Royal Mail closure plan flags pulldown effect of low rates

[RobertT]

Maybe I mis-understood you or maybe you didn’t explain yourself fully on the fuel costs, but let’s not dwell on that. It’s obvious RM are benefitting by an X amount but what they are doing with that money is anyones guess. It could be increasing the profits or it could be being spent elsewhere.

Nobody has a controlling shareholding unless it’s the fund managers as a whole. They may want RM to provide a certain amount in dividend each year for example and put pressure on the business to provide that. But then again, some might want share price growth instead – the two don’t necessarily go together.

Normal shareholders have no clout whatsoever as you say, unless they come together as one, which rarely happens with any company.

The free shares were a sweetener and will not compensate anyone for the loss of the DB pension. Based on me working until 65 it could be a loss over £5,000 per year in retirement for me.

The DB scheme will be axed because of increased life expentancy and the fact that the pot of money that’s earmarked for our pensions is largely invested in gilts and bonds, which provide a lower but more stable return. And because it's an easy target.

I can only really speak personally, but I haven’t noticed a major change in my living standards over the last 10 years to be honest. But I have become far richer in terms of savings over that time as a result of my investments.

Royal Mail is profitable and those profits are now going to the shareholders and into modernising the business with new sorting machines and PDA’s, etc. You could say that morally it should be going to the workers, but that’s not how it works is it. Ultimately RM is now a business that is designed to make money, it’s not some kind of cooperative. We might not like that, but it is fact.

I can’t argue with your ideology at all and in a perfect world RM wouldn’t have been privatised in the first place. But I think Aston Villa are more likely to win the premier league than the RM be renationalised and the final salary pension be reinstated.

[nataddick]

Just to nail down the issue of perceived savings on fuel costs. The following extract is also from the latest financial statements:

'Diesel and jet fuel costs were £186 million in the year, compared with £195 million in the prior year. We buy forward a large part of our fuel requirements, therefore we are not materially exposed to short-term fluctuations in oil prices. We expect fuel costs to be around £171 million in 2015-16.'

Fuel cost savings are likely to be minimal relative to the savings from closing the current DB scheme. With the end of contracting out, the employers N.I. Contribution alone will increase the cost by another £75 million from April 2016.RM are paying £700 million p.a. into the pension scheme to keep it open to future accrual until March 2018.

The maths is simple. RM is paying 17.1% of pensionable pay before factoring in the increase in the employers N.I. contribution. If they close the existing DB to future accrual from 2018 and offer the existing DC scheme in it's place, they will cap the maximum employer contribution at 9% of pensionable pay per employee, a saving of several hundred million pounds!

The existing DC scheme provides at the standard level for a 9% p.a. employer contribution (the maximum) where an employee pays in 6% p.a. (the maximum) - not all employees will elect to pay the maximum and paying any less, will reduce RM's pension costs.

I personally wrote to the CWU and the Trustees raising objections on the last two Company Pension Proposals but I was, understandably, in a minority due to the complexity of pensions. I have no faith whatsoever that the CWU will be able to halt the inevitable change to our DB scheme but would love to be proved wrong. The pathetic distribution of postcards for members to post to the Trustees will have no impact.

On the issue of ownership, all we know is that the employees should end up with a maximum share of 11% in total, which is widely dispersed. Not all employees holding shares will be in the CWU and the voting intentions of those that are, remain unknown. We have limited knowledge of those institutional investors who have a share holding unless their total shareholding breaches prescribed percentages and there is then a legal requirement to make a disclosure.What we do know for sure, is that fund managers etc are looking for an increase in the share price and a regular dividend stream and ideally both. The RM Board will be under pressure from this group of shareholders to close the DB scheme to future accrual and, in my view, it is a done deal.

[jetblack]

From HMRC :- "Tax relief on employer contributions to a registered pension scheme is given by allowing contributions to be deducted as an expense in computing the profits of a trade, profession or investment business, and so reducing the amount of an employer’s taxable profit."

RM taxable profits for year ending 2015 were £750 million.

Low interest rates on gilts won't go on forever - long term average interest rates are around 5%, 10 times greater than the current base rate. Since 1960 average yields on 10 year gilts is around 9% - not the 1.54% currently on offer.



Of course costs will be cut by scrapping the defined benefit scheme - but is it necessary ?
RM’s share price has risen what, 38% since the IPO in 2013 ? Its profits have gone from £152 million year ending 2012, to £750 million year ending 2015 - thats what, almost 500% in 3 years ?


What more does the City want ? Internal organs on a plate ?

[nataddick]

Pension costs are just one of a number of People costs that fall under Group Operating costs. There are many other costs that reduce the Group Operating Profit, which is then subject to corporation tax. An additional N.I. Contribution of £75 million is likely to attract tax relief at an effective rate of around 18% , so will still cost an extra £61.5 million. Not insignificant !

There are complex rules that provide for a statutory override by the Government that allow for the curtailment of benefits as a result of the N.I. increase and it remains to be seen whether RM has taken advantage of these.

The Group profit before tax was £400 million (£328 million after) per the latest financial statements, so a pension contribution of the same amount, even before using the surplus at the rate of around £300 million p.a. is very material in accounting terms.

The 3 key factors that impact on the provision of DB benefits are mortality, investment returns and operating costs. Assuming the latter has been minimised the other two factors have a major impact on scheme funding. None of us know the results of the latest actuarial advice give to RM on the state of funding of the RMPP and so we cannot argue the case blind. We need the CWU to employ professionals to get at the real detail and to then provide it to Union members.

jetblack, I agree with many of the points you have raised about RM selling the workers short on the issue of pensions. I have and will continue to fight for no change but I temper this with a healthy sense of realism. Dingo's latest post only serves to confirm where the outcome of this issue is heading and it will be to the detriment of all RMPP members.