March 7, 2019

CDC, or Collective Defined Contribution, is now a talking point in the pensions industry, but as First Actuarial’s Derek Benstead reports, it all started in the UK at Royal Mail. The proposed closure of the company’s Defined Benefit scheme led the trade union CWU and First Actuarial to the win-win pension solution that CDC promises to be.

The Communication Workers Union (CWU) has been a client of First Actuarial for many years, and we were keen to support them when pension issues arose following the privatisation of Royal Mail. Without the backing of the Government, Trustees of the Royal Mail Pension Plan became understandably nervous about funding and sought to charge extremely high contributions. Consequently, Royal Mail proposed moving from a Defined Benefit (DB) pension scheme to Defined Contribution (DC) arrangements.

The CWU had grave misgivings about DC, which puts the burden of risk on members. DC is cost-inefficient and produces a highly uncertain pension. And without adequate pension provision, employers can end up with a workforce that can’t afford to retire – as we at First Actuarial often point out.

Our latest case study outlines the negotiations that took place between CWU and Royal Mail, with First Actuarial in a supporting role.

Introducing CDC at Royal Mail

Following months of unsuccessful negotiations, and with the threat of industrial action, we hit on the idea of CDC, or Collective Defined Contribution.

The beauty of CDC, as a number of commentators have since pointed out, is that unlike other DC arrangements, contributions are pooled collectively. Not unlike DB in fact. A collective fund opens the way to more efficient, and less cautious, investment. For Royal Mail, this made for a win-win scenario – efficient use of employer and member contributions, combined with an attractive target benefit.

Relative to DC, CDC removes a lot of the uncertainty and risk for scheme members, who don’t have to choose their own investment strategy or work out how to spend their pot when they retire, in the way they do in a typical DC arrangement.

CDC also means that the scheme can offer a target benefit, which is tested in an annual actuarial valuation, which members can rely on in retirement. This target is a career-average benefit, so it looks like a DB scheme.

A wage in retirement scheme

The phrase ‘wage in retirement scheme’ is one that the CWU coined in the original proposal, and it has certainly gained currency in the pensions industry since. It has renewed the focus in the industry on providing an income for life, and was a key theme of the Union’s negotiations with the Royal Mail. The CWU wanted its members to be able to retire without having to worry about surviving on a low retirement income after buying an annuity, or even worse, running out of money before they die.

We’re running ahead of ourselves, however. Before we can put CDC in place at Royal Mail,  and hopefully elsewhere, we need to have legislation in place.

In the absence of legislation, both Royal Mail and the CWU agreed on CDC in principle, and started to lobby Government to facilitate CDC. Since then, Royal Mail and the CWU have appeared together at a number of pension events, sharing the idea of CDC in order to publicise and garner support for what they’re doing.

The good news is that the DWP is now working hard to draft the legislation needed to make it happen.

So it is very much a new chapter in positive industrial relations history between the union and Royal Mail. But more than that, it’s an innovation that could change the lives of millions of people, in Royal Mail and beyond.

Read the full story of how we supported CWU in the introduction of CDC in our Royal Mail case study.

Any questions or comments about this article?

Get in touch with the author, Derek Benstead.

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