The impact of VRs on the viability of the Pension Scheme

[Budfrog]

On 1 April 2012 the Government transferred Royal Mail’s historic liabilities of around £40 billion from Royal Mail’s pension scheme to a new public sector scheme (the Royal Mail Statutory Pension Scheme, RMSPS) to be administered by the government. However as we all know the Trustee of the RMPP are responsible for pension benefits earned after 31 March 2012.

With the company shrinking in terms of paid employees (staff who contribute to the pension scheme), and the number of people drawing a pension increasing (by taking VR), what impact will this have on the viability of the Pension Scheme (and of the business as a whole)?

Only last year the FT published the following article:

Last updated: May 28, 2013 11:42 am
Royal Mail runs risk of fresh pension deficit

Royal Mail, the UK postal service operator, has been criticised for running the risk of building up a fresh pension deficit after its previous black hole was “magicked away” by the government.
Last year the UK government relieved Royal Mail of £38bn of pension liabilities and a £10bn deficit in preparation for its privatisation, scheduled to occur within the next 12 months.

However, the postal operator will still start life as a private company with pension liabilities of £2.5bn, similar to its mooted market capitalisation of £2bn- £3bn. With 112,000 active scheme members, these liabilities rose by £434m in the past year.

Royal Mail’s preliminary results, released last week, show the scheme has an accounting surplus of £825m. This has lead John Ralfe, an independent pension consultant, to argue that it should invest purely in assets such as index-linked gilts and long-dated corporate bonds, which should move in line with its liabilities.

Royal Mail Pensions Trustees Limited declined to reveal its asset allocation, but told FTfm: “Since the pension transfer, we are following a more diversified investment strategy than we have in the past.”
As a result, Mr Ralfe criticised Royal Mail for not “battening down the hatches”.

“They don’t seem to have learnt their lesson,” he said.

[RobertT]

In my opinion the RM Pension Plan will be closed completely in the next few years and be replaced by a defined contribution version. With the costs involved in providing a defined benefit pension, the loss of business and so revenue and an aging population it is bound to happen sooner rather than later. Just be thankful that most of your pension is now underwritten by the government.

And if you haven’t already started to put extra money aside for your retirement I would start asap, because the pension you get from any new scheme will be substantially inferior.

[nataddick]

I have said on here several times that, in my view, the Career Average Pension Scheme will cease from the date of the next review which concludes on 31 March 2018.

Royal Mail's employer's contribution was 17.1% of pensionable pay according to the latest set of Financial Statements 2013/4 - this is before the company's N.I. costs are due to rise by an estimated £75 million a year from 2016, as a result of the end of contracting out.

By closing the current scheme and transferring all existing members to a defined contribution version (similar or the same as that for new entrants) the company's pension contributions will more than half and their future pension liability will be able to determined very accurately as it will simply be X % of pensionable pay. Typically, a employee will pay in a maximum of 6% of pensionable pay and an employer will pay in 9%, with a sliding scale in operation at various contribution levels. Most members would probably carry on paying in at the same rate of 6% but this will not compulsory, some may elect to pay in just 3%. But assuming all members paid in 6% and RM set it's own contribution rate at 9% from March 2018 it would cut it's pension costs at a stroke. This is inevitable now we are have been privatised. Most FTSE 100 size companies have already tackled the issue of having 'open-ended' pension liabilities and the fact that we have 3 more years should be seen as a bonus when judged against what other major companies have already done.

[Budfrog]

I have said on here several times that, in my view, the Career Average Pension Scheme will cease from the date of the next review which concludes on 31 March 2018.

Royal Mail's employer's contribution was 17.1% of pensionable pay according to the latest set of Financial Statements 2013/4 - this is before the company's N.I. costs are due to rise by an estimated £75 million a year from 2016, as a result of the end of contracting out.

By closing the current scheme and transferring all existing members to a defined contribution version (similar or the same as that for new entrants) the company's pension contributions will more than half and their future pension liability will be able to determined very accurately as it will simply be X % of pensionable pay. Typically, a employee will pay in a maximum of 6% of pensionable pay and an employer will pay in 9%, with a sliding scale in operation at various contribution levels. Most members would probably carry on paying in at the same rate of 6% but this will not compulsory, some may elect to pay in just 3%. But assuming all members paid in 6% and RM set it's own contribution rate at 9% from March 2018 it would cut it's pension costs at a stroke. This is inevitable now we are have been privatised. Most FTSE 100 size companies have already tackled the issue of having 'open-ended' pension liabilities and the fact that we have 3 more years should be seen as a bonus when judged against what other major companies have already done.

Thanks for this post nataddick ... what affect (I know it will be detrimental) in terms of actual Pension will this have for people who have only just joined RM ? The rise in the age of state pension for men and women is already having a devastating affect (particularly for single women) on those who thought they had made plans for their retirement only for the rug to be pulled from under them and this will be yet another hammer blow. Cameron 'says' he wants to reward people who contribute and work hard but a cynic would say that he is only interested in policies that win votes (like most politicians) .... are we seriously saying that women could still be out on walks at 66 or 67 years of age ??? and what about freeing up jobs for the young who are struggling to find employment ???

[RobertT]

... what affect (I know it will be detrimental) in terms of actual Pension will this have for people who have only just joined RM ?

Their contributions will be invested into the stock market and the eventual pot will be used to provide either an annuity or under the new pension rules from April, an amount that they either withdraw all in one go or drawdown over a period of time. Annuity rates are very poor, so somebody wanting a £10,000 per year pension at 60 that increases with RPI each year with no widows pension would need a pot of around £375,000, based on these figures: http://www.ft.com/personal-finance/annuity-table" onclick="window.open(this.href);return false;

Most working people are unlikely to get anywhere near the amount of money needed to provide a decent pension and so will effectively be forced to carry on working until at least their state pension age and possibly afterwards too.

The rise in the age of state pension for men and women is already having a devastating affect (particularly for single women) on those who thought they had made plans for their retirement only for the rug to be pulled from under them and this will be yet another hammer blow. Cameron 'says' he wants to reward people who contribute and work hard but a cynic would say that he is only interested in policies that win votes (like most politicians) .... are we seriously saying that women could still be out on walks at 66 or 67 years of age ??? and what about freeing up jobs for the young who are struggling to find employment ???

I can appreciate that some women are affected by the rise in SPA from 65 to 66/67, but the increase from 60 to 65 was in the pensions act of 1995, so many have had 20 years to get used to that idea.
The rise in SPA is a matter of finances. The government wants people to pay tax for longer and pay out the state pension for less time because it helps to balance their books and cut the deficit. Unfortunately the burden will come down on the working man and woman.

[Budfrog]

Thanks for the feedback RobertT .... it is looking like retirement could be a real struggle for many people, even for those who have earned reasonably good wages throughout their working lives, unless they can build up savings (not always that easy when you are bringing up a family and paying either a mortgage or rent).

[RobertT]

Yes it is increasingly the case that the individual has to save hard for probably a large chunk of their working lives to provide a decent pension for themselves. That is never going to be easy with, as you say, kids and mortgages etc.

The days of the ‘gold plated’ pension are gone I’m afraid and personally I consider myself lucky to be in a defined benefits scheme that I was automatically joined up to back in the 80’s when I started working for RM. The benefits our pension provides won’t necessarily provide a good retirement on their own but they will give a good solid base to start from and at a relatively low cost.

But the young workers of today who are just starting out in life, will still have it a lot worse. With the increase in part time work and zero hour contracts many will have to wait until 70 or older before they can retire, and some may never retire at all. Not a scenario that would appeal to me much.

[fishtank]

For an increasing number of people the only viable option will be prison, three squares a day, an xbox, a 50 inch flat screen TV and at that advanced an age you're unlikely to attract much attention in the showers.
Rob a bank at 65 and it's basically a win/win scenario.

[toomuchcoke]

By closing the current scheme and transferring all existing members to a defined contribution version (similar or the same as that for new entrants) the company's pension contributions will more than half and their future pension liability will be able to determined very accurately as it will simply be X % of pensionable pay. Typically, a employee will pay in a maximum of 6% of pensionable pay and an employer will pay in 9%, with a sliding scale in operation at various contribution levels. Most members would probably carry on paying in at the same rate of 6% but this will not compulsory, some may elect to pay in just 3%. But assuming all members paid in 6% and RM set it's own contribution rate at 9% from March 2018 it would cut it's pension costs at a stroke. This is inevitable now we are have been privatised. Most FTSE 100 size companies have already tackled the issue of having 'open-ended' pension liabilities and the fact that we have 3 more years should be seen as a bonus when judged against what other major companies have already done.

Closing the defined-benefit scheme and moving everyone into the existing defined-contribution scheme would (ultimately) have administrative cost savings due to only having to deal with one scheme. The Royal Mail could also sweeten the pot slightly by making another change similar to that made last year to the defined-contribution scheme, i.e. adding an extra 1% to the Royal Mail's contribution levels so the top level of contribution would become 6%+10% rather than 6%+9%.

The other cost saving options, if keeping the defined-benefit scheme open is considered desirable would seem be :-

• Increasing the retirement age.
• Increasing the employee's contribution.
• Decreasing the benefits paid - e.g. switching to a 1/80ths rather than 1/60th accrual.

Can't see any of those being wildly popular, especially the first one! And they might only ultimately enable the scheme(s) to carry on until the following review?

[heapsy]

By closing the current scheme and transferring all existing members to a defined contribution version (similar or the same as that for new entrants) the company's pension contributions will more than half and their future pension liability will be able to determined very accurately as it will simply be X % of pensionable pay. Typically, a employee will pay in a maximum of 6% of pensionable pay and an employer will pay in 9%, with a sliding scale in operation at various contribution levels. Most members would probably carry on paying in at the same rate of 6% but this will not compulsory, some may elect to pay in just 3%. But assuming all members paid in 6% and RM set it's own contribution rate at 9% from March 2018 it would cut it's pension costs at a stroke. This is inevitable now we are have been privatised. Most FTSE 100 size companies have already tackled the issue of having 'open-ended' pension liabilities and the fact that we have 3 more years should be seen as a bonus when judged against what other major companies have already done.

Closing the defined-benefit scheme and moving everyone into the existing defined-contribution scheme would (ultimately) have administrative cost savings due to only having to deal with one scheme. The Royal Mail could also sweeten the pot slightly by making another change similar to that made last year to the defined-contribution scheme, i.e. adding an extra 1% to the Royal Mail's contribution levels so the top level of contribution would become 6%+10% rather than 6%+9%.

The other cost saving options, if keeping the defined-benefit scheme open is considered desirable would seem be :-

• Increasing the retirement age.
• Increasing the employee's contribution.
• Decreasing the benefits paid - e.g. switching to a 1/80ths rather than 1/60th accrual.

Can't see any of those being wildly popular, especially the first one! And they might only ultimately enable the scheme(s) to carry on until the following review?

My guess, for what it is worth would be closure of the current scheme, with everyone enrolled into the Zurich Assurance scheme or something similar. Probably with a late retirement age too, around 67.

[RobertT]

The other cost saving options, if keeping the defined-benefit scheme open is considered desirable would seem be :-
Increasing the retirement age.

That was considered during the last pension changes and was dismissed, although if it did increase it would only apply to accruals after any implementation date.

Increasing the employee's contribution.

Our current 6% contribution or 4.8% once you factor in tax relief is quite low compared to other similar schemes. An increase wouldn’t be popular although personally I would choose an increase over a change to a DC scheme.

Decreasing the benefits paid - e.g. switching to a 1/80ths rather than 1/60th accrual.

Section A/B members already build up their CARE pension in 1/80ths as they did with their final salary pension, section C’ers are 1/60ths. There are other differences between the two schemes so more changes with accrual rates could be tricky to implement.

One thing that could save the current pension, at least for a little while longer is inflation. It is currently very low and while it may mean our already accrued pension won’t be going up by as much, it may also mean the schemes liabilities won’t be going up as much as expected either. So it’s possible that could prolong the scheme in its current form.

[nataddick]

I do not believe that the viability of the Pension Scheme is materially affected by VR's.

Redundancy costs are reported as Transformation Costs in RM's Annual Report and Accounts.These costs although treated as exceptional items, are a business expense and thus reduce the company's profits and Corporation Tax. Any increased pension costs would be treated the same way, although I am not sure of the precise accounting treatment of each individual element. The short term impact is on profits but the long term gain is also on profits.

Do not forget that taking staff out of the business results in a considerable saving for the company which is why they allow it - they do not offer redundancy as a 'benefit' for staff. They may pay out redundancy pay & enhanced pension benefits, but the cost is calculated so as to provide the necessary savings, when compared to the cost of the job that is being lost.

The pension as we know it will go by March 2018, in my view. We can all protest as much as we like and I personally spent many hours challenging the Company's last Proposal. Having analysed the responses to the proposal which were very few, it is clear that very few individuals protested themselves and simply relied on submitting a pre-printed CWU card.

I understand this, as the world of pensions is a very complex subject. It is also a topic that an employer can exploit with minimal resistance. RM know that offering an inferior Defined Contribution scheme on reasonably fair terms will result in a bit of controversy at the time of any new proposal but they will simply point to what other FTSE 100 companies have done by way of a defence. The CWU will protest, win a few concessions, and tell us that they got a good deal, relative to what other employees are getting.

It is a legal requirement that RM consult on proposed pension changes but they know and we know they can do whatever they like and the shareholders will now back them. They will argue that a defined contribution scheme with an employer contribution in the region of 150% of the employee's contribution is still generous. Add in group life assurance cover of say 6 times pensionable pay in the event of death and they are on to a winner.

Pension costs halved - minimal resistance from workforce - shareholders happy - Job done !

[Fatboyslim]

Hate to sound worried - but, I am a little...

Keep reading reference to March 2018 in pensions threads. Whats with this date - only I will be 55 the following month.

Hmmm...

[RobertT]

Hate to sound worried - but, I am a little...

Keep reading reference to March 2018 in pensions threads. Whats with this date - only I will be 55 the following month.

Hmmm...

You may remember last year the company made some changes to the pension scheme. For example the link with salary was removed and replaced by inflation for the NRA60 element. We all got booklets about it! Without going into detail, basically they decided that the changes made would be implemented from April 2014 and no more changes would be made until the next review, which is due to be in 2018. Although there were a few conditions that would possibly mean changes before that date.

If any more changes do happen, only pension going forward will be altered and NOT pension already accrued.

[Fatboyslim]

Many thanks - i might have to start reading the booklets...