Cash Balance/DC proposal Q&A's

[RobertT]

https://www.myroyalmail.com/pensions/rm-pension-plan" onclick="window.open(this.href);return false;

Current pension proposal

1. Why is the Company closing Sections B and C of the Royal Mail Pension Plan (the Plan) to future accrual?
We have worked very hard to keep the Plan open until at least March 2018. We are still confident that we can keep that commitment. The Plan is currently in surplus. But, the Company expects this surplus will run out in 2018. Royal Mail needs to take action before then.

If no changes are made to the Plan, the Company’s contributions would more than double from £400 million a year to £1.26 billion. That increase is unaffordable. It is significantly more than the cash the Company generates each year – around £209 million in 2016-17.

Unfortunately, we have not been able to find an affordable way of keeping the Plan open in its current form after March 2018. With regret, the Company has come to the decision that Sections B and C of the Plan will close to future accrual on 31 March 2018. We are seeking agreement with our unions on a new set of arrangements.

2. What does 'close to future accrual’ mean for Section B and C members?

This means that Section B and Section C members will not be able to build up more pension in these sections of the Royal Mail Pension Plan (the Plan) after 31 March 2018. The way you have built up pension in these sections will cease.

The benefits you have built up to 31 March 2018 will not be affected by the changes. All the benefits you have built up until April 2002 are backed by Government. Benefits built up between 2012 and 2018 are backed by the Plan’s assets. Plan members can get these benefits when they come to take their pensions.

3. Would my pension be safer if I take it early?

As the proposed changes would only affect the build-up of future retirement benefits after 1 April 2018, there is no advantage in taking your pension early. In fact, taking your existing pension benefits early could disadvantage you in the future by reducing your ability to build up additional retirement benefits.

Under our proposal, we remain committed to not making any changes before April 2018, subject to certain conditions. You would continue to build up benefits as you do now until 31 March 2018.

The Company would continue to make a significant contribution to your pension. Our Pension Review is not about reducing what the Company spends. It is about avoiding an unaffordable increase in the cost of funding the pension.

4. What happens to benefits built up to 31 March 2018 when Sections B and C of the Plan will be closed to future accrual?

Plan members' benefits built up to 31 March 2018 are not affected by the changes. Benefits built up until April 2012 are backed by Government. Benefits built up between 2012 and 2018 are backed by the Plan’s assets. Plan members can get these benefits when they come to take their pensions.

5. What is the definition of pensionable pay for the proposed Defined Benefit cash balance scheme, and the alternative Defined Contribution scheme for Plan members?

We have kept the same definition of pensionable pay for the proposed Defined Benefit cash balance scheme as the one currently used by the Plan.

Pensionable pay is made up of basic pay plus, in some cases, pensionable allowances and pensionable bonuses. Section C members – who make up the majority of Plan members – then have £3,328 deducted (the Lower Earnings Deduction) every year. Members would continue to make a 6% contribution after 1 April 2018, as their pensionable pay would not change.

6. Why do we need HM Government approval for the proposed Defined Benefit cash balance scheme?

We do not need HM Government approval for our Defined Benefit cash balance scheme to work. We can set that up for our Plan without approval.

But we are working with HM Government so that our Defined Benefit cash balance scheme is as tax efficient as possible for members. We will achieve this if our proposed scheme is linked through to the benefits that members have accrued in the Royal Mail Statutory Pension Scheme (RMSPS). We need HM Government approval for that to happen.

7. Why do we need to link the proposed Defined Benefit cash balance scheme to benefits accrued up to 2012 in the Royal Mail Statutory Pension Scheme, (RMSPS)?

The proposed Defined Benefit cash balance scheme will be set up as a new section of the Royal Mail Pension Plan, (the “Plan”). Under this scheme you would build up a guaranteed lump sum at retirement (age 65).

You would use that Defined Benefit cash balance lump sum at retirement to provide some or all of your tax-free lump sum instead of cashing in (“commuting”) your pre-2018 pension benefits. Under the Company’s proposal, this would involve two steps:

The Defined Benefit cash balance fund would first be used to provide the tax-free lump sum for Plan benefits accrued between 1 April 2012 and 31 March 2018 up to the maximum permitted under HM Revenue & Customs rules - currently 25% of the overall value of Plan benefits;
Any balance of the Defined Benefit cash balance fund leftover after Step 1, would then be used to provide the tax-free lump sum for the RMSPS benefits accrued up to 31 March 2012 that transferred to Government. Again, that would be up to the maximum of 25% of the overall value of RMSPS benefits under current rules;
If there was still a balance of funds from the Defined Benefit cash balance scheme, you would have the option to use that amount to buy an annuity (i.e. additional pension), to transfer it to an external pension arrangement for drawdown or take it as a taxable cash lump sum.

Plan members with Additional Voluntary Contributions (AVCs) can already transfer any balance left over (after taking the maximum tax-free lump sum from the Plan) to the RMSPS to maximise the tax-free lump sum under the RMSPS rules. The Company has asked Government for its approval to adopt the same approach for the Defined Benefit cash balance scheme. We are in discussions with Government over the steps required to implement this approach. If we are unable to obtain Government approval, we may need to review our scheme again in 2020.

8. By how much will my Defined Benefit cash benefit scheme be increased by each year?

Increases are discretionary and are not guaranteed. The target increase is 2% above the rate of CPI inflation. However, the actual increase will depend on Plan investment returns. At this stage, it is not possible to speculate on what the long term increases could be. Once awarded, increases are guaranteed at retirement (age 65).

9. Will the current AVC arrangements continue in the new scheme?

The intention is that AVC arrangements (Bonusplan and Flexiplan) would continue after 1 April 2018. Addplan will cease on 31 March 2018.

10. What are the death in service and ill health benefits?

If you die in service, the lump sum would remain at 4 x pensionable pay. There would be an additional dependants’ lump sum of 2 x pensionable pay. In addition, there would be the value of the Defined Benefit cash balance lump sum or the Defined Contribution accumulated fund at date of death. This is in addition to the death benefits already built up for pre-2018 service.

Ill health benefits would be an insured benefit (payable monthly) of 50% of basic pay less the Government’s Employment & Support Allowance (ESA) for up to three years. At the three-year point, a lump sum would be paid as a taxable amount. Alternatively, this could paid into the Defined Benefit cash balance scheme or Defined Contribution scheme fund in the Plan. The amount of the lump sum would vary according to the severity of the ongoing medical condition. In addition, there would be the benefits you have already built up for pre-2018 service, if not already paid.

11. How does the Defined Benefit cash balance scheme compare to the scheme put forward by the CWU?

CWU put forward a proposal for an alternative scheme. On a like-for-like basis, 70% of Royal Mail Pension Plan members would be expected to be worse off under the CWU’s scheme compared to our Defined Benefit cash balance proposal. That’s our conclusion based on calculations by Willis Towers Watson – an independent firm of highly respected employee benefit consultants we commissioned. Their work was based on as much of a like-for-like comparison as possible. See the key assumptions below.

Separately, if the Plan had adopted the CWU’s investment strategy in 2012, it would now be facing a deficit of over £2 billion. If we had adopted the CWU investment strategy after the transfer to Government, we would have had to close the scheme in 2016. The CWU scheme does not meet our affordability, sustainability and security objectives. The supporting financial and legal framework required to implement it is not in place.

Key assumptions used by Willis Towers Watson:
Total contributions of 19.6% of pensionable pay are assumed to be paid into each scheme. The member proportions make no allowance for pension increases or interest in payment. They assume that asset returns of 2% a year above CPI inflation are achieved, but please note that under the Defined Benefit cash balance solution these increases would be targeted but not guaranteed until granted. When working out the proportion of members who are better off under our Defined Benefit cash balance scheme, the member is assumed to live for 20 years from age 65, which represents broadly average life expectancy. No allowance is made for any spouse pension, interest or pension increases in payment, which would still be payable in accordance with the Rules of the Plan. CWU scheme terms for commutation of pension to lump sum assumed to be as currently for members’ pensions. CWU scheme accrual pension rate assumed to be 1/100th, based on assumed investment returns. Pay quoted is pensionable pay before the lower earnings deduction and is assumed to apply to both schemes. The proportion of members better off under Defined Benefit cash balance is approximate, based on summarised membership data.

12. What are the next steps?

We are working hard with our unions to reach agreement, We will write further to Plan and RMDCP members about the 2018 Pension Review once more decisions have been made.

Personal illustrations

1. I have received my 2017 Benefit Illustration from the Trustee of the Plan. How does this compare with my personal illustration on the Company’s Defined Benefit cash balance proposal?

The two illustrations are not directly comparable as they are produced for different purposes. The Trustee’s 2017 Benefit Illustration shows the benefits you have built up in the Plan up to 31 March 2017. If you have any questions about this, you can contact the Pensions Service Centre by email pensions.helpline@royalmail.com or by phoning 0114 241 4545 (or Postline on 5456 4545).

The personal illustration you recently received from Royal Mail has been provided to help you understand the possible impact of the Company’s proposal on your benefits. It sets out our estimate of your possible benefits at retirement age under three scenarios: the Plan without any changes; the Company’s new Defined Benefit cash balance proposal; and our original Defined Contribution proposal.

2. I have lost my personal illustration (or I never received it). Can I have another one?

Yes. Please email my.pension@royalmail.com or phone the Pensions Review Helpline on 0345 850 0081 and request one. You will be asked to confirm your name, address, date of birth and payroll number.

3. I think my personal illustration is wrong or incomplete. Can I have another one?

Please email my.pension@royalmail.com or phone the Pensions Review Helpline on 0345 850 0081 and explain why you think the statement is wrong or incomplete. Please remember to quote your payroll number in any communication. If an error is identified, we will send you a revised version.

4. Why have you not included State pension in the revised illustration?

We have not included State pension in the revised personal illustration following specific feedback from members and the unions.

We do however note that the full rate of the new State Pension is currently £8,296.60 a year. The rules for receiving the State Pension are complex and can be changed by the Government, but currently we believe that around 85% of Plan members will get the full State Pension. You can obtain an estimate of your actual State Pension by going to http://www.gov.uk/check-state-pension" onclick="window.open(this.href);return false;.

5. Given that my estimated pension at 60 is only slightly different to the amount I will have built up to 31 March 2018, should I take my pension early?

Please note that taking your pension benefits early will reduce your future potential pension benefits. As the proposal would only affect the build-up of future pension benefits from 1 April 2018, there is no advantage in taking your pension early to avoid any changes brought about by the proposal. In fact, taking your pension benefits early could disadvantage you in the future by reducing your ability to build up additional pension benefits.

6. My Trustee benefit statement shows a different maximum cash lump sum than my personal illustration. Why is this?

The Trustee statement has been prepared using a different calculation basis and those figures are therefore expressed differently. Under the new Defined Benefit cash balance proposal, both Section B and C members would still have the option in the future to take as much cash as possible from their pension benefits. There would be no change to the general rule that the maximum cash sum currently available from the Plan is around 25% of the total value of the benefits being taken.

7. Why doesn’t the new illustration show my separate Section B cash lump (3 times my pension) separately?

In this illustration, we have included the maximum cash sum you can take. Your 3 times pension cash sum is therefore included in this maximum cash sum figure.

8. My Trustee benefit statement shows figures at 31 March 2017. Why doesn’t my personal illustration show the same figures?

We have used the 2016 figures in your personal illustration for consistency with the previous personal illustration sent to you in January 2017. This enables you to more easily compare the Company’s Defined Benefit cash balance proposal with the original Defined Contribution proposal.

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5. What is the definition of pensionable pay for the proposed Defined Benefit cash balance scheme, and the alternative Defined Contribution scheme for Plan members?

We have kept the same definition of pensionable pay for the proposed Defined Benefit cash balance scheme as the one currently used by the Plan.

Pensionable pay is made up of basic pay plus, in some cases, pensionable allowances and pensionable bonuses. Section C members – who make up the majority of Plan members – then have £3,328 deducted (the Lower Earnings Deduction) every year. Members would continue to make a 6% contribution after 1 April 2018, as their pensionable pay would not change.

It's interesting that the Q&A on myroyalmail.com doesn't specify the definition of pensionable pay for the alternative Defined Contribution scheme. Are we to assume it's the same as the RMPP (pensionable allowances included but with the LED for section C members) or will it be the same as the RMDCP (basic pay only, no allowances included but no LED either)?

[RobertT]

The exact terms of the DC option haven’t been communicated very well by RM, in fact there’s been hardly any info on it at all.
But I assume the definition of pensionable pay for the DC alternative would be the same as for cash balance.