The Pensions Regulator authorises UK’s first CDC pension scheme

The Pensions Regulator (TPR) has assessed and authorised the UK’s first collective defined contribution (CDC) pension scheme.

The Royal Mail Collective Pension Plan (RMCPP) was the first to be added to the newly published list of authorised CDC pensions on TPR’s website.

The regulator authorised the scheme in order to continue with its strategy to embrace innovation and help the UK’s pension provision meet savers’ needs.

The Pension Schemes Act 2021 introduced CDC pensions, to add to the existing defined benefit (DB) and defined contribution (DC) structures. Where DB schemes pay a promised amount based on salary and service, and DC schemes create a pot of money to be used in retirement, in a CDC scheme, both employer and employee contribute to a collective fund with a target pension. If the scheme is under or over-funded, the pension it pays can be decreased or increased accordingly. Schemes such as this exist in the Netherlands, Denmark and Canada.

The main benefits of CDC schemes include accumulation and decumulation within the same scheme, income without a risk premium, longevity risk sharing, and longer-term investment strategies.

Possible disadvantages include that benefits can fall, difficulty in communicating more complex attributes, complexities around pension transfers, potential intergenerational unfairness, and some members potentially being worse off due to longevity sharing.

The RMCPP was developed after the Royal Mail and the Communication Workers Union (CWU) agreed to introduce a CDC scheme in February 2018, following the employer’s decision to close its DB scheme.

The Pension Schemes Act 2021 also introduced the authorisation and supervision regime, outlining that CDC pension schemes must meet strict criteria, while those running them meet fitness and propriety requirements. Schemes must have the right systems and processes in place, show they are financially stable, and provide robust member communications.

Currently, CDC schemes can be set up by single employers, for that employer only, or for employers in the same group of companies. However, there is some possibility of multi-employer schemes being allowed in the future.

Nicola Parish, executive director of frontline regulation at TPR, said: “I am delighted that we have authorised the first CDC scheme, which is a clear demonstration that we are serious about embracing innovative approaches to deliver the pensions of tomorrow.”

Laura Trott, minister for pensions, added: “TPR authorising the first CDC scheme is a landmark moment, and this is just the beginning. We have seen the positive effect of these schemes in other countries and our plans to extend out CDC framework will enable more pensioners savers to achieve the retirements they want.”