Royal Mail outlines CDC plans with ‘minimum set of legislative changes’

Royal Mail has outlined its initial plans for its proposed collective defined contribution scheme, with the aim to make minimal legislative changes, to the Work and Pensions Committee.

Following Royal Mail’s meeting with the Work and Pensions Committee in February this year, group HR director Jon Millidge has responded to the Committee’s chair Frank Field with a more detailed explanation of its proposed CDC scheme.

As a result of the constraints on parliamentary time and the current environment, Royal Mail is “currently exploring how we could introduce a collective scheme with the minimum set of legislative changes,” Millidge said, adding that the company is also engaging with the Department for Work and Pensions on the issue.

The current Royal Mail and Communication Workers Union-approved plan is for a CDC scheme with a defined benefit lump sum alongside it, providing one overall arrangement for Royal Mail employees. As a result the scheme would provide members with a retirement income as well as a lump sum at-retirement from the DBLS.

Millidge explained that the new CDC and DBLS arrangement would “target, but not guarantee a similar level of retirement benefits” to Royal Mail’s current DB scheme, the Royal Mail Pension Plan that is closed at the end of March 2018. Contributions would include 13.6 per cent of members’ pensionable pay from the company and 6 per cent of members’ pensionable pay to the new plan.

In addition, assuming the necessary legislative and regulatory changes are made, the CDC scheme would pool risk among members, while the company would guarantee the lump sum, the letter detailed.

While it is anticipated that legislative change could be kept minimal, Royal Mail has proposed that a “possible route” to introduce the CDC scheme could be through the 2011 Pensions Act: “to amend the “money purchase” definition in the 1993 Pension Schemes Act”.

Millidge highlighted that “at the highest level” amendments to legislation will need to comprise of: clarifying “prevailing rate of a pension in payment from a CDC scheme can be reduced without infringing Section 67 of the Pensions Act 1995 or HMRC “authorised payment” rule”, as well as clarifying how CDC benefits should be assessed for HMRC annual and lifetime allowance purposes and to enable the CDC and lump sum “to fit together appropriately”.

Adding to this, Millidge stated that regulations would need to ensure that members are clear on the nature of CDC arrangements, including how benefits are calculated and members’ rights on transfers and retirement. Also, consequential amendments should be made to “ensure the “money purchase” designation of the scheme does not cut across the intended collective benefit nature of the scheme design. For example, by setting out key principles governing the rules around revaluation and transfers in and out of the scheme so that there is no discrimination against “early leavers”, and there are appropriate provisions to guard against ‘system gaming’”, the letter detailed.

“Our proposal would enable such a pension scheme to be treated for legislative purposes as “money purchase” and so exempt from the various “defined benefit” employer funding and debt requirements which would otherwise apply to a plan which pays pensions from its own assets, rather than backing each member’s pension with an annuity,” Millidge concluded.

Millidge acknowledged that it is still early in the process to decide the full terms of the proposed scheme and that he will keep the Committee updated on “significant developments”.

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