15 December 2019
myroyalmail is updated daily

Collective Defined Contribution (CDC) scheme FAQs

What is a Collective Defined Contribution (CDC) scheme?

The Collective Defined Contribution (CDC) is a new type of pension offering to be made available in the UK.

CDC schemes are collective, meaning contributions are paid into a pooled fund for all members and invested on their behalf.

Under the proposed Royal Mail scheme, the CDC pension will build up at 1.25% (1/80th) of member’s pensionable pay. The benefits are adjusted each year based on the scheme’s performance and may go up or down – a risk member’s bear.

The other key difference is that when you retire you’ll be paid an income directly from the scheme’s pooled assets, rather than having to buy an annuity or draw down your pension fund.

What would the Company’s contribution be under a CDC scheme?

Royal Mail would pay in 13.6%. Members of the pension scheme would pay in 6%. Members can also make extra contributions for additional benefit during retirement.

How likely is it that the Government will enable CDC schemes?

The Government has formally announced in the Queen’s Speech on 14 October 2019 its intention to introduce a Collective Defined Contribution (CDC) pension scheme into UK law. The Bill will soon have its first reading in the House of Lords. The next step will involve the Pensions Minister tabling it in the House of Commons. If passed, the Bill will make CDC pensions available in the UK for the first time.

When will the new CDC scheme be available?

The timetable for doing this is a matter for Government. We hope that it passes the necessary legislation quickly to enable us to introduce a CDC scheme at the earliest opportunity. Meanwhile we are continuing our work on the detailed CDC scheme design.

Will you be sending out personal illustrations of the possible effect of CDC?

We understand that people want to see how the agreement will affect them personally. But, CDC is a completely new type of scheme and we are not clear yet on how the regulations will require us to show benefits at an individual level.

We included several example illustrations in the RMPP and RMDCP booklets, which we sent to members’ homes in February 2018. These illustrations seek to show how the target benefits under the proposed CDC scheme, with the Defined Benefit Lump Sum (DBLS) sitting alongside it, might (based on certain assumptions) compare variously with the RMPP, the RMDCP default contributions prior to 1 April 2018, the improved RMDCP from 1 April 2018, and the DBCBS. They cover a broad range of ages and lengths of service.

As we’ve said, the new arrangements will target, but not guarantee, a similar level of benefits to those currently provided by the RMPP. 

Is the retirement age increasing to 67 under the CDC scheme?

The retirement age under the CDC scheme would be 67.This is in line with the increase in the State Pension age set by the Government, which is currently expected to be 67 by 2028.

As now, employees would be able to take their pension from the Minimum Pension Age, which is currently 55, reduced for early payment.

The retirement age under our transitional arrangements – the DBCBS and the improved RMDCP – will remain at 65. 

And the retirement age for the benefits that members built up to 31 March 2018 remains unchanged.

Was existing money built up in RMDCP or RMPP transferred into the new DBCBS or the CDC and DBLS arrangement?

No. The retirement pots that members built up prior to 1 April 2018 have not been transferred into our new retirement schemes.

RMPP members’ benefits built up until April 2012 are backed by Government under the Royal Mail Statutory Pension Scheme. Their benefits built up between 1 April 2012 and 31 March 2018 are backed by the RMPP’s assets. Those benefits will remain in the RMPP.

RMDCP members’ benefits built up prior to 1 April 2018 will remain in that scheme.

Who would be responsible for managing the investments in the CDC scheme?

The scheme would be set up as a trust, like the current RMPP. The board of trustees would be responsible for setting the investment strategy and managing the scheme’s investments.  

Who is accountable if the scheme doesn’t deliver its target?

Under a CDC scheme, the amount that the employee receives in retirement is not guaranteed. The actual benefit payable will depend on the scheme’s investment performance (and once in payment can go down as well as up) and other factors such as average life expectancy of members. We would expect the trustees of the CDC scheme would be responsible for setting the investment strategy and managing the scheme’s investments, but ultimately there is no guarantee as to the benefits that members will receive.

What is the governance under the CDC scheme to ensure that decisions around revaluations are appropriate?

We would expect matters such as how target benefits will be communicated to members and how increases are awarded (or not) to be set out in the scheme documents, but until the necessary legislation is in place we will not know what the actual requirements will be. 

How will the CDC arrangements aim to target a similar level of benefits to the RMPP, when contributions remain at £400million rather than rising to £1.26bn had changes not been made to the RMPP?  

The new arrangements are designed to provide on average, although not guarantee, a similar level of member benefits as the RMPP, while significantly reducing the risk to the Company. CDC schemes can do this by taking a more return-seeking investment strategy both up to retirement and after, allowing higher potential returns. The RMPP has a very low risk approach to investment, which materially increases the contributions required to fund the benefits.

How can you be sure you won’t need to make further pension changes?

The pension arrangements we have agreed are more sustainable than the current RMPP. The Company will not have to face the unsustainable financial risks associated with a DB pension scheme. Under the RMPP, if we hadn’t made changes, annual contributions were expected to increase from £400 million to £1.26 billion. That increase is simply unaffordable.

Will employees take on all of the risk under the future CDC/DBLS scheme?

Royal Mail and the CWU have committed in principle to the future introduction of a Collective Defined Contribution (CDC) scheme - subject to the necessary legislative and regulatory changes - with a Defined Benefit Lump Sum (DBLS) sitting alongside it. The Company would bear the risk of guaranteeing a minimum lump sum at normal retirement age under the DBLS.

How will the CDC/DBLS target benefit be calculated?

Together, the CDC scheme and DBLS sitting alongside it would target, but not guarantee, a similar level of benefits to those currently provided by RMPP. The target CDC income would be the 1/80th of pensionable pay for each year of pensionable service, plus RPI revaluation each year. The guaranteed DBLS lump sum would be 3/80ths of pensionable pay for each year of pensionable service, plus any revaluations once credited.

Will members receive annual statements showing their expected benefits?

Yes, we would expect that members would be sent an annual statement showing how their target benefits have built up. However, we do not have the details about how benefits will be shown yet.

Is there an option to remain in the DBCBS after the CDC scheme is introduced?

No. The DBCBS is a transitional arrangement that we are have put in place while we seek the necessary legislative and regulatory changes to enable a CDC scheme to be introduced. Assuming the necessary regulatory and legislative changes are made, the intention is that once the new arrangements are set up, members of the RMPP and RMDCP would automatically join the CDC scheme.

Would members who are over 60 and already drawing their pension automatically join the CDC/DBLS scheme?

All active members of RMPP and RMDCP would automatically become members of the CDC/DBLS scheme when it is established. Other employees with 12 months' or more Company service would be able to opt to join the scheme if they wish. 

Under CDC, could a member’s pension change while they are in retirement? What is the notice period for this?

Yes. Under a CDC scheme, there is a target for what the employee will receive in retirement, but this target is not guaranteed. The actual benefit payable will depend on the scheme’s investment performance, and once in payment can go down as well as up. It will also depend on other factors such as average life expectancy of members.

CDC is a completely new type of scheme, and we do not know what the legislative requirements will be. However, we expect clear rules to be put in place around how we communicate any changes to members’ target benefits.

How are payments smoothed out so that the assets are shared appropriately between current and future beneficiaries?

CDC is a completely new type of scheme, and we do not know what the legislative requirements will be. However, we expect clear rules to be put in place to ensure fairness between generations within the scheme. This would include rules around when increases can be granted, and when benefits would have to be reduced.

Are members forced to take a cash lump sum under the CDC scheme with the Defined Benefit Lump Sum scheme sitting alongside it?

Royal Mail and the CWU have committed in principle to the future introduction of a CDC scheme - subject to the necessary legislative and regulatory changes - with a Defined Benefit Lump Sum scheme (DBLS) sitting alongside it. This means all members would receive a guaranteed lump sum at retirement. At present, 97% of RMPP members choose to take a lump sum at retirement. The DBLSS would provide a lump sum at retirement but it would be up to members whether they take that as cash, or use it to buy an alternative product, such as an annuity.