Royal Mail delivers a return to collectivism

After years of development and effort we are delighted to see the launch of the first Collective Defined Contribution (“CDC”) scheme in the UK by the Royal Mail.  This represents the birth of a genuine ‘third-way’ of providing pension benefits that looks to capture the positive elements of the existing defined benefit (‘DB’) and defined contribution (‘DC’) approaches.

The Royal Mail CDC scheme will allow their staff to save for an income in retirement without having to worry about making complex decisions on selecting and monitoring investment strategy, contributions rates and how to ultimately access their benefits.  For the Royal Mail they will be able to provide this valuable benefit to their staff without any of the associated contribution and balance sheet risks that have plagued DB schemes in recent decades.

At Isio, we are pleased to have played our part in the efforts to make this a reality by supporting the trustees in establishing their governance and board effectiveness strategy.  This enabled them to ensure the new Trustee Board for the CDC scheme will operate effectively together as they take on this historic role.

The question is often posed to us as to whether the Royal Mail CDC Scheme will be the first of many or a unique experiment.  While we don’t expect many sponsors to have the appetite and energy of the Royal Mail and its Unions to set up their own CDC scheme, we do believe the multi-employer CDC regulations will provide a route to bringing the benefits of CDC to employers of all shapes and sizes.  It was very pleasing to see the new government show its commitment in this space by launching a consultation on the multi-employer CDC regulations today.

There will be challenges in ensuring the regulations provide the suitable flexibility in CDC scheme design and the reluctance of employers to be the first-mover into anything new in the world of pensions.  However, if these barriers can be overcome, there are clear benefits to employers and employees from providing a CDC option.