Rate rise would release Royal Mail from ‘pension jail’

[TrueBlueTerrier]

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The UK’s accelerating economic growth is good news for most of us but for Royal Mail’s new shareholders it could be a double blessing.

The third quarter economic growth of 0.8% announced today has revived speculation of whether the Bank of England will raise interest rates before 2016. This is the current date pencilled in under governor Mark Carney’s new policy of ‘forward guidance’.

However, an earlier rise in interest rates would dig Royal Mail out of a hole and avoid a near doubling in the amount it pays into its pension scheme, says Andrew Lyddon of investment group Schroders.

In a note today Lyddon, a member of Schroders’ ‘deep value’ investing team, described rising interest rates as the ‘get out of jail free card’ for Royal Mail which could enable it to maintain the high dividend that drew in so many investors to the flotation this month.

Although the government paved the way for the Royal Mail IPO in 2010 by absorbing an estimated £38 billion in pension liabilities, these related to its final salary scheme only. The company is still on the hook for the money purchase (or defined contribution) pension scheme, which it is why it is locked in dispute with trade unions over proposals to cut the bill.

Under the terms of the last triennial review by trustees in 2012, Royal Mail was meant to pay £700 million a year into the pension scheme. However, Lyddon says the government was able to ‘finesse’ matters so that the bill fell to £400 million. The next review is in March 2015 and, he says, unless there is a rise in interest rates by then it is likely that trustees will demand £700 million.

According to the prospectus issued before its share listing, this ‘would have put considerable strain on the Royal Mail and would have been a significant risk to the viability of RMG’. It would have wiped out the cashflow supporting Royal Mail’s dividend which provided a 6% yield at flotation (now fallen to 4.5% after the rise in the share price).

‘Investors looking to generate an income from Royal Mail are largely, we suspect, unaware of the bet on higher rates they are effectively making,’ Lyddon concludes.

So far this is not disturbing shareholders. Royal Mail (RMG.L + ) shares today gained over 5p or 1% to 534.5p – more than £2 per share up on their flotation price two weeks ago – as stock broker Panmure Gordon reiterated its ‘buy’ rating with a 570p 12-month price target.

The rapid gain in Royal Mail shares has enraged critics who have accused the government of selling a state asset too cheaply. This week it emerged that bankers at JP Morgan put a £10 billion valuation on Royal Mail as they pitched unsuccessfully for the job of advising on the IPO. The government subsequently decided to float Royal Mail at £3 billion. The Children’s Investment Fund, a hedge fund, has also snapped up a 5% stake in the group.

Meanwhile the FTSE 100 drifted three points higher at 6,716, just below the 13-year peak it reached in May.

[stephen500]

"Under the terms of the last triennial review by trustees in 2012, Royal Mail was meant to pay £700 million a year into the pension scheme. However, Lyddon says the government was able to ‘finesse’ matters so that the bill fell to £400 million. The next review is in March 2015 and, he says, unless there is a rise in interest rates by then it is likely that trustees will demand £700 million." No wonder Rm started a consultation period. According to this piece the pension scheme as it was could have derided the whole IPO. So the question is, have the changes, stopped the scheme from going under in the future. Well no, it has not addressed any of the issues. It has kicked all of them into the long grass with an economic sleight of hand, that appears to have been instigated (as I read this article) by the government. That poker hand was the £2bn of our own pension money, That prevented RM having to find £700m a year and the IPO going down the tube. So at the end of the day. Us postal workers and prospective pensioners have saved the day with our own cash. As for the future. Well unless interest rates rise and quantitative easing ceases, I just can't see RM dipping into shareholder dividends to increase pension contributions past the next review. Politically and economically they pulled a blinder. They placated us, ie we took no industrial action over pensions....note how generous RM were in not increasing our pension age, contributions or closing the scheme. This in turn resulted in keeping us in work and stopping the out lflow of funds to protect and introduce the shareholders 6% precious dividend. So next time, if it comes to a choice between a dividend and your pension, which side will the double headed coin fall? One can only guess.
By then I will only have a two years to go. But for the young postie, don't rely on the RM pension scheme to see you through to retirement.

[stephen500]

Dear Gary Redmond ,
Chief Executive Office
Royal Mail HQ
100 Victoria Embankment
LONDON
EC4Y 0HQ

I have read an article today that has filled me with despair as to the apparent lengths both the government and Royal Mail were and did go to to protect the IPO.
"http://www.citywire.co.uk/wealth-manage ... -news-list";
This article suggests that the whole of the IPO was at risk because of the projected £700m outflow to the pension scheme after the latest review.
"Under the terms of the last triennial review by trustees in 2012, Royal Mail was meant to pay £700 million a year into the pension scheme. However, Lyddon says the government was able to ‘finesse’ matters so that the bill fell to £400 million. The next review is in March 2015 and, he says, unless there is a rise in interest rates by then it is likely that trustees will demand £700 million." No wonder Rm started a consultation period. According to this piece the pension scheme as it was could have derided the whole IPO. So the question is, have the changes, stopped the scheme from going under in the future. Well no, it has not addressed any of the issues. It has kicked all of them into the long grass with an economic sleight of hand, that appears to have been instigated (as I read this article) by the government. That poker hand was the £2bn of our own pension money, That prevented RM having to find £700m a year and the IPO going down the tube. So at the end of the day. Us postal workers and prospective pensioners have saved the day with our own cash. As for the future. Well unless interest rates rise and quantitative easing ceases, I just can't see RM dipping into shareholder dividends to increase pension contributions past the next review. Politically and economically Rm and the government pulled a blinder. They placated us, ie we took no industrial action over pensions....note how generous RM were in not increasing our pension age, contributions or closing the scheme, this appears motivated by the need to keep us sweet and quiet. Resulting in keeping us in work and stopping the out flow of funds to protect the shareholders 6% precious dividend. The very carrot that made the whole IPO so successful for the City, but not so succesful for the government. Unless you conclude that the City is the government and vice versa.
So next time, at the next review, if it comes to a choice between a dividend and our pension, which side will the double headed coin fall? One can only guess.

[vmaxv4]

"Under the terms of the last triennial review by trustees in 2012, Royal Mail was meant to pay £700 million a year into the pension scheme. However, Lyddon says the government was able to ‘finesse’ matters so that the bill fell to £400 million. The next review is in March 2015 and, he says, unless there is a rise in interest rates by then it is likely that trustees will demand £700 million." No wonder Rm started a consultation period. According to this piece the pension scheme as it was could have derided the whole IPO. So the question is, have the changes, stopped the scheme from going under in the future. Well no, it has not addressed any of the issues. It has kicked all of them into the long grass with an economic sleight of hand, that appears to have been instigated (as I read this article) by the government. That poker hand was the £2bn of our own pension money, That prevented RM having to find £700m a year and the IPO going down the tube. So at the end of the day. Us postal workers and prospective pensioners have saved the day with our own cash. As for the future. Well unless interest rates rise and quantitative easing ceases, I just can't see RM dipping into shareholder dividends to increase pension contributions past the next review. Politically and economically they pulled a blinder. They placated us, ie we took no industrial action over pensions....note how generous RM were in not increasing our pension age, contributions or closing the scheme. This in turn resulted in keeping us in work and stopping the out lflow of funds to protect and introduce the shareholders 6% precious dividend. So next time, if it comes to a choice between a dividend and your pension, which side will the double headed coin fall? One can only guess.
By then I will only have a two years to go. But for the young postie, don't rely on the RM pension scheme to see you through to retirement.

Well said