Royal Mail’s plan to introduce a collective defined contribution pension scheme is a “wholly unnecessary adventure”, Centre for Policy Studies research fellow Michael Johnson has argued.

Writing in a personal capacity, Johnson’s recent letter to the Work and Pensions Committee chair Frank Field, critiqued CDC schemes and Royal Mail’s new scheme proposals. In what Johnson deems to be an “unnecessary adventure”, he noted that Royal Mail “does not need to establish any form of retirement saving scheme dedicated solely to its own workforce”.

Instead, Johnson has called for the rebranding of CDC to with-profits funds. He explained that the collective pooling of investment and longevity risks in proposed CDC schemes could be provided by transparent with-profits funds as they share “similar performance drivers”. These could be accrued via employee and employer contributions, but with CDC’s “target language”, he noted.

In terms of investments, Johnson suggested that during accumulation, individual defined contribution pots should be invested in low cost, diversified, default funds to provide economies of scale. In the decumulation phase, (from private pension age), he added that employees and retirees should be defaulted into 15-20 years of income drawdown, while remaining invested in the low cost defaults. Following this, longevity risk could be pooled by default in the form of a lifetime annuity at the age of 75 or 80, Johnson said.

“Unlike a CDC scheme, these proposals could be accommodated within today’s legislative framework,” he stated.

Another key recommendation in the letter referred to moving employees to the government-backed master trust Nest. The scheme has the systems that are “well accustomed to handling large numbers of individuals” and so could potentially manage the with profits funds. “Alternatively, NEST’s existing (default) Retirement Date Funds could be used for the asset accumulation phase,” he added.

Johnson went on to list some of the key risks facing Royal Mail if it were to introduce a CDC scheme. These included legal risks as the scheme type lacks legal definition, incompatibility with the pension freedoms, reputational risk where employers would be attaching their reputations to the wellbeing of any CDC scheme that they may sponsor and irreversible inter-generational injustice.

In addition, the letter highlighted that as the first of its kind, CDC is a “leap into the unknown”, committing to deliver a pension scheme that is untried and untested in the UK.

Johnson concluded: “Royal Mail does not need a new CDC scheme. Indeed, there is no need for any entirely separate workplace-dedicated savings architecture. Each employee could have his own, personalised, savings pot capable of accommodating both his own and his employer’s contributions.

“The DWP is sensibly demurring on proceeding with CDC schemes. Notwithstanding their attributes, the lack of private sector demand for them, and CDC schemes’ similarities to with-profits funds, suggests that the innovation opportunity rests in improving with-profits funds’ governance arrangements (incorporating communication and transparency), and a rebranding to assuage an unfortunate history. CDC schemes in the UK are superfluous.”

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