Royal Mail leapt into contention for a return to Britain’s blue-chip index after “damaging industrial action” was averted.
The postal giant said a pay and pensions deal had been struck with the Communication Workers Union, ending a long and embittered dispute.
Shares in the 501-year-old firm leapt over nine per cent after an announcement was made at lunchtime, prompting analysts to predict a swift return to the FTSE 100 in next month's reshuffle.
Royal Mail’s unwieldy final salary pension scheme – which the firm said would cost more than £1bn a year to keep open – will be closed from the end of March. It will ultimately be replaced by a hybrid scheme, with a transitional arrangement in place in the interim.
“As an employee, if you’re going to lose your final salary pension scheme, this is a pretty good way to do it,” said Hargreaves Lansdown head of policy Tom McPhail.
Staff will see pay rise by five per cent with two per cent rises from April 2019. One hour will be taken from the working week and Royal Mail made a commitment to move towards a 35-hour week by 2022.
Royal Mail also snuck in a trading update into today’s announcement, saying it expected to deliver adjusted operating profit before transformation costs for 2017-18 of at least £680m.
Cantor Fitzgerald analyst Rob Byde said while the pay deal was more favourable and the hours deal was less favourable, changes “will come with significant productivity gains”.
With Royal Mail powering past a £5bn stock market valuation, the firm is in the running for a return to the FTSE 100, Byde said.
ETX Capital senior market analyst Neil Wilson added:
It was already looking like it might re-enter the FTSE 100 after gaining about 25 per cent since November but this jump takes it back to September 2016 levels so should make the grade.
Wilson said today’s share price reaction was due to the “major overhang” from a potential £1bn plus pension cost.
“There is a clear winner here in getting unions to agree to effectively a cut in pensions but they’ve obviously had to buy them off with a five per cent pay rise and reduction in working hours,” he said.
Moya Greene, Royal Mail’s chief executive said: “This agreement marks a new chapter for Royal Mail and the CWU. Following the conclusion of a helpful mediation process and further talks, we have delivered the right result for Royal Mail and our stakeholders. This is an affordable and sustainable solution that enables us to continue to innovate and grow and to meet the intense competition with confidence.
“Royal Mail and the CWU will continue to work together as we build on our position as the leading delivery company in the UK. I’m pleased that, under this agreement, we will continue to offer the best terms and conditions in the delivery industry by some distance.”
Wilson said today’s announcement appeared to be “job done” for Greene.
"She’s taken the business through a radical transformation in becoming listed and now seems to have fixed the pension problem and squared things (for now) with the unions,” he said.
Time to get pensioned off and allow a younger CEO to take the business forward with focus on parcels and grow [international arm] GLS.
What has been agreed?
Pay and shorter working week
Culture and operational changes
Pensions – what the analysts said
AJ Bell analyst Tom Selby said: “While many Royal Mail employees will inevitably be angry at the decision to ditch their gold-plated defined benefit pension scheme, its replacement – a scheme with an employer contribution of over 13% - remains extremely generous by private sector standards. Indeed, from 2019 the minimum employer contribution required by law under automatic enrolment will be just 3%, way below the figure Royal Mail employees will enjoy under the new arrangement.
“Confirmation Royal Mail plans to work towards building a Collective Defined Contribution scheme for members is particularly interesting. Advocates of these schemes argue that they pay significantly higher pensions than their individual DC counterparts, although these claims are usually based on a number of assumptions which have been vigorously challenged by many in the industry.
“Furthermore, the costs and charges associated with CDC schemes tend to be murky. This lack of transparency jars with growing demands on providers to show investors exactly what they pay for their pensions and investments.”
McPhail added: "The ongoing employer contributions at £400 million and 13.6 per cent of salary are very generous compared to the majority of Defined Contribution schemes. For members of the Cash Balance scheme there will still be an element of certainty around their benefits. The plans to launch a CDC scheme will be watched with keen interest by the pensions industry, which has very mixed feelings about the viability of such schemes.”
Aon senior partner Kevin Wesbroom said: “Royal Mail and the CWU have identified a ground-breaking approach to pension provisions. Aon has long been an advocate of the collective defined contribution (CDC) scheme they have committed to, and we have lobbied hard for their introduction, building on our global experience of these plans.
“CDC fills a gap in the market of current pension provision. Individual members do not bear all of the longevity, inflation and investment return risk as they would with a conventional DC scheme. Instead, demographic and financial risks are pooled across the membership. At the same time there is a fixed cost to the employer – none of the open-ended commitment associated with DB schemes.
“Members receive a lifetime income in retirement, paid directly from the scheme’s asset pool. This means members do not need to take on the risk of buying an individual income product, such as an annuity, where low rates at the point of retirement lead to a permanent impact in members’ retirement funds. They also do not need to make complex financial decisions if they do not wish to, unlike conventional DC pensions.”