Royal Mail’s new pension scheme, the first of its kind in the UK, experienced a nearly 5 percent drop in its first six months, sparking concerns about future payouts for its over 100,000 members, including postal workers.

New Pension Plan Faces Early Turbulence

The Royal Mail Collective Pension Plan’s initial performance raises questions about the viability of this novel approach to retirement savings.

  • The Royal Mail Collective Pension Plan, launched in October, declined 4.6 percent by the end of March.
  • This performance trailed its benchmark index, which fell 3.6 percent over the same period.
  • The UK government is keen to see wider adoption of these “collective defined contribution” schemes.
  • Experts caution that it’s too early to draw firm conclusions about long-term payouts.

The Royal Mail Collective Pension Plan, a collective defined contribution (CDC) scheme launched in October after six years of planning, dropped 4.6 percent by the end of March, compared to a 3.6 percent decline in its benchmark index, according to results reviewed by sources. The scheme represents a new approach to pensions, sitting between conventional defined-benefit plans-which offer predictable payouts-and defined-contribution plans, were income depends on contributions and investment performance.

The government is actively seeking to encourage wider adoption of CDC schemes, hoping they will boost retirement incomes and channel savings into a broader range of assets. The Royal Mail plan, established after legislation in 2021, is being closely watched by other employers considering similar arrangements.

However, sources familiar with the Royal Mail CDC, which has 110,000 members, emphasized that it’s premature to assess the impact on long-term payouts. They noted that the fund is in its early stages, and initial cash flows and timing significantly influence returns.

A spokesperson for the CDC stated that the scheme is “designed to hold long-term growth investments that allow for short-term volatility” and reported “positive” returns as the end of March. As of the start of April, the fund held £192 million in assets.

A significant 77 percent of the fund was invested in global equities aligned with a benchmark targeting a limit of 1.5C of global warming. An additional 9 percent was allocated to small-cap equities, and another 9 percent to emerging market stocks.BlackRock, the scheme’s outsourced chief investment officer, did not provide comment.

CDC members participate in a pooled scheme with a target return intended to guide retirement planning. However, returns aren’t guaranteed, and companies aren’t obligated to cover any funding shortfalls.

What happens when performance is up or down, and how does that affect target pensions? John Ralfe, an independent pensions consultant, highlighted a lack of clarity on this issue. He stressed the need for Royal Mail CDC to be “entirely obvious” about its calculations and their impact on members of different age groups.

Royal Mail intends to update scheme members on their target pensions and the calculation methods this spring.

Pensions minister Torsten Bell stated in october that new regulations enabling multiple private-sector employers to join CDC schemes could increase retirement incomes by 25 to 60 percent. While he acknowledged it’s “too early to say” if CDC products will dominate the UK’s £600 billion workplace defined-contribution market, he expressed confidence that they “should play a notable part in our future pension system.”

Royal Mail’s parent company,International Distribution Services,was acquired last year by EP Group,led by Czech billionaire Daniel Křetínský,who pledged to strengthen the postal service’s financial position. Křetínský also has investments in UK supermarket chain J Sainsbury and football club West Ham United.