The Company's Decision FAQs

The Company has been listening carefully to employees' feedback and also to the discussions that have taken place in the Consultation Forum. The task has been to  find a solution which best suits all members and the business and this means balancing comments viewpoints and considering who would be affected by any proposed changes.

As a result of the overall discussions, however, a number of things have changed from the Company's original position back in April 2007:

• Closing the Plan: the Plan will now be closed to new members from 31 March 2008, instead of 31 January 2008. This gives people who are not members longer to join if they wish to. Eligible employees who wish to join the Plan should ensure that their application is received by 31 March 2008.
• Career Salary: feedback showed this was the preferred alternative for changing how pension would build up in the future, but a key concern was that all pension earned before any change should continue to be linked to Final Salary at the time of leaving or retiring rather than being linked to inflation. This was a major concession for the Company to make because of the lost opportunity to make significant cost savings.
• Changing the Normal Retirement Age (NRA): this was a logical step, but members felt that doing it in 2008 was too soon, and it was felt that members should be able to take some of their pension at age 60.  The Company has therefore decided to increase NRA to 65 from 1 April 2010, and members can still retire at 60, but there is an early payment reduction to benefits built up after 1 April 2010 if taken early.
• Additional Voluntary Contributions (AVCs): Existing AddPlan AVCs taken out before 1 April 2008 will still be linked to Final Salary.
• A new style of defined benefit AVC will also be introduced making it easier for people to plan the size of their pension.
• Section C Members Death in Service benefits: will now be increased to 4 x pensionable pay (including the Lower Earnings Deduction)
• Years of pension build up: the maximum number of years you can build up a pension has increased from 40 years at NRA to 45 years
• More flexibility on retirement:  It will be possible, if members wish, to draw a pension at 60 (constituting all the benefits a member has earned before 1 April 2010) and continue working and building up more pension at the same time. After the Plan's normal retirement age is raised to age 65, you will still be able to take your pension earned before that change at age 60. The change to retirement age will only affect pension earned from the date the change is implemented (1 April 2010). The pension you have already earned, based on service and salary up to 1 April 2010, is still payable without a reduction for early payment at age 60, but the pension you build up from the date of change will be reduced by an ‘early payment factor' for each year before the new normal retirement age of 65. You will not suddenly have to work until you are 65 before being able to take any pension. You can choose to take your pre 1 April 2010 pension at age 60 without reduction while continuing to work and at the same time you will be able to earn more career salary based benefits for service after 1 April 2010, which you could take unreduced at age 65.

Since the Consultation Forum first met in April 2007 Royal Mail has been listening to and discussing comments, input and feedback with your representatives. The Proposal that was sent out in November - which was developed after all that listening and discussion - took account of all of this and reflected people's feedback in the proposed changes.

Since November, Royal Mail has received over 35,000 comments and questions directly from members, which have helped form the final decision on pension changes. All comments have been carefully considered and where necessary discussed with the Company's professional advisors.

The changes are:

• To increase the normal retirement age from 60 to 65 with effect from 1 April 2010.
• To change how your pension is calculated from a Final Salary to a Career Salary Defined Benefit arrangement from 1 April 2008. This means that only pension earned in respect of service from 1 April 2008 would be affected by this change. Pension earned prior to this date will still be linked to your final pensionable pay on the date you leave or retire.
• To close the Pension Plan to new members on 31 March 2008.

• You do not have to work until 65 - you could still retire at 60 if you wanted to.
• Benefits built up before 1 April 2008 still continue to be calculated on a Final Salary
  basis.
• The cost to you of being a member of the Pension Plan does not go up.
• People already receiving a pension are not affected.
• AVC contracts in place by 31 March 2008 will be honoured and will retain the link to final salary.

There is a potential saving of approximately 1% a year of pensionable salary (by year 5) from closing the Plan to new entrants and a potential saving of approximately 4% a year each (initially) for each of the other changes; the move to the Career Salary basis and the change of retirement age to 65. This is a total estimated saving of 9% of pensionable salary a year to the Company once all the changes are made. However, the respective savings would change over time and would need the approval of the Trustee, so it is impossible to say exactly what the actual initial or future saving to the business might be.

Pension costs are rising - on top of the deficit contributions being made to the Plan to pay off the current funding shortfall, the Company now pays a further 20% (up from around 12% in previous years) of pensionable pay. This compares with member contributions of only 6%.

In total, the Company is now expecting to pay around £850 million into pensions this financial year (2007/08) - around 30% of pensionable payroll.

But the current cost of providing pensions is not sustainable. We have to make changes to bring future pension costs to a more affordable and sustainable level.

These costs are very difficult for the Company to afford - quite simply they're the biggest financial risk facing the business. These risks could increase.

Our competitors typically pay much lower contributions to their pension arrangements.

Even with the implementation of the pension changes, the Company is still expecting to pay more in the future than in the past (2005/06). However, by 2010 the Company anticipates paying around 11% of pensionable pay for future service, plus 10% for past service, compared to a total of 30% of pensionable pay in 2007/08.

A very wide range of options were looked at. We studied the experience of many other companies in considering what to do. We want to keep to a small number of changes and to be as fair as possible across the whole membership. Some possible changes would have affected only some groups of employees and others would not have saved enough money.

Specifically we rejected increasing members' contributions (this would have needed to have been a very large increase to make pensions affordable and sustainable); capping members' annual pensionable pay increases at Retail Prices Index (RPI) (this would have had a much more severe impact on the vast majority of our employees than the career salary defined benefit arrangement); reducing the accrual rates; cutting spouses' and other family benefits; increasing the retirement age to more than 65; and reducing benefits in order to be able to keep the current Plan open to new recruits.

Unfortunately the savings we would make from closing the Plan to new members aren't enough, because there are so many members in the Plan that it would take a long time for the closure to new recruits to make an impact on the cost. We currently pay 20% of pensionable pay to provide pensions for people going forwards - and that is in addition to the 10% we are paying for the deficit. After five years we estimate that closing the Plan to new starters would save only about 1% per year from this cost. We have to close the Plan in order to reduce the longer-term risk to the business, but it still leaves the Plan very difficult for Royal Mail to afford.

Royal Mail wants to keep a defined benefit scheme for existing employees - that is, one in which the benefits at retirement are calculated using a set formula and where the risks of funding these benefits is mainly carried by the employer - but we have had to make changes to make it affordable (both now and over the longer term). We looked at the steps taken by other companies, and the comments that we had were very helpful in putting together the Proposal and then  reaching the Company's decision.

Making changes to the Pension Plan cannot be done over a short time scale, which is why the Company has spent most of the past year discussing this issue with trade unions and senior management representatives as part of the Pension Consultation. It is vital for the future of the business that the Company makes the necessary changes now in order to meet tight revenue targets and reduce the risks for the business. For this reason Royal Mail cannot wait for the outcome of the Government Review. The outcome of the Government Review may have an influence on the ability of the Company to fund the Pension Plan in the future. However, Royal Mail cannot afford to delay its changes in the expectation that an alternative solution will be found eventually.  Additionally, during the last year, the mails market has shrunk, competitors have taken more market share and internet substitution has also reduced volumes. These changes make pension reform even more important.

There were no plans to make changes to the way in which these benefits are calculated. It was considered best to keep to a small number of changes, which would affect everyone equally rather than have a longer list which would be more complicated to understand. However, from1 April 2008, it has now been agreed to increase the Death in Service benefit for Section C members from 3 times to 4 times pensionable pay and  prospective service will be raised from age 60 to age 65 from 1 April 2010 as a result of the change in NRA.

No changes will be made to anything that has been earned so far. This means that the benefits that you have built up to date are not being changed - and because pensioners and deferred pensioners are not building up any further benefits, they are not being asked to accept any changes either. There is also specific legislative protection for benefits built up so far, which also means that the level of benefits provided to pensioners and deferred pensioners are protected as long as Royal Mail continues as a commercial business.

For those who are still working there are a number of actions that could be taken to boost pension in the time ahead. This is not the case for pensioners.

Yes, the same changes apply to them.

Provided that there has been a consultation with affected members lasting at least 60 days  then the changes can be made. Royal Mail has however consulted with your representatives on the Consultation Forum since April last year, which has been very helpful in shaping the Company's proposals and the decision.

There is no  obligation to obtain Government consent to make changes to the Plan.

The principles the Company adopted at the beginning of the consultation process were to:

• Bring pensions to an affordable and sustainable level
• Protect current members' pensions
• Secure the benefits our people have already built up in the Plan
• Keep changes to a minimum
• Ensure pensions continue to be affordable for our people
• Ensure the changes have an equal impact on everyone
• Help to protect jobs and investment

The Proposal was developed and refined through the consultation process, with valuable input from your representatives. The resulting Proposal, and now the Company's decision, is regarded as a fair balance between the interests of the Company and members.