Could Royal Mail's Collective DC deal transform UK pensions landscape?

Defined benefit pension schemes are in decline as employers seek to reduce their exposure to ongoing funding obligations and massive scheme deficits which have featured in a series of high-profile corporate failures, including those such as BHS and Carillion.

Individual DC saving is growing fast under automatic enrolment, but while DC pensions are more manageable for employers, they require individual savers to consider how to manage investment and actuarial risk.

CDC pensions by contrast offer advantages in the middle ground. These schemes, which are already prominent features of highly successful pensions systems in Denmark and the Netherlands, offer a regular retirement income but in the form of a target benefit rather than DB schemes’ “guarantee”.

Changes in the funding position of the scheme are addressed by adjusting the benefit rather than calling on extra contributions from the employer. CDC gives companies the option of offering good pensions to their staff without the risk of large long-term pension liabilities on their balance sheets, and gives staff the welcome prospect of a regular income in retirement, managed collectively on behalf of all members.

Several studies have shown that CDC schemes could offer more generous and predictable benefits than individual DC provision, through the feature of risk pooling.

The Government has indicated that it will seek to enable CDC for Royal Mail in a way which will allow other companies to follow suit – the Committee supports this and says Government should set out a swift timetable for enacting CDC schemes in the UK in its response to this report.

Frank Field MP, chair of the Work and Pensions Select Committee, said: “The idea of a ‘new Beveridge’ has been overused and under-delivered during most of the welfare state’s life. But the report published today by the Select Committee offers that opportunity for pensions: how to combine decades of individual pension ownership and provision with collective security.

"The report centres on collective defined contribution schemes specifically in relation to the breakthrough at Royal Mail.”