One of the most eagerly anticipated parts of the new Pensions Bill promised in the 2019 Queen’s Speech is legislation that will enable Royal Mail to open a new collective defined contribution (CDC) scheme for its employees, replacing their current defined contribution (DC) pension.
The expected legislation, as trailed in the recent Department for Work and Pensions (DWP) consultation response, is likely to be specifically aimed at enabling Royal Mail to introduce the new scheme, but without enabling a wide range of alternative types.
The consultation response also makes clear that the Royal Mail scheme is seen as something of a test case, though; while broad legislation is not likely in this Bill, it has not been ruled out for the future if the Royal Mail scheme works well. If more uses of CDC are allowed, then this opens up various choices for both employers and existing schemes, such as looking at multi-employer schemes, and potential annuity alternatives.
Employers will have the option of considering another type of pension that might better meet the needs of employees, and schemes will have an increased range of options that might better meet the needs of members.
Nevertheless, it is important to remember that just because the option is there, not everyone will have to use it. Each decision should be taken considering the characteristics of employees and scheme members.
Most importantly, it is not a binary choice. One of the most interesting aspects of the Royal Mail example is the combination of a CDC scheme designed to produce income in retirement, with a defined benefit (DB) scheme to provide a lump sum.
While more choice brings greater complexity, it also brings the opportunity to be innovative and to better provide the outcomes in retirement that individuals might want.
Chris Curry is director at the Pensions Policy Institute