Steven Taylor, LCP’s Head of CDC said:“The launch of Royal Mail’s new Collective Defined Contribution (CDC) pension scheme could truly be a “Red Letter” day for pensions. For many of today’s savers, employers and for Government, the hope is that CDC pensions could be something of a panacea, helping to simultaneously solve many problems across the economy. For savers, particularly those currently in traditional lower cost Defined Contribution schemes, CDC offers the hope of receiving far more “bang for their buck” in retirement. Scheme designs vary, but previous LCP research has estimated CDC can potentially offer members up to 50% higher expected pensions per £ contributed than traditional DC schemes that annuitise.
The secret to this is in investment pooling and collectivization, which means schemes can more comfortably invest for the long term than most members could on their own. For today’s savers some of these benefits can be replicated using drawdown products. However, CDC could be preferable for large segments of the population, especially those that do not want to make complex decisions about managing their savings deep into retirement. The long-term investment approach also makes CDC schemes natural buyers of productive finance assets that government would love to see in the hands of UK pension schemes. For employers who are increasingly competing to attract and retain the best staff, this also means an ability to enhance reward strategies by providing better quality pensions, all within current pensions budgets and without the thorny risks of deficits that have in the past plagued defined benefit schemes.”
Helen Draper, Partner at LCP said:“We welcome the long-awaited launch of the Royal Mail’s Collective Pension Plan, the first CDC scheme in the UK. We believe CDC offers distinct advantages to traditional alternatives, giving the current generation of pension savers a better opportunity to replicate the benefit levels of generous Final Salary schemes, which otherwise could require a significant, and often unaffordable, uplift to member or employer contributions. From working with our clients, this development can be expected to propel CDC much further up the pension and reward agenda for many of the UK’s largest and most paternal employers.
Given the significant advantages CDC schemes could offer to savers and the wider benefits to the UK economy in terms of investment in productive finance, we believe making CDC schemes accessible to a wider population of UK pension savers should be a priority. We expect the Government to shortly unveil new regulations that would enable the wider roll-out of these schemes, potentially creating a real shift in the pensions landscape.”
Chintan Gandhi, partner and head of Collective DC at Aon in the UK, said: “The launch of the UK’s first CDC pension scheme is an important milestone in the UK’s pensions landscape. This has been over seven years in the making. “Using this as a stepping-stone, we see tremendous value in the Government moving on to the swift introduction of scalable whole-life multi-employer CDC schemes. We believe these have the significant potential to help over 30 million workers in the UK build up a pension - including the self-employed.”
Matthew Arends, partner and head of UK Retirement Policy at Aon, said: “Following Aon’s original 2013 research into CDC, we were proud to advise Royal Mail on the design of its CDC scheme. The RMCPP scheme design that has been introduced today is a direct evolution of our earlier work and provides Royal Mail with certainty over their pension costs while delivering to over 100,000 workers what most of them want in retirement - an income for life that is expected to keep pace with the cost of living.”
Paul Waters, Head of DC, Hymans Robertson says: “The launch of the Royal Mail CDC scheme is a highly significant milestone for the pensions industry. Delivering a brand-new type of pension scheme has taken a sustained effort from everyone involved, innovation on this scale is hard. CDC provides great value by delivering higher pensions for lots of savers alongside increased certainty their pension won’t run out in retirement, which is desperately needed. “While celebrating today’s achievement, however, it’s important to recognise that the launch of the Royal Mail CDC scheme is just the beginning. The Royal Mail’s scheme was designed around specific objectives and the way it’s been set up will not be the best path for all schemes thinking about CDC. Other employers will have their own individual objectives and profile of members, which means a range of different types of design will be needed to cater appropriately for different groups. As an industry we need to develop a broad range of DC risk sharing options to deliver the greatest benefit to future members.”
Peter Daniels, Barnett Waddingham Partner and Head of Outsourced Investment Services, said: “Barnett Waddingham is proud to have advised on the investment arrangements of this milestone pension plan, by providing crucial input and support to the trustee board of the RMCPP. We’re very excited to witness the official launch of the RMCPP and to have played our part in this pivotal moment. The investment needs of the UK’s first CDC plan are complex and unique; helping to pick the right investment partner for the RMCPP relied on the depth of our market research and our long track record in advising on OCIO provider selection. We wish Royal Mail and the Trustee every success with the future of the plan”
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