Royal Mail retires pensions scheme: The what, why and how of delivering a credible deal for postal workers

Oliver Gill
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Royal Mail plans to shuts pension scheme on 31 March 2018 (Source: Getty)

The Royal Mail will deliver its full-year results on Thursday, three and a half years after the London listing of 501-year-old firm.

Perhaps the biggest millstone around the company’s neck is its gigantic final salary pension plan that services 90,000 of Royal Mail’s 160,000 employees.

In January Royal Mail revealed plans to shut down the scheme but it remains in the news.

What is going on with the Royal Mail pension?

Quite simply, Royal Mail says it is unaffordable.

The final salary scheme has been closed to new members since 2008 but is open to future accrual. This means Royal Mail must keep topping up the pot for employees who joined the firm before 2008.

Read more: Royal Mail share price drops 3.6 per cent as it unveils new pension plan

What the firm wants to do is close the scheme to future accrual, drawing a line in the sand on what benefits it needs to pay out in the future.

How big is the deficit?

This is the rather strange bit: the fund is actually in surplus. This stems from the decision by the government to underwrite pre-2012 payouts.

But the problem for Royal Mail is the pace at which this surplus is being extinguished. It is expected to be in deficit by 2018.

Last week, actuarial figures revealed the annual cost of keeping the scheme open as it stands is around £1.3bn each year. This compares with annual contributions made by Royal Mail of £400m.

What does that mean for posties?

Postal workers will still get a pension but going forwards the final salary element will not be guaranteed.

What about management. Will their benefits be cut?

The top brass at Royal Mail get some chunky payments into their pension pot. For example, chief executive Moya Greene had £200,000 contributed into her plan last year.

But these contributions are made to the firm’s defined contribution, rather than final salary, scheme.

What did the unions propose?

The Communication Workers Union (CWU), which represents around 100,000 employees, surprised Royal Mail by responding to closure plans with a novel idea.

Royal Mail Postal Workers Hold A Two Day Strike Over Pay And Conditions
(Source: Getty)

The CWU proposed opening a brand new final salary pension scheme that would be open to everyone, not just those who worked for the firm pre-2008.

Pensions traditionally invest in list risky assets such as government bonds. Under the CWU’s plans, the scheme would invest in riskier assets such as equities and corporate debt.

Read more: Royal Mail is closing its pension scheme - but a third way is possible

Most pension schemes include an annual increase in pension payouts each year, often linked to inflation. The CWU proposal had no fixed annual increase to pension payouts. Instead, worker representatives would meet with Royal Mail each year to calculate what increases the scheme could afford.

What did Royal Mail propose?

Last month, Royal Mail said the CWU plans are not sustainable, not affordable and insecure.

It estimated the CWU proposal would create a deficit that is larger than the market cap of the group within six years time.

Instead its counter proposition “builds on a proposal put forward by the CWU”. Called a “defined benefit cash balance scheme”, the new scheme guarantees that members get all the contributions put in during their working life. It adds “discretionary increases” based on investment performance.

Unlike a standard defined contribution scheme, where what you pay in is at the mercy of stockmarket movements, Royal Mail would underwrite at least what has been put into each member’s plan. Publicly the CWU slammed the Royal Mail response. CWU deputy general secretary Terry Pullinger called them a “mutant defined contribution proposal”.

What happens next?

The writing's on the wall for the pension plan in its current form.

But despite the CWU’s rhetoric in public, negotiations between the two parties continue behind closed doors in the hope of finding middle ground.

Read more: Ofcom to leave postal rules in place after Royal Mail delivers improvement

Will there be a strike?

The threat is there. When Royal Mail first revealed its pension plans in January, Pullinger said: “Any attempt to introduce any unagreed change by the business would be met with an industrial action ballot.”

But the proposal made by the CWU offers hope that unions are alive to commercial realities and a deal can be done.

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