Royal Mail CDC scheme to exceed initial cost estimates

The cost of Royal Mail’s planned Royal Mail Collective Pension Plan (RMCPP) is projected to exceed initial estimates by £30m per annum, Royal Mail has announced.

In its half year results, Royal Mail revealed that, whilst the expected cost of the RMCPP was around £400m per year, approximately the same as the cost of the existing schemes, the predicted cost is now expected to increase by £30m per year.

Royal Mail attributed the projected increase to the fact that, although the estimated cost of the RMCPP as a percentage of pensionable pay remains broadly the same as in 2018, at 13.6 per cent, payroll costs have increased.

In addition, it explained that, since the RMPP (Royal Mail Pension Plan) closed to accrual in 2018, the cost of existing plans has been reducing over time relative to overall pay costs, as Defined Benefit Cash Balance Section (DBCBS) members leave and are replaced by new employees in the Royal Mail Defined Contribution Plan (RMDCP), with a lower employer contribution rate.

The new pension scheme, the RMCPP, will look to replace the existing DBCBS and the RMDCP already in place and will comprise of a Defined Benefit Lump Sum Section (DBLS), and a collective defined contribution (CDC) section.

The scheme is expected to launch by early 2023, with Royal Mail confirming that it has now submitted an application to The Pensions Regulator (TPR) for the authorisation of their new pension scheme.

Royal Mail first launched a consultation on the RMCPP in the second half of 2021 where it sought input from sources including the employees of Royal Mail Group and RM property, and Unite.

In February 2022 it was announced that the plans for the CDC scheme were confirmed after a successful consultation process.

The interim results also confirmed that the Royal Mail Senior Executives Pension Plan (RMSEPP) has now been “fully extinguished” after completing a buyout in June of this year, and is expected to be wound up in the “coming months”.

The recent market volatility has impacted the group, however, with the results revealing that the pre-withholding tax accounting surplus of the RMPP had decreased by £1,285m from March to September 2022, standing at £2,897m as at 25 September 2022.

This was attributed to recent significant increase in index-linked gilt yields, against which the RMPP liabilities are hedged.

Despite this, the group clarified that although the surplus has decreased in absolute terms, the funding level on an accounting basis has improved since the year end as a result of the significant decrease in liabilities.

Furthermore, although an IAS 19 deficit of £188m is shown on the balance sheet in respect of the DBCBS, the group confirmed that the scheme is not in funding deficit and it is not anticipated that deficit payments will be required.

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