After Years of Planning, UK Finally Authorizes First CDC Pension Plan

The Royal Mail finally received authorization for a plan it proposed in 2018 after closing its defined benefit plan.



Five years after being proposed and more than two years since being introduced by the Pension Schemes Act 2021, the Royal Mail Collective Pension Plan has become the first collective defined contribution pension plan authorized in the U.K.

Collective defined contribution plans offer a third type of pension plan, in addition to defined benefit plans and defined contribution plans. In a CDC plan, both the employer and employee contribute to a collective fund that provides an income in retirement. Unlike a defined benefit plan, the employer does not guarantee the benefits paid by the plan. Instead, CDC plans provide a target pension; if the plan is underfunded or overfunded, the pensions it pays can be decreased or increased accordingly.

The Pension Schemes Act of 2015 first included a provision for the government to allow the creation of CDCs, which were then called defined ambition pension plans. However, the provisions never came into force. In February 2018, after the Royal Mail decided to close its defined benefit plan, the postal service company and the Communication Workers Union agreed to introduce a CDC plan. Regulation at the time, however, did not permit CDCs.

The following month, the U.K. government noted that there had been calls for it to legislate a provision for CDC plans. Later that year, the government concluded that the provisions in the Pension Schemes Act of 2015 Act were not the most appropriate way of providing CDC benefits.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

The Pension Schemes Act of 2021 eventually provided the necessary legislation, and CDC regulations came into force in August 2022 allowing plans to apply for authorization from The Pensions Regulator.

“TPR authorizing the first CDC scheme is a landmark moment, and this is just the beginning,” Laura Trott, the U.K.’s minister for pensions, said in a release. “We have seen the positive effect of these schemes in other countries, and our plans to extend our CDC framework will enable more pensioner savers to achieve the retirements they want.”

While CDC plans are new to the U.K., they are common in the Netherlands, Canada and Denmark, yet not everyone is convinced CDC plans should be adopted. A report from the Centre for Policy Studies, a conservative think tank, called CDCs risky and untested.

“The system risks creating irreversible intergenerational injustice by overpaying pensioners at the expense of current and future employees,” the report said. “The evidence all points to an obvious conclusion—CDC schemes in the UK are superfluous.”

Unison, the largest union in the U.K., urged caution when the U.K.’s Department for Work and Pensions announced it was launching the new pension model. Defined benefit plans remain Unison’s preferred type of pension plan for its members, although it does see CDCs as an improvement over defined contribution plans.

“UNISON supports improving member outcomes through the introduction of collective defined contribution for members in defined contribution schemes,” Glyn Jenkins, Unison’s head of pensions, said in a release. “But the new schemes should not be used to replace viable defined benefit schemes.” Jenkins added that “these new pension arrangements must not erode current provision.”

 

Related Stories:

UK Pensions Secretary Backs Collective Defined Contribution Plans

Collective DC is Unsustainable, Say Fund Managers

UK’s CDC Proposal Panned by Think Tank

Tags: , , , , , , , ,

«