A handful of corporate entities have held exploratory discussions with the Department for Work and Pensions on collective defined contribution schemes, according to the department's defined benefit strategy team leader Julian Barker.
In 2017, Royal Mail and the Communication Workers Union started developing a collective scheme in which members would receive a flexible pension for life, sharing longevity and investment risk.
Speaking at the Westminster Business Forum on Thursday, Barker disclosed that “we have had a couple of discussions with other parties around collective benefits”.
“I would say that it’s very embryonic thinking,” he added. “Other parties who have an interest in this area are more interested in seeing what we do now, and what Royal Mail do, and how it pans out.”
We didn’t just do this on the back of a fag packet and then throw it out and say, ‘This is it’
Terry Pullinger, CWU
With legislation originally laid in 2015, the creation of CDC schemes still requires further regulation, but Royal Mail’s plans have received the tentative support of the government and the full backing of the Work and Pensions Committee. However, Barker confirmed changes would need to be made to primary legislation.
Critics of the plans argue that prospective members do not fully appreciate the conditional nature of CDC benefits, which are not fixed.
New primary legislation needed
Barker stressed that the DWP would look to “take an approach that’s quite different to how it’s been done in other countries”. Netherlands, Canada and Belgium currently offer collective benefits to savers.
A consultation will be launched on legislative proposals for CDC in autumn.
Primary legislation for defined ambition schemes, a term for non-DB shared risk arrangements that includes CDC, was laid in the Pensions Act 2014 by then pensions minister Steve Webb.
Defined ambition schemes have a ‘target’ amount that they will pay out to members. The secondary legislation for DA remains outstanding.
Aside from Royal Mail, the DWP strategist does not expect the emergence of any concrete efforts to establish CDC for the next few years.
“I honestly don’t expect anyone else to commit to this for three, four, five years, because they will want to just see how it takes off, or doesn’t, as the case may be,” he said.
Innovation is needed
The Royal Mail is currently the only employer that is known to be actively trying to set up a CDC scheme. It is, however, being considered in other quarters.
In March, following strike action over the Universities Superannuation Scheme, Universities UK and The University and College Union agreed to explore risk-sharing alternatives from 2020, with a particular focus on CDC.
CWU deputy general secretary Terry Pullinger, told the Westminster forum CDC is an exciting proposition for a pensions industry that is “crying out for innovation”.
The pensions landscape in the UK is "becoming polarised and it’s not going in the right direction... certainly not for ordinary working people,” he said.
Just a Royal Mail labour dispute?
Last month, Centre for Policy Studies research fellow Michael Johnson published a paper arguing that individual savings pots invested in with-profits funds presented a less risky alternative to CDC.
Johnson, involved in the design of freedom and choice under the coalition government, admitted there are positives to a collective solution, including economies of scale, the extension of the investment horizon and the collectivisation of life expectancy risk and investment risk.
He dismissed the Royal Mail’s proposals as “ultimately a labour dispute”.
“Defined ambition entails risk sharing," he said. "Who’s sharing the risk? Is it purely the workforce? Within the workforce? Does it involve the employer to some extent?”
Johnson: With-profits a better alternative to risky CDC
Plans for collective defined contribution schemes are "a risk too far", and savers should instead be offered individual savings pots invested in with-profits funds, according to one of the architects of freedom and choice.
“Do members of a CDC scheme of the future understand that this word ‘target’ is what we think it means? Do they really understand that?” he added.
In response, Pullinger said it was “insulting to think that we haven’t thought of some of these things, and that we haven’t got experts with us”.
“We didn’t just do this on the back of a fag packet and then throw it out and say, ‘This is it’... we know there’s no guarantees for people,” he said, adding: “We just believe that it offers far greater outcomes.”
