Royal Mail Finally Launches Britain’s 1st CDC Pension Plan

U.K. postal services provider Royal Mail Group Ltd. has launched Britain’s first collective defined contribution pension plan nearly 10 years after the hybrid retirement plan was first proposed in the country in 2015. The plan is available, as of Monday, to all Royal Mail employees who have worked with the company for at least 12 months.

According to the Royal Mail, the CDC plan benefits include an automatic income for life and a cash lump sum, with employees paying 6% of pensionable pay into the collective pot each payday, while Royal Mail contributes 13.6%.

WTW, an adviser to Royal Mail in designing and implementing the CDC plan, has been named as the Royal Mail Collective Pension Plan’s actuary. According to Royal Mail, the “vast majority” of its employees will join the CDC automatically.

In a CDC plan, both the employer and employees contribute to a collective fund that provides an income in retirement. However, unlike defined benefit plans, the employer does not guarantee the benefits paid by the plan. Instead, CDC plans provide a target pension, and if the plan is underfunded or overfunded, the funds it pays out can decrease or increase accordingly.

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The concept of a CDC was first introduced in U.K. regulation by the Pension Schemes Act 2015, which included a provision for the government to allow companies to create the new plans. However, the provisions under the act never came into force. When Royal Mail decided to close its defined benefit plan in 2018, the postal service company and the Communication Workers Union agreed to introduce a CDC plan; however, CDC regulation did not exist at the time.

After concluding that the provisions in the Pension Schemes Act 2015 Act were not sufficient, the necessary legislation was eventually provided in the Pension Schemes Act 2021, and CDC regulations came into force in August 2022. Royal Mail’s plan was authorized by The Pension Regulator in April 2023.

The introduction of CDCs has been met with mixed expectations.

A 2018 report from the Centre for Policy Studies, a U.K. think tank, termed CDCs risky and untested, with the potential to undermine personal pension freedoms introduced in 2015.

“The system risks creating irreversible intergenerational injustice by overpaying pensioners at the expense of current and future employees,” the report stated. “It is also unclear whether what is promised to workers is actually deliverable.”

However, a report from Aon, updated in 2020, found that CDC plans were a better alternative for pension participants than a traditional defined contribution plan in that they offer “higher, more stable pension outcomes.”

“By sharing risk between members we achieve higher, more stable pension outcomes for members, than by using an individual DC pension arrangement,” the Aon report stated. However, citing Voltaire’s quote that “the best is the enemy of the good,” the report also acknowledged drawbacks to CDC plans.

“Collective DC may not be the perfect pensions system—but there again, most other pensions systems have been shown to have significant flaws,” the report stated. “It has always been relatively easy to criticize CDC and to spot potential flaws. But CDC has many powerful, good aspects that should improve retirement outcomes for many U.K. workers.”

CDC pensions differ from large defined contribution master trusts, like the U.K’s Nest. CDC pensions are designed to provide lifelong income that stops with a participant’s death. In contrast, the DC pensions provided through master trusts provide a pot of money, but any part of an individual pension account that has not been spent by a participant is property of the participant’s estate at their death, according to information from fintech provider firm Dunstan Thomas.