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Pension provision may prove profitable

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By Rachel Marsden, Manager, Audit at Grant Thornton

Upon concluding negotiations designed to avert strike action over employment conditions, in February 2019 the Royal Mail and the Communication Workers Union (CWU) took the first steps towards making ‘collective defined contribution’ (CDC) pension schemes a real possibility within UK workplaces.

The adoption of CDC schemes has the potential to herald a new era for pension provision in the UK.

Currently, pension provision is dominated by traditional ‘defined benefit’ (DB) plans, where all responsibility for building and delivering the employees’ retirement income lies with the employer, and the alternative ‘defined contribution’ (DC) arrangements, in which this responsibility passes to the individual.

Whilst the employer would still make set contributions to CDC schemes on behalf of its employees, the mechanisms within CDC schemes allow individual employee pension contributions to be pooled together into a single fund to be managed for the benefit of all members.

Certain features of these schemes may prove enticing to both employer and employee alike.

They will provide certainty over contributions for all parties. Unless specific guarantees are given from the outset, employers will not have to pay additional shortfall contributions over the lifetime of the scheme – one of the less attractive, and more costly, features of a DB scheme.

From an employee’s perspective, this approach shares the risk and rewards of the scheme across all members and aims to provide a greater final pension benefit to members, than they may otherwise achieve on their own.

Conversely, to establish a CDC scheme is not without its pitfalls for both the employer and the employee.

From an employer’s perspective, there are considerable costs to be taken into account.

Establishing and monitoring a new scheme may prove expensive, particularly as the scheme will require both experienced advisers and trustees to ensure its smooth implementation, proper governance and future operation.

For the employee, there are concerns surrounding the stability and growth of these schemes, particularly in the face of the ongoing evolution of the modern-day workforce.

As such, it has been suggested that adoption of CDC schemes may only be suitable within the largest and most stable companies.

Whilst CDC schemes may be more commonplace in both the Netherlands and Denmark, as Brexit continues to consume the government’s legislative agenda resulting in further delays to long-awaited pension reform, it could be some time before they are more widely introduced in the UK.

However, experts counsel against discounting them altogether, noting that if the appropriate legal and governance framework can be put in place, CDC schemes may yet become a valuable ‘third way’ within the sphere of workplace pensions.

For further information or advice, Rachel Marsden can be contacted at Rachel.Marsden@ie.gt.com

Grant Thornton (NI) LLP specialises in audit, tax and advisory services and was ranked by Experian as the Number 1 deal adviser in Northern Ireland in 2018

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