Guest Comment: Working towards a third way for pension schemes

When Royal Mail and the Communication Workers Union (CWU) began championing a ‘third way’ to deliver retirement savings for their employees and members, the government listened.

We worked closely with CWU and Royal Mail to develop firm proposals for new collective defined contribution (CDC) schemes – a departure from the established landscape of defined benefit or defined contribution pensions. In the process I got to know Terry Pulinger from CWU and Jon Millidge from Royal Mail very well!

And now, after lots of hard graft and constructive dialogue, we are in a position to deliver the very first CDC in Britain. An innovation that has the potential to boost the retirement prospects of millions of people, in time.

Credit is due here. If you want an outstanding example of a trade union working with an employer then look no further than the CWU and Royal Mail. The positive way in which they have collaborated shows what can be achieved in the interests of both bosses and workers, and you won’t meet employees who have a greater understanding of or are more engaged with their pensions than Royal Mail’s workforce.

The pensions industry has broadly embraced the proposals on which we consulted, recognising that CDCs could yield better investment returns for workers while cutting costs and red tape for employers. In fact, they wanted us to go further, faster, ensuring they become a big part of the pensions scene in future. But responsible government is about balancing risk and reward, and our focus is on posting a success with the inaugural CDC.

To those who claim that CDCs are just ‘Ponzi’ schemes which transfer the contributions of those currently employed to the retired, I say you are wrong. The government will not allow any CDC scheme to use future contributions to offset current underperformance. Schemes will not be permitted to apply reductions in benefit value to younger members in order to limit reductions to older members or pensioners.

We want first-class, well-designed CDC schemes, set up and governed so that members are not exposed to unreasonable risks. There are risks, yes, with returns linked to how investments perform, so some fluctuations are possible. But we want CDC schemes to be transparent too, providing effective and clear communication about how they operate to their members and the markets. That will forge understanding and confidence in this new type of pension.

There is clear support from trade unions for their members to have access to CDC schemes because they know that for many ordinary working people they are a good way of getting a regular income in retirement. Members get more certainty with regular pay-outs from their scheme and, unlike traditional final salary pension schemes, those payouts aren’t jeopardised if an employer goes to the wall. As I said earlier we will proceed carefully, however, making sure that the pioneering Royal Mail-CWU scheme is signed, sealed and delivered successfully before rolling out CDCs more widely.

This government is working hard to make Britain the best country in the world in which to grow old, transforming Britain’s retirement savings culture with vital innovations such as pensions dashboards to help people plan better for later life. And, of course, more than 10 million people have benefitted from our drive to enrol them automatically into workplace pensions.

Hard-working people deserve to be able to look forward to retirement with confidence and CDC schemes can open new avenues for employers and their workers to find the type of pension provision that works best for them.

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