Collective Defined Contribution pensions – the next steps for new type of pension scheme

First, there was the launch of the Royal Mail Collective Pension Plan (RMCPP), which became the UK’s first private-sector pension scheme to provide CDC benefits.

As part of a whole-life CDC retirement scheme, such as RMCPP provides, CDC offers savers an inflation-linked income, more affordably than by annuities; an income that is payable for life; and members are not required to make any complex financial or investment decisions, either at or during retirement.

Employers and employees contribute fixed contributions as a percentage of pay, in the same way that most currently do into regular defined contribution pension schemes.

CDC works by pooling all members’ contributions and risks, which means that with several thousands of members they will have the scale to provide efficient pensions.

The performance of members’ investments and their demographics, particularly longevity, are reflected on a scheme-wide basis to provide a target pension. This means that, from the outset, while the pension will be expected to keep pace with the cost of living, actual adjustments to pensions each year will vary depending on investment returns, inflation and life expectancy.

Crucially, in providing CDC benefits, there is no ability to seek more money from employers or members.

This means that savers will need to accept that there may be circumstances when their CDC pension could reduce as well as increase - although research from Aon has shown that well-designed CDC schemes are expected to have a low likelihood of needing to do this.

The nature of CDC schemes means they will be able to invest in a more return-seeking way and over longer periods of time, than we typically see in existing open defined benefit and defined contribution pension schemes.

CDC schemes are therefore in line with the government’s priorities around unlocking investment in productive finance – as well as delivering value to their members through their scale and consolidation. All this is expected to result in improved outcomes for members through higher expected retirement incomes than might otherwise be possible from existing defined

contribution savings.

The RMCPP offers Royal Mail’s entire 100,000 plus workforce the opportunity to join a pension scheme that will provide them with a CDC income for life in retirement, generated from both their own and Royal Mail’s defined contributions. This is also in a way that is sustainable and offers certainty over pension costs. To supplement their CDC income for life, RMCPP also provides retirees with a defined benefit cash lump sum on retirement.