New royal mail collective plan

olb81

Hi I understand that this is a new plan where all the money is pooled and invested by a manager, rather than having your own pot which you can change funds.
Any one know whether it's a good scheme, I know he company pays in 13% but does this outweigh not having control of your own pot?

Marcon

olb81 said:

Hi I understand that this is a new plan where all the money is pooled and invested by a manager, rather than having your own pot which you can change funds.
Any one know whether it's a good scheme, I know he company pays in 13% but does this outweigh not having control of your own pot?

It's only been going for a year so too early to know how well things will work out - but having control of your own pot doesn't always deliver a good outcome, especially for those who don't know what they're doing when it comes to investments.

DRS1

If I read it right it is a CARE scheme - ie defined benefit.  Most people think that is GOOD.

Having your own pot and controlling your pot's investment is for defined contribution schemes.

Marcon

DRS1 said:

If I read it right it is a CARE scheme - ie defined benefit.  Most people think that is GOOD.

Having your own pot and controlling your pot's investment is for defined contribution schemes.

No - it's a collective defined contribution plan.

DRS1

The benefits are described as a pension of 1/80th of pensionable pay pa and a lump sum of 3/80ths of pensionable pay pa.

This page Royal Mail - Pensions says

"Your income for life

The Collective Plan is designed to give you an income for the rest of your life from age 67. You build up 1/80th of all your pensionable pay earned each year while paying into the Collective Plan and the aim is to increase it to help keep up with the cost of living. However, this is not guaranteed.

What does that mean for me?

So, using an example, if your pensionable pay was £26,000 over a year, in that year you’d initially build up £325 as a yearly income, based on you getting it at age 67.

£26,000 ÷ 80 = £325

Over time, if you continue paying into the Collective Plan, your income for life will build up to provide your total income for life in retirement.

What about the cost of living?

This part’s important. The cost of living is rising, and it’s fair to assume that £325 today isn’t going to buy as much when you come to retire (which could be in many years’ time).

Each year your income for life will change, when you’re building it up and after you’ve started to get it in retirement. Everyone’s income for life is adjusted each year by the same percentage, even after you’ve retired, so that the cost of everyone’s incomes stays in balance with the value of the Collective Plan’s assets. This means your income for life could go down, or go up, or stay the same each year - to balance the cost of everyone’s incomes with the value of the Collective Plan’s assets.

The aim is to have more ups than downs and so that your income for life will keep up with the cost of living over time. However, this is not guaranteed – you could end up with more or less than the £325 shown in the example as a yearly income when you reach age 67. " 

and

"The Collective Plan is designed for you to get your lump sum at age 67, and builds up year by year, separately from your income for life. It’s paid as a one-off amount at the same time you get your income for life.

Your lump sum also builds up at a proportion of your pensionable pay - at a rate of 3/80ths of any pensionable pay earned while paying into the Collective Plan. But, unlike your income for life, the lump sum you build up won’t go down – it’s guaranteed.

But if the Collective Plan performs well, for example if the lump sum investments do well, it could go up, along with everyone else’s lump sums. Any increases will be guaranteed and cannot be taken away in the future. If you haven’t transferred out your income for life and aren’t subject to any tax restrictions, you might be able to get all your lump sum tax-free. See the Collective Plan’s Handbook for more information."

It may be that I am missing something?  The bit about staying in balance with the assets?

hugheskevi

DRS1 said:

It may be that I am missing something?  The bit about staying in balance with the assets?

A Collective Defined Contribution (CDC) scheme does not benefit from the backing of an employer beyond the regular contributions. Whereas a DB scheme can have a deficit that the employer has to make good (and if they cannot do that, the PPF as a backstop) a CDC scheme has no call on a scheme sponsor, except possibly as a goodwill gesture - you can envisage unions arguing at a future date that a profitable employer should make a voluntary contribution so Mrs Miggin's pension isn't cut, for example, regardless of what the requirements and agreements might be.

Target incomes are adjusted to ensure the schemes do not build up deficits. This is the crucial thing for a member to understand - how are the returns distributed, and how will markets downturns be managed, ie, who exactly will lose, and how much will they lose relative to others in the scheme.

There are various possible designs around how assets and returns are shared. For example, a priority may be to give pensioner members inflation uplifts, with younger members either suffering disproportionately if markets go down, or benefitting disproportionately if markets go up.

A key challenge for a CDC is around contingency capital. A scheme could want to hold capital to smooth out investment volatility. However, that capital would have to come from somewhere, and that could unfairly disadvantage the earliest savers if it comes from their contributions.

In theory, returns can be higher than individual DC primarily due to a CDC scheme being able to take more risk than an individual will, as the CDC investments are across the whole membership so there is no need to derisk on approach to and during retirement. However, with more folks using UFPLS and drawdown and remaining invested long into retirement, it will be interesting to see if this actuallly takes place once CDCs have large pensioner membership and might not feel so willing to take risk.

You could also have CDC for both accumulation and decumulation phase, or just one or the other.

You could probably do pretty much what a CDC does using with-profit investments and an index-linked annuity.

To date, only Royal Mail have implemented a CDC, but there is a lot of interest and encouragement for others to adopt them, perhaps on an industry-wide arrangement as they require a fairly large membership to be able to pool investments and manage liabilities efficiently. It is far too early to evaluate yet, especially as the membership will take years to mature and have a large pensioner base.

Marcon

DRS1 said:

The benefits are described as a pension of 1/80th of pensionable pay pa and a lump sum of 3/80ths of pensionable pay pa.

This page Royal Mail - Pensions says

"Your income for life

The Collective Plan is designed to give you an income for the rest of your life from age 67. You build up 1/80th of all your pensionable pay earned each year while paying into the Collective Plan and the aim is to increase it to help keep up with the cost of living. However, this is not guaranteed.

What does that mean for me?

So, using an example, if your pensionable pay was £26,000 over a year, in that year you’d initially build up £325 as a yearly income, based on you getting it at age 67.

£26,000 ÷ 80 = £325

Over time, if you continue paying into the Collective Plan, your income for life will build up to provide your total income for life in retirement.

What about the cost of living?

This part’s important. The cost of living is rising, and it’s fair to assume that £325 today isn’t going to buy as much when you come to retire (which could be in many years’ time).

Each year your income for life will change, when you’re building it up and after you’ve started to get it in retirement. Everyone’s income for life is adjusted each year by the same percentage, even after you’ve retired, so that the cost of everyone’s incomes stays in balance with the value of the Collective Plan’s assets. This means your income for life could go down, or go up, or stay the same each year - to balance the cost of everyone’s incomes with the value of the Collective Plan’s assets.

The aim is to have more ups than downs and so that your income for life will keep up with the cost of living over time. However, this is not guaranteed – you could end up with more or less than the £325 shown in the example as a yearly income when you reach age 67. " 

and

"The Collective Plan is designed for you to get your lump sum at age 67, and builds up year by year, separately from your income for life. It’s paid as a one-off amount at the same time you get your income for life.

Your lump sum also builds up at a proportion of your pensionable pay - at a rate of 3/80ths of any pensionable pay earned while paying into the Collective Plan. But, unlike your income for life, the lump sum you build up won’t go down – it’s guaranteed.

But if the Collective Plan performs well, for example if the lump sum investments do well, it could go up, along with everyone else’s lump sums. Any increases will be guaranteed and cannot be taken away in the future. If you haven’t transferred out your income for life and aren’t subject to any tax restrictions, you might be able to get all your lump sum tax-free. See the Collective Plan’s Handbook for more information."

It may be that I am missing something?  The bit about staying in balance with the assets?

Not sure why you've post a great swathe of text OP could read for themself on the website.

The bit you're missing is that it's a defined contribution scheme. Target incomes aren't guaranteed in the same way a DB scheme guarantees them.

DRS1

Marcon said:

DRS1 said:

The benefits are described as a pension of 1/80th of pensionable pay pa and a lump sum of 3/80ths of pensionable pay pa.

This page Royal Mail - Pensions says

"Your income for life

The Collective Plan is designed to give you an income for the rest of your life from age 67. You build up 1/80th of all your pensionable pay earned each year while paying into the Collective Plan and the aim is to increase it to help keep up with the cost of living. However, this is not guaranteed.

What does that mean for me?

So, using an example, if your pensionable pay was £26,000 over a year, in that year you’d initially build up £325 as a yearly income, based on you getting it at age 67.

£26,000 ÷ 80 = £325

Over time, if you continue paying into the Collective Plan, your income for life will build up to provide your total income for life in retirement.

What about the cost of living?

This part’s important. The cost of living is rising, and it’s fair to assume that £325 today isn’t going to buy as much when you come to retire (which could be in many years’ time).

Each year your income for life will change, when you’re building it up and after you’ve started to get it in retirement. Everyone’s income for life is adjusted each year by the same percentage, even after you’ve retired, so that the cost of everyone’s incomes stays in balance with the value of the Collective Plan’s assets. This means your income for life could go down, or go up, or stay the same each year - to balance the cost of everyone’s incomes with the value of the Collective Plan’s assets.

The aim is to have more ups than downs and so that your income for life will keep up with the cost of living over time. However, this is not guaranteed – you could end up with more or less than the £325 shown in the example as a yearly income when you reach age 67. " 

and

"The Collective Plan is designed for you to get your lump sum at age 67, and builds up year by year, separately from your income for life. It’s paid as a one-off amount at the same time you get your income for life.

Your lump sum also builds up at a proportion of your pensionable pay - at a rate of 3/80ths of any pensionable pay earned while paying into the Collective Plan. But, unlike your income for life, the lump sum you build up won’t go down – it’s guaranteed.

But if the Collective Plan performs well, for example if the lump sum investments do well, it could go up, along with everyone else’s lump sums. Any increases will be guaranteed and cannot be taken away in the future. If you haven’t transferred out your income for life and aren’t subject to any tax restrictions, you might be able to get all your lump sum tax-free. See the Collective Plan’s Handbook for more information."

It may be that I am missing something?  The bit about staying in balance with the assets?

Not sure why you've post a great swathe of text OP could read for themself on the website.

The bit you're missing is that it's a defined contribution scheme. Target incomes aren't guaranteed in the same way a DB scheme guarantees them.

Well I posted it to explain why I thought it was a CARE scheme.

Clearly I had missed something and I found @hugheskevi's explanation very interesting. It feels like something which could lead to some very disappointed members.