28 April 2017 Royal Mail : 2018 Pension Review Update

[TrueBlueTerrier]

http://www.royalmailgroup.com/royal-mai ... iew-update" onclick="window.open(this.href);return false;


The member-wide consultation on the future of the Royal Mail Pension Plan (the Plan) ended on 10 March 2017. On 13 April 2017, Royal Mail confirmed that the current Plan, a career average Defined Benefit scheme, will close to future accrual on 31 March 2018, subject to Trustee approval.
We know how important pension benefits are to our colleagues. As part of our 2018 Pension Review we have been working with the CWU and Unite/CMA on a sustainable and affordable solution for some time.

Royal Mail is looking at options for the accrual of retirement benefits after 31 March 2018, including a Defined Benefit cash balance scheme that builds on a proposal put forward by the CWU. This addresses some of the employee feedback Royal Mail received during the member-wide consultation. The scheme would be set up in a new section of the Plan. Plan members would have the option of joining a Defined Contribution scheme as an alternative.
Member benefits built up until April 2012 are backed by Government. Benefits built up between 2012 and 2018 are backed by the Plan’s assets. From 1 April 2018 the Defined Benefit cash balance scheme would provide members with a guaranteed lump sum at retirement. Members would be guaranteed to receive the total value of the contributions paid towards their lump sum up to retirement. In addition, discretionary increases would be applied up to retirement, subject to the investment performance of the scheme. Once applied, these increases would also be guaranteed.

Having reviewed matters with its actuarial advisers, the Company believes that the risk to the Company of the proposed Defined Benefit cash balance scheme would be materially lower than under the current Plan. The Company would also take steps to manage risk further through an appropriate investment strategy and a proportion of the Company contributions would be held as a pension risk reserve for additional security.

The proposed Defined Benefit cash balance scheme includes elements of a CWU proposal, without some of the inherent risks to the Company that, in our view, the CWU scheme would have created. We very much appreciate the care that the CWU applied to its proposal and we have agreed to meet them to discuss it further. However, at the moment we do not believe the CWU proposal, in its current form, meets the fundamental principles underpinning our 2018 Pension Review. These are: sustainability, affordability and security.

We believe that the Defined Benefit cash balance scheme would be a fair proposal that compares favourably with the retirement benefits offered in our industry and by other large UK employers. We will continue to discuss the future of the Plan with our unions CWU and Unite/CMA. We will write to Plan members once more decisions have been made.

The Company is also engaging in discussions with the CWU on issues including pay, the working week and the range of agreements under the Agenda for Growth.

Notes:
1. The Plan is currently in surplus, but we expect the surplus will run out in 2018. The Company’s annual pension contributions are currently around £400 million. If no changes are made, contributions would have to more than double to over £1 billion once the surplus runs out.

2. At around £400 million per year, Royal Mail currently makes one of the UK’s largest ongoing pension contributions. 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 still building up benefits in a Defined Benefit pension scheme.

3. Plan members’ benefits built up until April 2012 are backed by Government. Benefits built up between 2012 and 2018 are backed by the Plan’s assets. Members can get these benefits when they come to take their pensions.
- Royal Mail Statutory Pension Scheme (backed by Government) - Defined Benefit (DB) 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.
- Royal Mail Pension Plan (backed by the Plan’s assets, and by Royal Mail) - Defined Benefit (DB) 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.

4. The Company is committed to working hard to find a solution which enables it to continue providing sustainable, good quality retirement benefits, a healthy Company, and as many high quality jobs as possible.

[fishtank]

So that was the end game, they already had another less desirable DB scheme up their sleeves. Don't be fooled by the "builds on the CWU scheme" rhetoric. This kind of plan takes months to plan and risk assess, it has nothing to do with the CWU scheme. I think this was always the "plan".

[fishtank]

For information purposes......

DB Schemes / Investment
Cash balance schemes

Cash balance – what is it?

A “cash balance” scheme is a form of DB pension arrangement where the defined benefit is a lump sum expressed as a formula linked to the member’s final pensionable salary. The lump sum will be available at retirement to provide benefits for the member and his or her dependants. The benefit is still calculated on the basis of service completed and on final salary but the amount of pension that can be purchased (if this is the option taken) depends on annuity rates at retirement.

Why cash balance?

Cash balance schemes combine the advantages of both DB and DC pension provision by providing an accumulation of contributions at a specified rate. The emerging lump sum is defined in terms of the contributions paid in (known as the “Employer Credit”) and an annual uplift (the “Interest Credit”).

In summary:

The employer bears the investment risk and the full cost of increases in pensionable pay until the member’s retirement. This is compensated for by more stable costs as well as steady cash flow and accounts entries.
Funding for a lump sum means that the employer does not bear the mortality risk. The risk and cost of increasing longevity amongst pensioners is transferred to the annuity provider.
The employee has certainty in knowing how much his or her lump sum will be at retirement but bears the risk of changes in the cost of buying an annuity.
Finally, cash balance schemes are generally easy to understand and communicate – an advantage for employer and employee alike

[fishtank]

The risk and cost of increasing longevity amongst pensioners is transferred to the annuity provider.

Of course that's not really true, the cost is transferred to you because if you want a pension rather than a lump sum you will have to purchase an annuity and the price you pay will factor in increasing longevity amongst pensioners.

[RobertT]

Unite’s website has a good description of cash balance pension schemes:
http://www.unitetheunion.org/unite-at-w ... onschemes/" onclick="window.open(this.href);return false;

From RM's two proposals, personally I'd prefer the flexibility of a DC scheme.

[clashcityrocker]

So that was the end game, they already had another less desirable DB scheme up their sleeves. Don't be fooled by the "builds on the CWU scheme" rhetoric. This kind of plan takes months to plan and risk assess, it has nothing to do with the CWU scheme. I think this was always the "plan".

Unless you are really cynical and believe the CWU proposal was only ever there to give further legitimacy to this new offer?

[Chimps_tea_party]

The requirement to buy an annuity is enough to put me off.

[claretandblue]

I will have 20 years service in when the scheme closes in 2018, do you have to take a lump sum out of the 2 RM pensions i already have ?

[BeamishStout]

I was blissfully unaware of this particular type of pension scheme until today!

On the Unite link given by Robert I think the most salient point to take from it all is:

A cash balance scheme is a form of defined benefit pension under which what is promised to the member is not a defined amount of pension at retirement but a defined lump sum -

And of course the pension that can be provided by said (estimated) lump sum can only be known at the age when annuity is taken! Glad I don't have to rely on this - I had more faith in Mystic Meg's predictions on the National Lottery.

Re the two major benefits on the propaganda issued at work today, I am really scratching my head at the second of the 2 major benefits listed stating

Unlike now, where most members convert around a quarter of their pension into a lump sum at retirement, there would be either less need - or even no need at all - to do that

I am intending using my AVCs to 'fund' my maximum tax-free lump sum (probably just under 25% of total pension pot @ April 2018) so this new scheme will not affect me one iota but had I been retiring say in 2020 then surely this new proposed scheme would face me with exactly the same issues - maximise the tax-free lump sum or maximise the pension/annuity or something between the two.

I assume that should anyone take more than 25% of the lump sum available from this new scheme then the excess will be treated as taxable income!

[BeamishStout]

I will have 20 years service in when the scheme closes in 2018, do you have to take a lump sum out of the 2 RM pensions i already have ?

Look at the 'Nutshell' booklet p2 (from Sep 2016) under pension (col 1 and 3) where it states 'Pension' and then below it where it states 'Pension (reduced if you take the maximum tax free cash sum allowed) So I'd say you are NOT obliged to take up to the maximum tax-free lump sum. Perhaps someone else can confirm

[RobertT]

I will have 20 years service in when the scheme closes in 2018, do you have to take a lump sum out of the 2 RM pensions i already have ?

You’re in Section C, so you have the choice whether you take a lump sum or not. Your statement will give you the info you need, or for more detailed info consult the library section of the pensions website.

[RobertT]

I was blissfully unaware of this particular type of pension scheme until today!

I’m not particularly clued up on this type of pension either. But they are more akin to DC rather than DB as RM seem to be saying.

I assume that should anyone take more than 25% of the lump sum available from this new scheme then the excess will be treated as taxable income!

I’m not 100% sure, but that doesn’t seem to be an option! You either take up to 25% as tax free cash and the rest as annuity or all of it as an annuity.

Although it does say in this article: http://www.royalmailchat.co.uk/communit ... 27&t=79605" onclick="window.open(this.href);return false; that RM will give us the option of whether to join the DC scheme or the Cash Balance version.

[BeamishStout]

Although it does say in this article: http://www.royalmailchat.co.uk/communit ... 27&t=79605" onclick="window.open(this.href);return false; that RM will give us the option of whether to join the DC scheme or the Cash Balance version.

Looking for this additional nugget (cannot see this info) - perhaps too many grogs

[RobertT]

Looking for this additional nugget (cannot see this info) - perhaps too many grogs

Second paragraph!

Royal Mail is looking at options for the accrual of retirement benefits after 31 March 2018, including a Defined Benefit cash balance scheme that builds on a proposal put forward by the CWU. This addresses some of the employee feedback Royal Mail received during the member-wide consultation. The scheme would be set up in a new section of the Plan. Plan members would have the option of joining a Defined Contribution scheme as an alternative.

[BeamishStout]

Looking for this additional nugget (cannot see this info) - perhaps too many grogs

Second paragraph!

Royal Mail is looking at options for the accrual of retirement benefits after 31 March 2018, including a Defined Benefit cash balance scheme that builds on a proposal put forward by the CWU. This addresses some of the employee feedback Royal Mail received during the member-wide consultation. The scheme would be set up in a new section of the Plan. Plan members would have the option of joining a Defined Contribution scheme as an alternative.

Thanks Robert