Jon Millidge: Are collective defined contribution schemes a viable option for the future of pensions?

Jon Millidge

Retirement provision is a major challenge facing our society. As the provider of around one in every 190 jobs in the UK, Royal Mail has a responsibility to help tackle this issue. We are committed to providing our employees with the best possible pension arrangements.

Like many employers, our defined benefit (DB) scheme became unaffordable. If we had not made changes, contributions were expected to grow from around £400 million a year to more than £1.2 billion.

We had detailed discussions with our unions about our future pension arrangements. They had to be sustainable, affordable and secure, for both members and the organisation.

We agreed that a collective defined contribution (CDC) scheme was a progressive option which would meet our objectives, providing the best outcome for members and Royal Mail. We committed in principle to the future introduction of a CDC scheme for all employees. We agreed with the Communication Workers Union (CWU) to jointly lobby government to make the necessary legislative and regulatory changes so a CDC scheme can be established.

Risk would be shared between members and Royal Mail. The risks associated with the target CDC pension would be borne by members collectively. The organisation would guarantee a set lump sum at retirement. The risk to Royal Mail would be significantly reduced, compared to our scheme in its previous DB form.

A CDC scheme offers several advantages. It can adopt a less conservative investment strategy in members’ later years, enabling higher potential returns. Unlike individual defined contribution (DC) schemes, risk is shared among members; they do not need to purchase an annuity to receive a retirement income for life. CDC schemes can benefit from a reduction in costs through economies of scale. They can be simpler for members. The combination of these features creates a more efficient scheme design when compared with individual DC.

Jon Millidge is group HR director at Royal Mail