Pensions Bulletin 2019/11

Our viewpoint

Royal Mail CDC scheme given the green light

The Government is to provide a legislative framework to enable the Royal Mail Collective Defined Contribution (CDC) scheme to go ahead.  This is the key outcome of the consultation carried out last November by the DWP (see Pensions Bulletin 2018/45) on which the Government has on 18 March published its response.  But in what could be a significant move for wider pension provision, after delivering a “single employer” model for Royal Mail, the Government will work with industry to develop CDC models for wider application – particularly decumulation-only vehicles and DC master trusts.

This is because the Government says that the vast majority of the responses to the consultation were supportive of the proposals and keen to see CDC schemes up and running in the UK.  The Government also says that the responses showed encouraging signs of a growing interest in CDC models amongst employers and commercial providers, outside of Royal Mail.

An examination of the consultation response reveals that much of what the Government intended last November for Royal Mail is to go ahead with little alteration.  And contained within what is a fairly comprehensive response are a number of interesting points including the following:

  • HMRC has looked carefully at all the responses that discuss the tax treatment of CDC schemes, is working with its lawyers to ensure that CDC benefits can fit within the pensions tax framework and intends to publish a consultation in due course on the technical details of any necessary tax changes
  • Members of CDC schemes will have a statutory right to transfer out into a DC scheme, on a “share of fund” calculation and through this, access “pensions freedom and choice”
  • Initially, a “cost of accrual” model may be used to demonstrate that the proposed scheme meets a test of quality for auto-enrolment purposes
  • The decision not to require a capital buffer generated significant debate, but the Government has decided that for the Royal Mail model at least, a “no buffers” approach, tested through annual actuarial valuations carried out on a best estimate basis is the right one
  • The Government accepts that, given the nature of a CDC scheme, appropriate member communication is key. It promises to consult on draft regulations, which as a minimum will require basic scheme information to contain specific information on the CDC scheme design and relevant “risk warnings”, the provision of a CDC specific annual benefit statement including relevant risk warnings and signposting to other useful information, and annual information to pensioners in advance of any changes to their expected payments, again with repeated risk warnings for potential future changes
  • All CDC schemes will be required to demonstrate that they would be sustainable without ongoing employer contributions as a part of the Pensions Regulator’s authorisation and oversight process. Apparent unsustainability would be a winding up trigger

The consultation response is accompanied by a press release in which Amber Rudd says that millions of workers could eventually benefit from better retirement savings when CDC schemes become available in the market, along with a ministerial statement for Parliament’s benefit.


As is apparent from a reading of the consultation response, many of the details of the model designed with Royal Mail in mind will need to be set out in regulations.  These in turn can only follow once the necessary primary legislation is in place, for which there is no timescale.  However, hopefully the primary will be contained within the intended Pensions Bill this summer.  Nevertheless, it is likely to be quite some time before the Royal Mail CDC scheme is up and running in the UK and longer still for a wider CDC regulatory regime to come to fruition.

Actuaries predict lower life expectancies in latest mortality projections model

The Continuous Mortality Investigation, an offshoot of the Institute and Faculty of Actuaries, has released its latest mortality projections model (CMI_2018) which is predicting lower cohort life expectancies than in all previous versions of its model.

The observed slowdown in general population mortality improvements since 2011 has continued into 2018, and this has validated a key change to the model compared to that issued last year – a reduction in the default value of the period smoothing parameter from 7.5 to 7.0.  This has the effect of taking greater account of more recent experience in the general population leading to lower estimates of current mortality improvements.

The CMI has also introduced a new parameter that allows users the possibility of adjusting initial mortality improvements more easily.  This would, for example, enable actuaries to directly adjust the core CMI model to reflect their views on how the categories they are modelling may be experiencing different rates of improvement to the general population to which the CMI model is calibrated.

The CMI has published a Briefing Note which provides an overview of CMI_2018 with the aim of assisting those presented with results from the latest model – such as pension scheme trustees and non-executive directors of insurance companies.  Amongst other things it highlights that in the general population of England and Wales, average mortality improvements were 2% pa or higher for most of the period 2000-2011, but have since fallen to around 0.5% pa.  Quite why this has happened and for how long such low improvements will persist is uncertain.


Projecting future improvements in mortality is inevitably full of uncertainty, but the release of this latest projection model and the earlier publication of the S3 series of base tables (see Pensions Bulletin 2019/04) enables actuarial advisers to discuss with their clients an updated approach to mortality assumption setting, taking into account more recent experience.

Spring Statement provides little in the way of pensions news

The Chancellor’s Spring Statement on 13 March and accompanying Written Ministerial Statement were low-key and fairly short and the associated announcements too contained little in the way of developments directly relevant to pensions.  Amongst those touching on pensions were the following:

  • In April the Government will respond to the House of Lords Economic Affairs Committee’s report about the use of RPI (see Pensions Bulletin 2019/03)
  • Index-linked gilt issuance in 2019/20 at a predicted level of £21.8bn will be very similar to the outturn for 2018/19 (now predicted to be £21.3bn) and so in contrast to the significant reduction between 2017/18 (£28.4bn) and 2018/19 disclosed in Budget 2018 (see Pensions Bulletin 2018/43)
  • A consultation was launched on how best to support private investment in infrastructure, in light of the likely changes to the UK’s relationship with the European Investment Bank. Institutional investors, such as pension funds, have traditionally had such investment routed through infrastructure funds, although the Government has also taken other steps to promote investment (including through the Local Government Pension Pools which are now operational and have confirmed increased allocations to infrastructure investment).  The Government is seeking views on how best to ensure that high levels of private investment continue to flow into UK projects.  Consultation closes on 5 June

In other news, growth for this year is now forecast by the OBR to be 1.2% rather than 1.6% as forecast last October.  Additionally, there will be a 3-year departmental spending review this summer before Budget 2019.


Given the other pressing issues on the Government’s agenda, it is unsurprising of course that this Spring Statement was devoid of any meaty announcements.  It is useful, however, to have an idea of when to expect the Government’s reaction on RPI and no doubt reassuring for those DB pension schemes with considerable inflation-linked liabilities that the issuance of index-linked gilts is to remain stable.

GKN – how the Regulator helped

The Pensions Regulator has issued a report highlighting its role in last year’s takeover of GKN by Melrose and to illustrate to the market how it expects to work with parties where there is a takeover or acquisition and a DB scheme is involved.

The summary of events illustrates how the mitigation offered to the DB schemes by Melrose increased substantially during the course of the takeover – from an initial £150m to an amount up to £1bn, in order to fully fund the DB schemes on a more prudent funding basis than had previously been the case.  GKN for its part also agreed a package of support for the schemes which would apply if the takeover bid was unsuccessful, although it is not disclosed what this would have been.

The Regulator says that the robust approach taken by the schemes trustees, supported by prompt engagement by the Regulator, with its expectations clearly set out, meant that both GKN and Melrose provided details of their business plans and engaged with the trustees.

The Regulator concludes by saying that it expects to be notified as soon as practicably possible about any potential transaction affecting a company or group that has a DB scheme attached.


Currently the notification requirement is only after the transaction has concluded, but all this is set to change as part of the Government giving the Regulator new powers (see our News Alert), further details of which should be in the forthcoming Pensions Bill.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.

Subscribe to receive our Pensions Bulletin and News Alerts