Royal Mail faces pension showdown

[TrueBlueTerrier]

http://www.iii.co.uk/articles/249172/ro ... n-showdown" onclick="window.open(this.href);return false;?

Royal Mail's (RMG) current pension scheme costs the postal giant about £400 million a year, but the charge to the profit and loss account is over £600 million. That's confusing broker UBS, which believes that in the long-run this situation is "unsustainable".

"We believe the most likely option is closure of the Defined Benefit scheme, which should result in upgrades to earnings (although cashflow will be less affected), "writes analyst Dominic Edridge. "However, the reaction of workers and the union to a closure would need to be watched, with a new labour deal required next year."

Pensions are such a big deal for the valuation of Royal Mail because of the importance of cashflow generation. The gap between pension cash costs and the accounting charge has widened from £72 million last year to an estimated £255 million in 2016. This is because a deal with pension trustees allowed a surplus to be created and the scheme to remain open until March 2018. The P&L cost assumes the scheme remains open and has risen in line with interest rates.

"The mark-to-market pension cost of c£700m pa would wipe out most of RMG's free cash flow and is unsustainable, in our view," says Edridge. Although the range of outcomes is wide, he's betting on a compromise at around current cash levels.

And Wednesday's announcement from industry regulator Ofcom that is launching a review of the regulation of Royal Mail is significant, too. The news follows the recent withdrawal by Whistl from the "direct delivery" letters market, leaving Royal Mail with no national competition.

"With UKPIL now making 6% cash EBIT margin, the market’s focus may move on from supporting and protecting Royal Mail to ensuring customers are well served and Royal Mail continues to improve productivity and therefore can protect itself going forwards," says Edridge.

The analyst upgrades his price target from 414p to 500p using his new assumption that the current cash pension cost remains into perpetuity. The figure is also based on a 5% GAAP operating profit margin, although each 1% change in margin is worth 60p per share.

Earlier this week, we reported how JP Morgan suggested buying Royal Mail shares with a 605p price target, and that superstar fund manager Neil Woodford had increased his stake by over 2 million shares to 5.2% of the company.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

[westham000]

I would vote for industrial action if Royal Mail closed their pension scheme. It is one of the few good benefits we have left. One of the main reasons I have stayed here for so many years. And I'm sure most of my colleagues would be in full agreement .

[Lounge Lizard]

I would vote for industrial action if Royal Mail closed their pension scheme. It is one of the few good benefits we have left. One of the main reasons I have stayed here for so many years. And I'm sure most of my colleagues would be in full agreement .

There's no chance of industrial action over pensions.
We've had it good in the past but no way is it going to continue.

[stodgy88]

How would this affect current Royal mail ex-employees ,who are currently receiving pensions.

[baldrick]

How would this affect current Royal mail ex-employees ,who are currently receiving pensions.

It shouldn't affect those whose pensions were transferred to the public sector pension scheme when Osborne stole the RM Pension Fund. Though they might be affected if the public sector scheme pensions are capped or frozen by this Government.

[RobertT]

How would this affect current Royal mail ex-employees ,who are currently receiving pensions.

If you’re already receiving your pension or you have left and have a deferred RM pension, nothing will change at all.

However the pensions of current employees would be deferred as if we had left and a new scheme, probably a defined contribution one, will be started to replace it.

[stodgy88]

thanks Robert.

[heapsy]

Here we go again. People should watch this very carefully. If RM do change the pension and it becomes linked to stock market performance then this will be soooo bad. Anyone pushing towards 50 or older should think about whether it is worth putting money into something they probably wont be able to access until 67 or 68 years of age and will be subject to stock market fluctuations. Greece etc. On a personal note I will be 51 in 2018 and would like to retire at 60. Think I will be dropping out of the pension and putting my money elsewhere.

[Lounge Lizard]

Here we go again. People should watch this very carefully. If RM do change the pension and it becomes linked to stock market performance then this will be soooo bad. Anyone pushing towards 50 or older should think about whether it is worth putting money into something they probably wont be able to access until 67 or 68 years of age and will be subject to stock market fluctuations. Greece etc. On a personal note I will be 51 in 2018 and would like to retire at 60. Think I will be dropping out of the pension and putting my money elsewhere.

Indeed. Under the mattress and you need not worry about the banks or stock market.

[POSTMAN]

Confused...
Didn't the government take over our pensions (pre 2008?),so that would/should be safe regardless of RM's finances?

[RobertT]

Here we go again. People should watch this very carefully. If RM do change the pension and it becomes linked to stock market performance then this will be soooo bad. Anyone pushing towards 50 or older should think about whether it is worth putting money into something they probably wont be able to access until 67 or 68 years of age and will be subject to stock market fluctuations. Greece etc. On a personal note I will be 51 in 2018 and would like to retire at 60. Think I will be dropping out of the pension and putting my money elsewhere.

If the current RMPP is closed and replaced by a defined contribution pension which it probably will be sooner or later, I see no reason why it shouldn’t have a minimum access age of 55 just like any other pension, that is the law after all. And I also see no reason why anybody would not want to pay in to it and to receive RM contributions on top.

[RobertT]

Confused...
Didn't the government take over our pensions (pre 2008?),so that would/should be safe regardless of RM's finances?

The government took over the liabilities pre 2012 and those are safe, but with RM now being privatised, there are more pressures on their finances and ultimately they’ll be looking at ways to save money. The current defined benefit pension is one thing that is bound to go in due course in my opinion. It will be replaced by one that costs RM less and ultimately will provide less pension for us, but it’s nothing that hasn’t been happening in other companies for years.

[wannabeek]

Haven't they already closed the defined benefit plan - to new entrants, anyway? Anyone who starts now, or has started in the last few years, can only access the defined contribution plan which is wholly linked to the stock market and has just a prediction of what you may get with no assurances. I thought that arrangement was part of the deal when the govt took over the pension liabilities, preparing RM for privatisation - it certainly happened at around the same time as that.

[bogstandard]

whats the difference between a defined contribution pension and a defined benefit pension

[RobertT]

Haven't they already closed the defined benefit plan - to new entrants, anyway? Anyone who starts now, or has started in the last few years, can only access the defined contribution plan which is wholly linked to the stock market and has just a prediction of what you may get with no assurances. I thought that arrangement was part of the deal when the govt took over the pension liabilities, preparing RM for privatisation - it certainly happened at around the same time as that.

Yes, they closed the defined benefit plan to new entrants in 2008 when the final salary scheme was replaced with the career average plan for existing employees. At the same time they started the defined contribution plan for new starters.

The government took over the existing liabilities in 2012 as part of the privatisation deal, RM still have to pay for pensions after that date.