I see no reason why this new DC scheme won't have an access age equal to the legal minimum, which is currently 55 but will rise to 57 in 2028.

Maybe that is why RM are offering it. Perhaps they've realised that some wont be in the new scheme long, such as those who have years in the NRA60 pension and who hope to go at 60.

I can't see the turnover of staff being any higher or lower once CDC starts.

From the point of view of those who would rather have a DC scheme, it'll be a relatively simple bit of maths.
Will they get more out of the new DC scheme, or by joining CDC and then transferring out to their own DC plan?

Which brings us back to the contribution rates and how CDC will be valued, neither of which we currently know.