Royal Mail posts pensions surplus as it lobbies for CDC legislation

[TrueBlueTerrier]

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The Royal Mail DB pension schemes posted an annual surplus of £59m as of March 2019 as the firm continues to lobby the government for collective defined contribution (CDC) legislation.

It’s two main schemes, the Royal Mail Pension Plan (RMPP) and the Royal Mail Senior Executives Pension Plan (RMSEPP), had a combined post-tax surplus of £59m, down from the £143m surplus in March 2018.

The Royal Mail’s full year results report also revealed that the schemes had combined assets of £10,877m, a £416m increase compared to last year, although its liabilities also rose, by £500m to £10,818m.

The RMPP closed to future accrual in March 2018 and its members were transferred to either the Defined Benefit Cash Balance Scheme (DBCBS) or its defined contribution counterpart.

A deficit of £72m is shown in the DBCBS balance sheet, although the company days that it “is not in funding deficit and it is not anticipated that deficit payments will be required”.

In March 2019, the government concluded its consultation into CDC pension schemes and confirmed that primary legislation will be brought forwards to introduce CDC pensions “as soon as parliamentary time allows”.

The Royal Mail and the Communication Workers Union are lobbying the government to “make the necessary legislative and regulatory changes to enable the introduction of a CDC pension scheme”.

The firm added: “This is an important step towards allowing the introduction of a CDC scheme for our employees as soon as possible.”

In September 2018, trustees of the RMSEPP purchased a further buy-in insurance policy for all remaining pensioners and deferred members. The buy-in means that all liabilities of the scheme are covered by insurance policies.

The total value of the buy-in annuity policies in place is £335m (March 2018: £148m) and is included as a pension asset and a pension liability at 31 March 2019.

The company expects to contribute around £400m into its UK pension schemes in 2019/20.

Royal Mail Group chief executive officer, Rico Back, said: "Our ambition is to build a parcels-led, more balanced and more diversified international business, delivering adjusted group operating profit margin of over four per cent in 2021/22, increasing to over five per cent in 2023/24.

“In 2018-19, after a challenging year, we delivered productivity improvements and cost avoidance in line with our revised expectations.

"The investment in the UK, and expected lower cash flow in the early years, means we are rebasing the dividend and changing our dividend policy.

“This is not a decision we have taken lightly as we know how important the dividend is to our shareholders. We have sought to find an appropriate balance between sustainable shareholder returns and investing in the future.”

[arnold cheshire]

How does the CDC work?

[RobertT]

How does the CDC work?

You've asked that before!
It's been answered before!
You can read up on it here.

[arnold cheshire]

How does the CDC work?

You've asked that before!
It's been answered before!
You can read up on it here.

Thanks Robert T full timers go part timers come in and leave I'm confused? I pay in more they pay less most baffled

[arnold cheshire]

Shows how s**t it is

[RobertT]

Thanks Robert T full timers go part timers come in and leave I'm confused? I pay in more they pay less most baffled

I've tried to put it as simply as possible:

Everyone will be building up a pension worth 1/80th of their pensionable pay each year. So based on current basic pay, a full timer would accrue a pension of £287.02, and for someone on 25 hours per week it would be £188.83.

The aim is what we've accrued will increase each year by CPI inflation + 1%, so our pensions keep up with the cost of living. But whether that happens will depend on how well the investments perform. I think the average growth rate over the last 20 years is something like 5% above inflation, so it's not a particularly high target!
In practice there will be an element of smoothing, where by returns during the good years are held back to pay for the bad years.

Then there's life expectancy to factor in. I'm not 100% sure of the exact figures without looking, but lets say on average it's 15 years after the NRA of 67.
If so there would need to be £43,053 in the pot to fund a full timers pension with 10 years in CDC(based on current pay & no investment ups or downs).
Multiply that by the number of members and factor in that some will be part time and building up less, and you'll get how much needs to be in the overall pot so it's capable of paying everyone's pension.

The fact that some posties are full time and some are part time is irrelevant, because everyone will have their own proportional slice of the cake based on how much they contribute and for how long.

There will be an 'audit' each year to determine whether things are on track, where they'll factor in investment returns and any changes in life expectancy, etc. If everything's ok, our pensions will increase. If not, they could either stay the same or go down.
But the whole point is that they''ll be enough money in the pot to pay for everyone's pension, however much it may be, and even if the scheme closes!

[arnold cheshire]

Thanks Robert T full timers go part timers come in and leave I'm confused? I pay in more they pay less most baffled

I've tried to put it as simply as possible:

Everyone will be building up a pension worth 1/80th of their pensionable pay each year. So based on current basic pay, a full timer would accrue a pension of £287.02, and for someone on 25 hours per week it would be £188.83.

The aim is what we've accrued will increase each year by CPI inflation + 1%, so our pensions keep up with the cost of living. But whether that happens will depend on how well the investments perform. I think the average growth rate over the last 20 years is something like 5% above inflation, so it's not a particularly high target!
In practice there will be an element of smoothing, where by returns during the good years are held back to pay for the bad years.

Then there's life expectancy to factor in. I'm not 100% sure of the exact figures without looking, but lets say on average it's 15 years after the NRA of 67.
If so there would need to be £43,053 in the pot to fund a full timers pension with 10 years in CDC(based on current pay & no investment ups or downs).
Multiply that by the number of members and factor in that some will be part time and building up less, and you'll get how much needs to be in the overall pot so it's capable of paying everyone's pension.

The fact that some posties are full time and some are part time is irrelevant, because everyone will have their own proportional slice of the cake based on how much they contribute and for how long.

There will be an 'audit' each year to determine whether things are on track, where they'll factor in investment returns and any changes in life expectancy, etc. If everything's ok, our pensions will increase. If not, they could either stay the same or go down.
But the whole point is that they''ll be enough money in the pot to pay for everyone's pension, however much it may be, and even if the scheme closes!

Thanks Robert T that makes sense

[Celgar]

Highly misleading title to the article as the surplus has reduced by more than fifty percent. I guess that is something to do with all the pension contributions still all being diverted to the lump sum rather than the actual pension scheme?

[RobertT]

Highly misleading title to the article as the surplus has reduced by more than fifty percent. I guess that is something to do with all the pension contributions still all being diverted to the lump sum rather than the actual pension scheme?

Not really!

As the article says, the RMPP assets increased in value by £416 Million, but its liabilities also increased by £500 Million, giving you that £84 million reduction in the surplus - about 59%.

The money within the RMPP and the RMSEPP is now basically just invested to provide the benefits that have already been accrued, so the returns need to at least keep pace with inflation to keep things on an even keel.

A surplus of £59 Million might sound a lot, but when you've got a scheme the size of the RMPP, it can be eaten into quite quickly!

The majority of RMPP employee members are currently building up a lump sum via the DBCBS to take with their pension, which means they won't be giving up as much pension to get that lump sum and they'll get a higher index linked income for the rest of their life too. And that in turn has the effect of increasing the already accrued liabilities of the scheme.

And the DBCBS hasn't exactly done well in it's first year either!

I would imagine RM will want the CDC scheme to start asap!

[Hawkey99]

Hi Robert,

I know the stock markets are pants but have we had any actual results of how the DBCBS did in the first year?

Thanks

[RobertT]

The above article says the DBCBS is £72 Million in deficit!

The company results go into a bit more detail. Those can be downloaded here.

[Celgar]

Hi Robert,

I know the stock markets are pants but have we had any actual results of how the DBCBS did in the first year?

Thanks

If capable candidates are employed by RM to do the investment side of the pension scheme it isn't actually that difficult to produce a good return on investments. I expect they have continued to be overly cautious with the funds.

[RobertT]

If capable candidates are employed by RM to do the investment side of the pension scheme it isn't actually that difficult to produce a good return on investments. I expect they have continued to be overly cautious with the funds.

You'd be surprised how difficult it actually is, because unless you have the power to see into the future, nobody really knows what's going to happen!

The DBCBS is largely invested in bonds rather than shares, as far as I know. Which considering the nature of the product was probably always going to be the case.