Royal Mail has begun consultation with its defined benefit (DB) pension scheme members over closing the plan to future accrual from April 2018.
The company said it had been unable to find an affordable way to keep the Royal Mail Pension Plan (RMPP) open on a final salary basis after March 2018, despite actively exploring possible ways to do so with its unions, CWU and Unite/CMA.
The move to consult with some 90,000 members of the RMPP on a new benefits package (see details below) comes as part of the 2018 Pension Review undertaken with unions which considers the affordability of the scheme. The announcement comes after Royal Mail wrote to members in June last year saying it believed the scheme was “unaffordable” in its current form.
It said it was committed to not making any changes before April 2018, subject to certain conditions members were told about in 2013, including that the company contribution remained at the current level and any actuarial valuation did not require additional contributions of more than £50m each year.
The RMPP is currently in surplus, but this is expected to run out in 2018. The company currently pumps £400m a year into the scheme, which it claimed was one of the UK’s largest ongoing cash contributions.
It said if the plan was maintained in its current form, and members continued to build up benefits on the present basis, then the level of company contributions required from April 2018 would more than double to in excess of £1bn – an increase from around 17% of pensionable pay to more than 50%.
This amount is significantly more than the annual cash Royal Mail generates, which was about £290m in 2015/16.
Added to this, it said since the 2012 review, financial market conditions had significantly worsened and recent improvements had not materially changed its position.
Royal Mail Group HR director, Jon Millidge, 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.”
JLT Employee Benefits director, Charles Cowling, said the loss of the Royal Mail DB scheme represented a “significant milestone towards the extinction of this type of employee benefit”.
He added: “As the third largest provider of final salary pensions in the FTSE 100, Royal Mail represents one of the largest private sector employers to succumb to the untenable pressure of running those schemes. Recent closures also include Tesco, HSBC and Aviva. According to our research only 23 FTSE 100 companies, which includes Tesco and Royal Mail, still provide DB benefits to a significant number of employees.”
The consultation period ends on 10 March.
What Royal Mail is 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.
