Zara Okoro, senior paraplanner at JG Paraplanning and member of the PFS Paraplanner Panel, considers the Royal Mail’s Collective Defined Contribution (CDC) scheme as the litmus test for other schemes in the UK and whether it can address the key challenges in the country’s pension landscape.
The Royal Mail Collective Pension Plan (RMCPP), which recently launched on 7 October, is a pioneering Collective Defined Contribution (CDC) scheme in the UK. Designed to pool contributions from both employees and employers, the plan aims to provide a stable income for life, complemented by a cash lump sum upon retirement. This innovative pension model blends elements of traditional Defined Benefit (DB) and Defined Contribution (DC) schemes, offering a fresh approach to retirement planning.
But what’s so “revolutionary” about it?
Brief History
The RMCPP is the first significant implementation of a CDC scheme in the UK. However, hybrid pensions, combining elements of DC and DB schemes, have been attempted in the UK before. Examples include the Defined Ambition (DA) pensions and Cash Balance Plans. As with the RMCPP, these schemes aimed to offer more predictable outcomes for their members than DC plans, while avoiding the high costs associated with DB plans. However, they faced significant struggles that ultimately lead to their failure.
Why did they fail?
Regulatory Complexity: Navigating the regulatory landscape proved difficult for these schemes, making implementation and compliance costly and complicated.
The DA Pensions and Cash Balance Plans faced stringent funding requirements, risk management constraints, complex benefit calculations, lack of clear guidelines and heightened scrutiny.
Lack of Trust: There was a general mistrust of new and complex pension products among the public and employers.
Historical precedents of pension mismanagement and high-profile failures left both employers and employees wary of new pension models.
Communication Issues: The benefits and mechanisms of these schemes were not effectively communicated to potential members.
The complex nature of these schemes made it difficult to convey their benefits and mechanisms clearly to potential members.
How the RMCPP is Different
- Simplicity and Clarity: The newly launched RMCPP aims to provide clear and transparent information to its members, addressing previous communication issues.
- Regulatory Support: With the FCA’s relatively new consumer duty emphasising better outcomes and transparency, the RMCPP is better positioned to meet regulatory requirements.
- Member-Centric Approach: The RMCPP focuses on member outcomes, aiming to build trust and engagement through clear benefits and predictable incomes.
“But maybe CDCs are just bound to fail?”
Yes, the UK has struggled to implement these schemes historically. However, when we look outside of ourselves, we can see that our failures aren’t due to an innate flaw in CDCs.
Countries like Canada, Denmark, and the Netherlands have successfully implemented CDCs, offering valuable insights into how these schemes can function effectively:
- Canada: Multi-employer pension plans (MEPPs) in Canada have shown how pooling contributions can provide stable retirement incomes.
- Denmark: Denmark’s pension system, which includes CDC elements, is renowned for its sustainability and effectiveness.
- Netherlands: The Dutch pension system, a blend of CDC and DB elements, provides a model for collective risk-sharing and member engagement.
This shows that CDCs are not only plausible in theory but can be successfully implemented.
Why Have These Countries’ CDCs Worked When the UK’s Have Failed?
- Cultural Acceptance: In countries like the Netherlands, collective pension schemes are deeply rooted in tradition, fostering higher trust and acceptance. High pension literacy, social solidarity, and professional management further support their success.
- Regulatory Framework: Supportive regulations in places like Denmark ensure CDC schemes are well-structured, protect members, and align with national retirement goals, instilling confidence in their long-term viability.
- Communication and Transparency: Clear communication has been essential to building trust. Members understand how CDCs work, the potential risks, and the benefits, leading to greater engagement and trust in the system.
Does the RMCPP stand a chance in the current landscape?
The launch of the RMCPP couldn’t have come at a more opportune time, following Labour’s general election victory in July 2024. Labour has long been seen as the party “for the people,” fostering the cultural acceptance and trust needed to support the RMCPP—similar to what we’ve seen in countries like Denmark and Canada, where public trust is central to the success of financial programs…We won’t discuss the party’s current political image. This alignment with Labour’s long-standing image could aid the scheme’s launch, but it won’t guarantee success.
A major hurdle remains: the UK’s relatively low level of financial literacy. Wealthify’s 2023 research with The Centre for Economics and Business Research revealed that only 5% of Brits could correctly answer 10 frequently discussed financial topics. Without a stronger grasp of basic financial concepts, widespread adoption of the RMCPP could be met with scepticism or confusion.
For the RMCPP to succeed, it will need more than just cultural acceptance. The scheme’s reputation and the reliability of its providers must be carefully built, while financial education efforts should continue. Unfortunately, previous attempts to raise financial awareness in the UK have often lacked the impact, effectiveness, and general appeal needed to significantly improve the nation’s financial literacy. The challenge remains significant, but with the right approach, the RMCPP could still pave the way for progress.
The need for innovation in the pension landscape
The UK pension system faces a critical need for innovation, driven by widespread mistrust and misunderstanding of pension schemes. Many working-age people in the UK struggle to comprehend how pensions function, which contributes to disengagement and under-saving. Pensions are often viewed as complex, opaque, and difficult to navigate, leading to a lack of public confidence. As a result, many individuals avoid long-term planning altogether, further exacerbating the nation’s pension crisis.
In order to bridge this gap, the pension landscape must evolve to become more accessible, transparent, and tailored to the everyday individual. With a growing need to simplify pensions and improve engagement, innovation is key to reaching and educating the majority who currently feel disconnected from these financial products.
The Pension Crisis
This discussion can’t be had without touching on the pension crisis it is widely agreed the UK is facing. The UK’s pension system is under immense pressure, with several factors contributing to this crisis. First, there is the issue of insufficient savings. A large portion of the population is not saving enough for retirement, leading to increasing concerns about their financial security in later life. Many are simply unaware of how much they need to save to live comfortably in retirement, and this knowledge gap worsens their outlook.
Secondly, the state pension—once introduced as a means-tested lifeline in 1909 for people aged 70 (when average life expectancy was only 52)—now supports the largest number of pensioners the UK has ever seen. While life expectancy has significantly increased, the structure of the state pension has not evolved at the same pace, creating strain on the system. The triple lock mechanism, which guarantees the state pension will rise in line with inflation, wages, or 2.5%, is a controversial element that is seen by many as unsustainable, especially as the population ages.
Given that many rely heavily on the state pension for their retirement income, any instability or reduction in its value could push more individuals into poverty. A lack of understanding and preparation for retirement amplifies these challenges, making pension innovation more crucial than ever to ensure individuals are better prepared and the system is more sustainable.
Target Market for the RMCPP
The RMCPP is designed to address some of these systemic challenges by providing a more stable and predictable retirement income. Its key appeal lies in its simplicity and security, which makes it particularly suitable for the general public—especially those who currently mistrust pensions or find them overly complex.
However, it’s important to acknowledge that many financial advisers focus on affluent, HNW, or UHNW clients, who are more likely to already have robust retirement plans and access to financial advice. For these individuals, the RMCPP and similar CDC schemes may not offer a revolutionary change.
But for the average Brit, whose income at age 60 hovers around £33,852 (according to the House of Commons report in April 2023), this scheme could provide significant benefits. It targets the vast majority of workers who have historically been underserved by the pension system and are less likely to receive tailored financial advice. These are the individuals for whom the RMCPP could make a meaningful impact by offering a more secure and straightforward pathway to retirement planning.
By focusing on the everyday working individual, the RMCPP has the potential to reshape how pensions are perceived and utilised in the UK.
Conclusion
While not globally revolutionary, the RMCPP has the potential to address key challenges in the UK’s pension landscape. Transparency will be critical to its success, but striking the right balance is essential. Too much detail could overwhelm members, yet too little may undermine trust. The RMCPP must navigate this carefully to foster confidence and engagement. As the first large-scale CDC in the UK, its performance will serve as a litmus test for future schemes, potentially opening the door to wider adoption. Time will tell if it can reshape the way we think about pensions and provide a model that others will follow.
Main image: derek-thomson-NqJYQ3m_rVA-unsplash
