Royal Mail's pension scheme under pressure as costs set to double

Billy Bambrough
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A Royal Mail Van Makes a Delivery to Buckingham Palace
Royal Mail’s defined benefit scheme closed to new members in 2008 (Source: Getty)

Royal Mail's pension scheme is facing closure after it warned trade unions and workers the plan will be "unaffordable" in as little as two years.

Costs to maintain the fund are expected to balloon to over £900m by March of 2018, more than double the £400m currently.

Royal Mail is now negotiating with trade unions over what will become of the fund.

The £400m in cash that Royal Mail currently pays into the fund each year guarantees a retirement income to two-thirds of its 140,000-strong workforce.

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Costs are set to increase due to a deterioration in financial market conditions, the company told employees.

A spokesperson for Royal Mail said:

We understand how much our people value their pension benefits. We committed to keep the Royal Mail Pension Plan open to future accrual on a career average basis for existing members without further changes, at least until March 2018.

Early indications from the latest triennial valuation of the plan suggest that the company’s contributions to the pension plan each year would have to increase from around £400m, to over £900m.

Such an increase in costs is not sustainable. We are talking to our unions about the future of the plan after March 2018.

Royal Mail is in the midst of a strategic shift as it shakes off the vestiges of its public sector heritage, which involve major changes to its pensions scheme and a hefty cost-cutting programme.

Falling letter volumes and rising competition in parcel delivery from technology upstarts mean Royal Mail has had to battle to defend its market share.

In a trading statement last month Royal Mail said group revenue was up one per cent in the three months to the end of June, although revenues at UKPIL, its UK international parcels and letters delivery business which includes its Parcelforce brands, fell one per cent.

The future of many of the UK's largest pension schemes has been thrust to the fore in recent months by the collapse of retailer BHS and the Tata Steel crisis.

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Struggling retailer BHS made headlines for its £571m pensions deficit, while Tata's pension is sporting a deficit of £485m and has been one of the main barriers to a sale of the businesses.

Royal Mail's pensions pot had to be rejigged last year after the company moved into the private sector with River and Mercantile managing the £700m options mandate for the pension plan.

The advisory and investment business was appointed in April 2015 by the FTSE 100-listed Royal Mail.

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