Govt 'tempted' by latest Royal Mail CDC proposals

Pensions and financial inclusion minister Guy Opperman told the Work and Pensions Committee on Wednesday that Royal Mail and the Communication Workers Union had submitted proposals late last week that would involve less legislative upheaval than previously envisaged.

However, he stressed that both his department and parliament in general had more pressing priorities, so proponents of CDC would need to create a convincing model that could be achieved with minimum fuss.

Nobody knows up front whether they’re going to be the lucky generation who retires at the top of the dot-com boom, or 10 years later

Kevin Wesbroom, Aon Hewitt

Royal Mail and the CWU are the only group to have asked to set up a CDC scheme since legislation for defined ambition schemes was laid in the Pensions Act 2015.

“This has not been a priority since 2015, partly because there has not been a call for it,” Opperman told the select committee. “It’s clearly the case that there is now one group which is very keen on this and we are tempted to facilitate and assist them.”

He said the DWP would wait to see the committee’s recommendations on CDC before acting.

A less disruptive path to CDC

The government has previously been reluctant to bring about CDC using the 2015 act because it envisaged a “more fundamental” shift away from current legislation, according to Ronan O’Connor, deputy director of private pensions policy at the Department for Work and Pensions.

Currently schemes are defined as a binary of money purchase (DC), or not money purchase. The 2015 act set out to create a new definition for DC, a previously non-existent definition of defined benefits, and the more flexible defined ambition schemes in between.

Given constraints on parliamentary time, O’Connor said that option was unpalatable, and that the department had challenged Royal Mail to find a better way.

The apparent solution, presented to the committee by Philip Bennett, a former partner at law firm Slaughter and May, would be to instead amend a definition of money purchase in the Pensions Act 2011 to capture CDC schemes.

“The key to the amendment is that the assets and the claims on the assets, the benefit obligations and the target benefit obligations, must always be in balance, because you have to adjust your target aspirations to the asset value,” Bennett told the committee.

Regulatory framework is key

That may bring CDC a step closer to fruition, but there are still plenty of hurdles to pass. O’Connor told the committee he had around 10 concerns that needed to be satisfied over CDC, including issues such as how benefits are accrued, and “what happens when things go wrong”.

Proponents of CDC giving evidence to the committee shared O’Connor’s concerns that regulation must be robust if the new system is to work.

Kevin Wesbroom, senior partner at pensions consultancy Aon Hewitt, said it was crucial that all information about prospective CDC schemes should be in the public domain, to enable scrutiny of trustees refusing to cut pensions in bad times, as happened with some Dutch schemes during the global financial crisis.

“They didn’t want to upset the older generation and so effectively they transferred the risk to the younger generation,” he said.

He also stressed that Aon’s research showing CDC creating outcomes that were 30 per cent better than DC was conducted in relation to a model where savers bought an annuity.

However, he pointed out the solution that CDC offers to the apparent pensions lottery of investment returns, where retirement date is a major factor in overall outcome.

“Nobody knows up front whether they’re going to be the lucky generation who retires at the top of the dot-com boom, or ten years later,” he said.

What about admin?

While those giving evidence to the committee argued that actuarial, governance and communications-related problems could be solved with the right framework, little mention was made of the administrative burden of new schemes.

John Reeve, a director at Cosan Consulting, told Pensions Expert that he was in favour of CDC but admitted there would be headaches for administrators: “The more I think about it the more it is very complicated.”

He said an audit trail would be needed, alongside potential investment in new systems and clear communications to members about benefit uplifts or cuts.

“It’s got to be technology-based. It’s got to be open to members [for them] to be able to see what’s happening online,” he added.