News and press releases

  • Royal Mail Group
    5 January 2017
    Royal Mail begins consultation with active members of Royal Mail Pension Plan as part of 2018 Pension Review with trade unions

Royal Mail has for some time been reviewing the future of its pension plan with its unions, CWU and Unite/CMA, as part of the 2018 Pension Review. As part of this review, Royal Mail has today launched a consultation involving the approximately 90,000 members of its Defined Benefit pension plan, the Royal Mail Pension Plan (‘the Plan’).

We know how important pension benefits are to our colleagues. We are very sorry we had to write to Plan members in June 2016, as part of the 2018 Pension Review, to say that we believe the current Plan will soon not be affordable. We are committed to not making any changes before April 2018, subject to certain conditions we told colleagues  about in 2013.

We believe the proposal we are consulting about, if implemented, would be a fair outcome for members. It would:

·         be a very competitive pension package compared to our industry and other large employers;

·         help us to meet our objective of  protecting the pension benefits members have built up;

·         provide more sustainable future pension arrangements; and

·         help us to continue to provide as many good quality jobs as possible.

With our unions, we have been actively exploring possible changes to potentially enable us to keep the Plan open on a Defined Benefit basis after March 2018 as part of our pension review process. Unfortunately, we have not been able to find an affordable way of doing this so far. This member consultation forms part of the review process. We will continue discussions with our unions during and after the consultation. We will carefully consider feedback and any affordable proposals that members or their representatives make.

Why the proposal is necessary                                                                                                                        

The Plan is currently in surplus. But, we expect this surplus will run out in 2018. At £400 million per year, Royal Mail makes one of the UK’s largest ongoing cash contributions. The level of Company contributions required from April 2018, if the Plan was maintained in its current form, is not affordable.

The most recent financial review indicates the Company’s contribution rate would increase from around 17 per cent of pensionable pay to over 50 per cent. This would more than double the Company’s contribution after March 2018 – to over £1 billion – if members continue to build up benefits on the current basis beyond that date. This increase would not be affordable. It is significantly more than the annual cash Royal Mail generates – around £290 million in 2015- 2016. This extra cost would reverse the benefits to the Company and employees of the previous actions we have taken. Those actions helped to make members’ pensions more secure, improved the viability of the Company and enhanced future job security.

Since the 2012 review, financial market conditions have significantly worsened and recent improvements have not materially changed that position.  Many companies have already closed their Defined Benefit pension schemes. Only a few FTSE 100 companies, like Royal Mail, have a significant number of their employees in a Defined Benefit scheme.

What we are proposing

·         The proposal is not about reducing what the Company spends. It is about avoiding an unaffordable increase in the cost of funding the pension.

·         Royal Mail would expect to pay around the same amount in pension contributions and National Insurance contributions in 2018-19 as it did in 2015-16.

·         In the absence of an affordable alternative, from April 2018, members would no longer build up future pension on a Defined Benefit basis. Instead, they would build up future benefits on a Defined Contribution basis. This could be either in a new section of the Plan or in the Royal Mail Defined Contribution Plan.

·         Members would continue to build up benefits in the Plan as they do now until 31 March 2018.

·         The age at which members can take Plan benefits would remain the same.

·         Salary changes after 31 March 2018 would immediately flow through into Defined Contribution pensionable pay.

·         Active Plan members as at 31 March 2018 would be given a one-off £750 payment, which they could either contribute to their DC retirement account or take as cash.

Where members’ benefits would come from if the proposal went ahead – a summary

Royal Mail Statutory Pension Scheme (backed by Government)

Royal Mail Pension Plan (backed by the Plan’s assets, and by Royal Mail)

Defined Contribution arrangement

Defined Benefit benefits earned up until 31 March 2012.

 

Increased in line with RPI (up to 5% a year) until a member takes them or leaves Royal Mail employment.

Defined Benefit benefits earned between 1 April 2012 and 31 March 2018.

 

Increased in line with RPI (up to 5% a year) until a member takes them or leaves Royal Mail employment.

Defined Contribution benefits built up from 1 April 2018.

 

 

Increases until a member takes benefits would depend on, among other things, investment returns (and charges) in your retirement account.

 

Next Steps

The consultation period ends on 10 March 2017. Royal Mail will carefully consider member feedback and discuss it with our unions as part of the 2018 pension review process. No changes would come into effect before April 2018.

Jon Millidge, Royal Mail Group HR director, said: “We know how important pension benefits are to our people. We are sorry that their current arrangements will soon not be affordable. We believe our proposal would be a fair outcome; it is the best option available. It is a very competitive pension package compared to the industry and other large employers. It is about continuing to provide sustainable, good quality pension benefits and as many high quality jobs as possible. We will carefully consider all viable options put forward by members or their representatives.”

-ends-

Notes:                                                                                                                                            

1.     The Royal Mail Pension Plan closed to new members in April 2008. Existing members continued to build up benefits on a Career Salary Average Basis.

2.     For a number of years prior to 2012, Royal Mail had been making a) significant pension deficit cash contributions (c.£300 million per annum); and b) ongoing pension contributions (c.£400 million per annum). It had also recognised a pension deficit on its balance sheet that ranged from £2.7 billion to £7.5 billion. In its Annual Report & Financial Statements 2012-13 (p75), the Company reported that these factors: “meant the Company faced issues with respect to Going Concern, it was balance sheet insolvent and it carried material pension risk and volatility”.

3.     On 1 April 2012, the majority of the assets and liabilities in the Plan were transferred to HM Government. Government is legally-responsible for the benefits built up until 1 April 2012, They are held in the Royal Mail Statutory Pension Scheme. The Plan remained the responsibility of Royal Mail and was fully-funded on an actuarial basis at this time.

4.     Deferred and retired members of the Plan are not affected by the proposal. Neither are over 40,000 employees who are members of the Royal Mail Defined Contribution Plan. But, the future cost of the Plan, and the potential impact that that could have on the health of the Company would affect all employees.

5.     We committed to not making any changes before April 2018, subject to the following conditions which we told members about in 2013:

·         The Company contribution rate remaining at the current level and any actuarial valuation not requiring additional contributions of more than £50 million each year;

·         The Company remaining a going concern; and

·         No factors outside the Company’s control causing a material adverse impact on the Plan or how the Plan must be recognised within the Company’s financial statements.