RM CDC scheme to increase annual payroll costs by GBP30 million

[RobertT]

https://www.pensions-expert.com/DB-Deri ... mn?ct=true

Royal Mail’s new collective defined contribution scheme is anticipated to increase its annual cash payroll costs by around £30mn, its half-year accounts have disclosed.

In August, providers in Great Britain became able to apply to launch CDC schemes. Under these schemes, employers and employees pay a fixed rate of contributions, collected in a manner similar to defined contribution schemes.

Benefits are paid with a target in mind, similar to defined benefit schemes, but with the prospect of variable increases — and the possibility of decreases.

Royal Mail appears set to become the first CDC scheme next year, having submitted its application for authorisation. The authorisation process is capped at six months.

‘Payroll costs have increased’

The Royal Mail Collective Pension Plan’s design was agreed in 2018, with a fixed employer contribution rate of 13.6 per cent of pensionable pay.

Standard employee contributions will sit at 6 per cent. The scheme will have an additional 1 per cent rate for employees who choose to save for an additional lump sum payment.

“The expected cost of the RMCPP based on pensionable payroll at that time was approximately the same as the cost of the existing schemes, at around £400mn per year,” Royal Mail said.

“The main reason for the increase is that, although the estimated cost of the RMCPP as a percentage of pensionable pay will remain broadly the same as in 2018, payroll costs have increased.”

It added that since the DB Royal Mail Pension Plan scheme closed to accrual in 2018, the cost of the existing plans had been reducing over time compared with overall pay costs, as members of the Defined Benefit Cash Balance Scheme leave and are placed by new employees who join the Royal Mail Defined Contribution Plan at a lower employer contribution rate.

The RMCPP will replace the DBCBS and the RMDCP.

RMPP accounting surplus dives

The group recorded an IAS19 deficit of £188mn on its balance sheet, down from £390mn on March 27.

It emphasised that the scheme is not in funding deficit, and explained that the drop in the deficit was “largely due to a considerable increase in the ‘real’ discount rate… as a result of a large increase in corporate bond yields at the balance sheet date, versus the year-end which has had the effect of significantly reducing liabilities”.

The pre-withholding tax accounting surplus of the RMPP’s legacy section, meanwhile, plummeted to £2.9tn as of September 25, from £4.18tn as of March 27.

“This was the result of a significant increase in index-linked gilt yields, against which the RMPP liabilities are hedged, driving a large proportion of the £3,805mn reduction in the value of this section’s assets,” Royal Mail said.

“This movement was, however, to a large degree offset by a significant increase in the ‘real’ discount rate driving a large proportion of an overall £2,520mn reduction to the value of the RMPP’s calculated liabilities versus the year-end.”

Royal Mail added that while the surplus had fallen in absolute terms, its funding level on an accounting basis had risen since the year-end owing to the sharp drop in liabilities.

[renrag40]

Given RMs clear intention is to shred the T & Cs of its employees during the present industrial dispute. I wouldn't be surprised if this scheme was next in the cross hairs for the Simon Thompson treatment. Put on the back burner to give them time to back out of it all together and then say that 13.6% employer contribution level to the interim cash balance and the proposed CDC schemes was far too high and unaffordable and that they would be cutting the employer contributions in half. Thereby making a saving of £200,000,000 per year.
RM senior management has proved (if anyone was in any doubt beforehand) in this dispute that they having nothing but contempt for their employees so why would they want to properly fund a pension to the tune of 13.6% ?

[hans solo]

Oh it’s coming

[RobertT]

Oh it’s coming

I believe it is!

RM have invested a lot of time, money and energy into CDC and I don't think they're going to shelve it in the near future.

It would be a prime money saving target, but it would make RM look incredibly stupid to a lot of high ranking people.

None of the 4.5 years of regulation and legislation would have happened unless the RM and CWU hadn't agreed to go the CDC route during the 4 Pillars negotiations. They're just not going to say, after all that time talking to government and the pensions industry, 'sorry we don't want to do it anymore'.

As has been said on this and another recent thread, a trustee board has already been set up and the application has been submitted to the Pensions Regulator, and personally I don't really see any immediate reason why it won't happen.

In my opinion, what's more worthy of discussion is how long it will be in operation for!
I predict 5-10 years until they decide it's either too expensive or not doing what it's supposed to do.

[renrag40]

I don't think they care how stupid they look....... all they care about is the money....... they have already stated in the negotiations that in their opinion we are 40% overpaid....... so why would they continue to contribute 13.6% to our pensions when the minimum legal requirement is 3%?
That would be a saving of £312,000,000 per year to RM........ suddenly they are profitable again......... big bonuses for Thompson et al ........ and all they have had to do to get these bonuses is f**k over their employees pensions. A nice easy fix for them.
To believe that RM will continue with its present funding level is to believe that the board of RM care about their employees ........ the evidence from this dispute is that they have nothing but contempt for their employees.

[renrag40]

Why would they want to spend £1.5B over 5 years or £3.1B over 10 years when they don't have to on pensions?
That could all be funnelled straight to the profits line of the annual accounts....... and a fair chunk of it via dividends into Vesas hands.

[RobertT]

The costs to RM of providing the current RMPP and RMDCP are broadly similar to the proposed costs of CDC.

So why haven't they already cut their contributions into those schemes?

[hans solo]

Why would they want to spend £1.5B over 5 years or £3.1B over 10 years when they don't have to on pensions?
That could all be funnelled straight to the profits line of the annual accounts....... and a fair chunk of it via dividends into Vesas hands.

Correct they will be after the assets
Especially if controlled from a foreign country

[renrag40]

In all honesty I believe the last thing that the present senior management of RM will turn to as a cost cutting measure is the employer pension contributions. However, I also believe they will cut them. Not to the minimum level but not far short of it. Say to 5 or 6%. It will almost certainly be in a time scale of less than 5 years.
It will be too tempting for the employer..... too low a hanging fruit....... especially if RM is taken over by a foreign investment fund like Vesa.

[NWpostie]

The senior management will have to be careful not to cut the pension scheme in order to increase short term profit otherwise if there is problems further down the line, they will have to answer for it in a future public enquiry which may carry the potential of criminal convictions for financial fraud and mismanagement.

[NorthernBoy]

The senior management will have to be careful not to cut the pension scheme in order to increase short term profit otherwise if there is problems further down the line, they will have to answer for it in a future public enquiry which may carry the potential of criminal convictions for financial fraud and mismanagement.

If any cut is made to pension contributions and is within the existing law/process, then I don’t see any fraud/criminal charges in the future. Unfortunately it’s a race to the bottom at the moment.

[RobertT]

The senior management will have to be careful not to cut the pension scheme in order to increase short term profit otherwise if there is problems further down the line, they will have to answer for it in a future public enquiry which may carry the potential of criminal convictions for financial fraud and mismanagement.

Ultimately there's nothing to stop any employer from reducing their pension contributions, or making other changes such as increasing the NRA, etc.

All they have to do is consult for a least 60 days. We've seen it at RM a few times over the last 15 years!

[Trumanity]

Nest

[RobertT]

Nest

Worse case scenario is that we all get made self employed, RM wouldn't have to offer us a pension at all then.

It's worth noting that amongst the various plans RM have of later start times, reduced VR rates, annualised hours, etc, citing their lack of money. As far as I'm aware, there has never been any mention of reducing pension contributions, or altering their pension strategy.

I suspect Simon Thompson's brief is just the operational side of things, and the pension/benefits side is a different department. Although as it obviously all comes under the same umbrella, it may only be a matter of time before they turn their attention to pensions?

[Woody Guthrie]

I would imagine some degree of separation from the previous decision making would be necessary before RM could walk away from CDC.

Something like a takeover perhaps and a complete change of board members. Maybe even a change of name.

Is that scenario likely?

I don't think to be fair there's much appetite for CDC in the pension market as such but I do think the government is keen to see it happening because they can probably see the inevitable flaw in the DC market where people cash out go a bit spending nuts and end up relying on the state/pension credit in their old age.

Government's don't like that..