The Department for Work and Pensions (DWP) has recently published its consultation on “Delivering collective defined contribution pension schemes”.

This sets out proposals about how collective defined contribution (CDC) schemes, such as the one proposed by Royal Mail, might work in the UK.

The key aspects of a CDC scheme are that:

• There is a target level of benefits, rather than a guaranteed one;
• Contributions are invested in a collective fund rather than individual accounts;
• Contribution levels are based on an estimate of how much money is needed to provide the target level of benefits to each member;
• The total assets available are used to provide target benefits to members;
• If the assets available are higher than those expected to be required to meet target benefits, then the target level of benefits is uplifted;
• However, where the assets available are lower than those expected to be required to meet target benefits the target level of benefits is scaled back.

One of the underlying principles behind the CDC scheme approach is that member funds can remain exposed to growth investments as members approach retirement because volatility from investment risk can be cushioned over time.
 
Longevity risk is also pooled and managed by the mechanism of being able to adjust the level of pensions and prospective pensions payable.
 
The consultation runs until 16 January 2019. Royal Mail is publishing more information on its proposed CDC scheme during the consultation period, so that those with an interest can consider its approach.