2018. ?

[Hawkey99]

Keep hearing about big changes in 2018 regarding our pension schemes.

Just wondered if anyone knows who why what are the reasons.

Thanks

Hawkey99

[RobertT]

The RMPP is a defined benefit scheme so the pension you get is based on how much you earn(basic) and your length of service. This is very expensive to run partly because the benefits are quite generous and partly because the long term liabilities are unknown to a large degree.

There is a pot of money tucked away to fund the scheme until 2018 but beyond then it would be up to RM to fund it from their profits. Therefore RM want to provide a cheaper pension scheme from 2018 onwards.

There will be a consultation period where the union might be able to negotiate a few concessions, but realistically the current scheme will be closed and replaced by the defined contribution version which has been in operation since 2008 for people who joined RM from then onwards.

I hope that helps.

[Hawkey99]

Thanks Robert.

Is there any knowledge of the difference in the pension payable on each scheme.

Ie after 30 years in current scheme you get xxx and 30 in defined benefits scheme you get xxxx.

Thanks

Hawkey

[nataddick]

The current position is set out on page 23 on the latest Financial Report :-

http://www.royalmailgroup.com/sites/def ... 202016.PDF" onclick="window.open(this.href);return false;

There are a few pages (22-26) that set out the Principal Risks that RM is facing and Pensions is just one of those. I have copied the information on Pensions below but sadly the original formatting has been lost but nevertheless it makes interesting reading !

Pension risk

The Group continues to operate a defined benefit pension scheme, the Royal Mail Pension Plan, open to accrual for existing members.

Affordability of the defined benefit pension scheme

Our ongoing ability to maintain the Royal Mail Pension (Plan) in its current form is subject to financial market conditions.

Status

As part of the Pension Reform in 2013, we committed, subject to certain conditions, to keep the Plan open until at least March 2018.

Current financial market conditions suggest that keeping the Plan open to accrual in its current form beyond 2018 will not be affordable.

How we are mitigating the risk

 The Plan is hedged against future interest rate and inflation rate exposures, and we are confident that this will enable us to meet our commitment to keep the
Plan open to accrual up to March 2018.

 We are in discussions with the unions, and are developing proposals for sustainable post-March 2018 pension arrangements.

So Hawkey, all we really know at this stage is that it is almost certain that RMPP will be closed to future accrual post March 2018 and be replaced by a far inferior (but cheaper for RM) Defined Contribution Plan, probably very similar to the existing one.

[RobertT]

Thanks Robert.
Is there any knowledge of the difference in the pension payable on each scheme.
Ie after 30 years in current scheme you get xxx and 30 in defined benefits scheme you get xxxx.
Thanks
Hawkey

With a defined benefits scheme you can guestimate roughly how much you’re likely to get based on current pay and possible overall service. Obviously it won’t be 100% accurate because wages can change and people don’t necessarily stay in the same job until normal retirement age. And in the case of the RMPP, schemes can close down.

With a DC pension however it’s the contributions that are defined, so both employee and employer are putting an X percentage of pay into a pot which is then invested with the resulting fund being used in 3 ways:

1. Buy an annuity which is basically an income for life.
2. Drawdown your fund over a period of time defined by you.
3. Take it all out as cash.
With all 3 options you can take the first 25% as a tax free lump sum while the rest would count as income and potentially be taxed.

Basically there are certain guarantees with a DB pension which make it valuable to the worker but costly to the company.

But there aren’t really any guarantees with a DC scheme, because what you get out of it will depend on how much is going in and how well the investments perform.

[fly-catchers]

I reach 60 in January 2018. If I decided to retire at that point how would they calculate my reduced 65 part of the pension? Would I actually be better off in a small way rather than waiting till they close the scheme and start the DC one- or would it not make much difference?

[RobertT]

I reach 60 in January 2018. If I decided to retire at that point how would they calculate my reduced 65 part of the pension? Would I actually be better off in a small way rather than waiting till they close the scheme and start the DC one- or would it not make much difference?

Your pension would be based on your service up to your leaving date. As January 2018 is before the expected closure date, which I assume would be April 2018, your pension wouldn’t be affected at all.

If you worked until the April you would build up a little bit more pension. If you carried on after April, you’d start to build up a DC pension too.

[Hawkey99]

I assume this won't effect AVCs in any way ???

[RobertT]

I assume this won't effect AVCs in any way ???

At this point in time we don’t know.

All 3 versions of AVC’s: Addplan(closed), Bonusplan(Section C) and Flexiplan are linked to the RMPP in one way or another, so if the main scheme closes in its current form then there is a possibility that the current AVC’s will also be ring fenced at the same time.

[Hawkey99]

Probably impossible to answer but is it possible to say how much the difference would be in the schemes given certain criteria.

Eg 30 years in old scheme, 10 years in defined contribution scheme. Or by proving a specific set of circumstances.

Also is it worth or even possible to pay extra in your scheme if its coming to an end.

Thanks

Hawkey

[heapsy]

I assume this won't effect AVCs in any way ???

At this point in time we don’t know.

All 3 versions of AVC’s: Addplan(closed), Bonusplan(Section C) and Flexiplan are linked to the RMPP in one way or another, so if the main scheme closes in its current form then there is a possibility that the current AVC’s will also be ring fenced at the same time.

As the pension was closed in 2008, it is reasonable to assume AVC contributions will continue as usual. I currently pay into the AVC Flexi and Bonus plans which I can STILL take at 60, along side the NRA 60 pension, even though it was closed.

As I have a private pension which I am taking at 60 in one from or another I intend to leave the NRA65 pension until 65. I will also receive a lump sum, currently about £20000 from a previous pension which I transferred to RM pre closure. This could not be transferred as it failed to reach the MPG. Minimum Pension Guarantee. The reason I will do this is avoid tax AND receive a higher pension from the state, when it comes, as lump sums are exempt from calculations for working out your state pension. As I will receive the £20000 lump sum before my state pension, about 67 years of age, this will not count when they work out my state pension, the more you have in company and or private pensions the LESS you get from the state pension. That's why the lump sum is always worth taking.

[RobertT]

The final salary scheme was closed in 2008 and replaced with the career average version, with Bonusplan and Flexiplan allowed to continue because they are additional DC arrangements alongside a DB scheme. Bonusplan being linked to Section C because of the LEL reduction. Addplan was closed except to those who were already paying into it. The NRA60 element actually relates to pension accrued up to 2010.

I’m not suggesting we won’t be able to still take our AVC’s at 60 to fund the tax free lump sum, but whether we’ll still be able to pay into them beyond 2018 is uncertain. From that date our main scheme benefits won’t increase anymore, apart from with inflation. But if we are still allowed to pay into our AVC’s the main scheme liabilities will effectively be slowly increasing for RM, hence why they may be stopped. Plus there’s also the on-going cost to the business of Bonusplan, however small that may be.
You can also argue there is not much sense having 2 or 3 DC schemes running alongside each other.

In my opinion those people paying into Addplan and Bonusplan should be allowed to continue. While Flexiplan may be ring fenced with no more new money allowed in. With any additional pension payments will then have to go into the ‘new’ DC scheme or another arrangement away from RM.

We’ll have to wait and see what happens.

[RobertT]

As I have a private pension which I am taking at 60 in one from or another I intend to leave the NRA65 pension until 65. I will also receive a lump sum, currently about £20000 from a previous pension which I transferred to RM pre closure. This could not be transferred as it failed to reach the MPG. Minimum Pension Guarantee. The reason I will do this is avoid tax AND receive a higher pension from the state, when it comes, as lump sums are exempt from calculations for working out your state pension. As I will receive the £20000 lump sum before my state pension, about 67 years of age, this will not count when they work out my state pension, the more you have in company and or private pensions the LESS you get from the state pension. That's why the lump sum is always worth taking.

Personal pensions don't reduce your state pension.
What you actually get from the state pension will be dependent on your NI history over your working life. Any provision you’ve made yourself or via an employers scheme will be on top. Although the higher income you have, the more tax you're likely to pay as with your wages now. Taking the lump sum can reduce your tax liability but that would depend on individual circumstances.

However it is possible that time spent contracting out will reduce your state pension, as with the RMPP. But the whole point is that you get a better pension than if you’d been contracted in. So you’re not actually being disadvantaged. Plus from April 2016 you will be building up qualifying years under the ‘new state pension’ and will potentially get the contracted out benefits from the RMPP and more state pension than you would have got otherwise.

[nataddick]

The advice provided by Robert is spot on with regard to future AVC'S and the impact of DC's on State Pension.

It is really a wait and see situation. I have downloaded the body of evidence submitted by the CWU in respect of the PO DB closure but it runs to 63 pages and so, it will take time to consider the potential impact on the existing RMPP scheme, post March 2018.

It is complex but possible to compare future accrual under a DC scheme to a DB scheme and I think the majority of RMPP members will be alarmed to find that it will fall by about 50% under any new DC plan that will be proposed by RM. There are lots of underlying assumptions that need to be taken into account, the most significant being the overall contribution rate being paid into the 'pot' both by the employee and the employer.

A simplified example :

Existing RMPP Contribution Rates (based upon pensionable pay)

Employees 6%
Employer 17.1%
Use of Surplus to maintain benefits 6.9%
Total around 30%

RM have proposed a case,as yet unproven,that this will rise to 40% which they claim is unaffordable .

Probable maximum new RMDC Contribution Rates to be offered (based on revised definition of pensionable pay that does not include LED)

Employees 6%
Employer 9%
Total around 15%

Without taking into account all the other actuarial underlying assumptions, it is evident that the amount that would be paid into any new DC scheme would be about half of what it is currently and that will improve RM's profitability and have a detrimental impact on members pension benefits.

[RobertT]

Probably impossible to answer but is it possible to say how much the difference would be in the schemes given certain criteria.

Eg 30 years in old scheme, 10 years in defined contribution scheme. Or by proving a specific set of circumstances.

Also is it worth or even possible to pay extra in your scheme if its coming to an end.

Thanks

Hawkey

As nataddick says, the overall contribution levels are likely to be around half as much as now. But because we’re changing from a DB to a DC scheme, there will be no guaranteed benefits as are offered by the RMPP.

In simple terms a full timers Section C 6% DC pension contribution without the LED deduction would be around £25 per week, which in turn would attract a 9% RM contribution of about £37.50, so about £3,250 per year in total. If you make those payments for 10 years, you would have a pot of £32,250 plus growth.

On the face of it you may think that’s a decent chunk of money. But if you tried to buy annuity at 60 with it, based on current rates, the most you would get is about £1,500 per year for a single life, level pension. And if you wanted one which rises with inflation each year and offers death benefits like the RMPP does, then it’s more like £900 per year.

Personally my Section C career average RM pension currently increases by just under £300 per year, including inflationary increases on previous years blocks. So after 10 years I’d have accrued a pension of about £3,000 per year. So more than 3 times as much as the DC pension would offer.

There is no way to increase your main RMPP benefits directly unless you’re already paying into Addplan. But paying into Bonusplan and Flexiplan will still help to fund your tax free lump and are still very tax efficient ways to save. As has already been discussed, AVC’s may not be an option after 2018 so it may well be a good idea to save as much as you can, while you can.