Royal Mail can lay claim to designing a consistent and fair pension scheme in its novel collective defined contributions (CDC) scheme. The scheme is not yet in force, but enabling legislation in Parliamentary under-secretary of state at the Department for Work and Pensions Guy Opperman's Pensions Bill is expected in the autumn.
Royal Mail's scheme will be defined contribution (DC) in style but its investments will be pooled and members’ retirement income will be paid directly out of the fund. It will target a similar level of benefits as currently provided by the organisation's defined benefit (DB) scheme, with contribution rates of 6% employee and 13.6% employer, for all members. Although benefits will be targets, rather than guaranteed, a guaranteed cash lump sum element is built up every year.
Terry Pullinger, deputy general secretary (postal) at the Communication Workers Union (CWU), says: “We faced a terrible dilemma when the DB scheme closed a decade ago. We had 80,000 [members] in DB and 40,000 in DC and the latter had a number of matched contribution levels, but not many members moved off the base level which was very low."
In DC schemes, because the risk is entirely the member’s, and much depends on timing, benefits in CDC should be more achievable because there is no need to switch to lower return, bond-like investments as a member approaches retirement, explains Pullinger. Benefits are paid directly out of the fund which, overseen by an in-house governance team, will be focused on the consumer prices index (CPI) plus 2%.
"In my opinion, this solution enables pension equality as all members go into it, and it helps with intergenerational fairness because older members have enjoyed DB while younger members tend to have DC,” says Pullinger.
Jon Millidge, pensions director at Royal Mail, adds: "We believe CDC is a progressive option, which meets our objectives of providing sustainable and affordable future retirement arrangements for our people.
“We’re pleased that government has said it plans to legislate for CDC pensions. Royal Mail and the CWU want to see CDC become a reality in the UK, and we hope the required legislation will be introduced at the earliest opportunity.”
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