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UPDATED: Royal Mail confirms new pension plan’s £400m annual contribution as a ‘manageable risk’

Written by Talya Misiri
14/07/17

Royal Mail has confirmed its plans for a new pension plan that comprises of a defined benefit cash balance scheme and a defined contribution scheme that will be funded within its current £400m annual pension contribution.

Revealing its full plans today, 14 July 2017, Royal Mail noted that the DB cash balance scheme’s risk will be “materially lower” than the current plan and is a “manageable risk” for the company.

The firm is offering its employees a choice between a DB scheme and a DC scheme, which have been set up as new sections of the Royal Mail Pension Plan. Royal Mail is one of few companies replacing one DB scheme with another.

It has been noted that the total company contribution of 15.6 per cent would remain unchanged from its initial DB cash balance proposal. Company contributions to members’ pensions will increase from 12.6 per cent to 13.6 per cent compared with the initial DB cash balance scheme proposal. Further, members’ retirement savings would be credited with 19.6 per cent of pensionable pay each year, including 13.6 per cent from the company and six per cent from members. DB scheme members will also receive a two per cent company contribution for other member benefits including death in service and ill-health.

Alternatively, members will have the option of the new DC scheme, which would also provide a company contribution of 13.6 per cent of pensionable pay.

From 1 April 2018, the DB cash balance scheme will provide members with a guaranteed lump sum at retirement.

Royal Mail said: “Ninety seven per cent of members currently give up annual pension at retirement in order to take a tax-free lump sum. Under the Company’s proposal, there would be less need – or even no need at all – for members to give up annual pension to get a tax-free lump sum.”

In addition to the new schemes, Royal Mail has said it will make improvements to the Royal Mail DC Plan (RMDCP), which will see the company’s standard contribution of one per cent in each tier, rise to a maximum of 10 per cent. “This would apply to all current and future RMDCP members,” Royal Mail said.

Royal Mail noted that one of its unions, Unite, plans to hold a consultative ballot of its members on the proposal.

Unite officer for Royal Mail Brian Scott said: “The latest position is an improvement from the original proposal and through our discussions we have achieved these improvements.

“One of the main developments is that we will keep the defined benefit pension scheme open and the lump sum approach being put forward will become a separate section of that scheme. This will reduce any adverse impact on members’ future retirement incomes.

“We have had many discussions with the company over the last few months and these have been difficult. However, the Unite negotiating team consider that what is on offer is the best achievable in the circumstances.”

Responding to Royal Mail's plan, the Communication Workers Union deputy general secretary (postal) Terry Pullinger said: "The CWU rejects the latest proposal from Royal Mail. It does not meet our aspiration of a wage in retirement pension scheme, but rather still promotes the conventional wisdom of a cash-out arrangement at the point of retirement. Whilst using elements of the CWU’s proposed Wage in Retirement Scheme, it would still represent a significant shortfall in the pensions promise and it is not something that we are prepared to recommend to our members.”

However, Royal Mail claimed that: "We very much appreciate the care that the CWU applied to its proposal. But, unfortunately, it does not meet the fundamental principles underpinning our 2018 Pension Review. They are: sustainability, affordability and security.

"In our view, from a sustainability perspective, the CWU proposal – based on investing 100% of the money in riskier assets such as shares – is too risky. In our view, from a sustainability perspective, the CWU proposal – based on investing 100% of the money in riskier assets such as shares – is too risky. We also calculate the CWU proposal would cost significantly more than we can afford.

"Within six years, the CWU scheme’s liabilities could be larger than the value of the Company today and continue to grow quickly.After 20 years, the Company could have an accounting deficit on its balance sheet of £18 billion – over four times the Company’s current market capitalisation."

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