LTB: Policy Forum: The future of RM pensions

[RobertT]

I have copied this from the full LTB, available here: http://www.royalmailchat.co.uk/communit ... 15&t=73466" onclick="window.open(this.href);return false; for those interested in the pension side of things, if that's ok.


SECTION 4: PENSIONS

The Pensions Agreement in the Agenda for Growth committed both parties to “safeguard the future of the Royal Mail Pension Plan and improve the Royal Mail Defined Contribution Plan” while recognising that “the future of pensions can best be maintained through the terms of the legally binding Agreement and by RM and the CWU jointly developing future pension strategy”.

The two outstanding motions on pensions relate to:

How we raise awareness of the Defined Contribution (DC) scheme and increase take up of the higher tiers of contributions; and

Setting up a Pensions Working Group to look at the issues and provide recommendations going forward.

The first meeting of the Pensions Working Group was held on 2nd December 2015 with the initial aim of establishing a clear understanding of the current financial position both in relation to the DC and Defined Benefit (DB) schemes and to start scoping the full range of potential options going forward.

While the CWU will continue to defend the existing DB scheme (RMPP) and seek improvements to the current DC scheme (RMDCP), we clearly face some major challenges around future funding for the DB scheme. Securing a new settlement on pensions that both safeguards the DB scheme and seeks to improve the DC scheme will be difficult. The wider developments witnessed in UK pension provision in both the private and public sectors provide a generally unfavourable backdrop. Over recent years we have already seen big changes to the Royal Mail Group (RMG) pensions. At the same time we have seen the Government introduce changes to pension law and to the system of state pensions.

UK Pension Provision

The latest survey of UK pension provision by XpertHR shows the top types of pensions on offer in UK workplaces are:

group personal pension plan - offered by 46.3% of our survey respondents;
money-purchase or defined-contribution scheme - 21.2%;
final salary scheme – 19.1%;
group stakeholder pension scheme - 18.4%;
career-average scheme - 11.3%;
NEST - 9.1%; and
hybrid scheme - 1.8%.

There are a couple of important points to note from the findings. Firstly, the results reflect the move to career-average pensions in the public sector, with 11.3% of all respondents now offering one, compared with 6.6% in HYPERLINK "http://www.xperthr.co.uk/survey-analysi ... ey/153080/" the 2014 survey. Secondly, the decline in final-salary pension schemes seems to have slowed, with 19.1% of this year's survey respondents offering such a scheme, which is on a par with the 19.2% of respondents from the 2014 survey. However, it should be noted that nearly two-thirds (64.5%) of final-salary pension schemes covered by the survey are no longer open to new members.

Final-salary pension schemes continue to predominantly be the preserve of the public sector - 57.9% of respondents in the sector have such a pension, compared with just 15% of private-sector respondents. With the move to career-average pensions in the public sector, this is now the most popular type of pension, offered by 71.1% of public-sector respondents. Career-average schemes are yet to take off in the private sector, offered by just 5% of workplaces. The most common type of pension scheme in the private sector is a group personal pension, provided in just over half (51.3%) of companies.

Table 1: Employer and Employee Pension Contribution Rates, 2015

Employer Contribution Rate (median, %) Employee Contribution Rate (median, %)

Career-average scheme 15.06.5
Final-salary scheme 14.06.8
Money-purchase or defined-contribution 5.03.0
Group personal pension plan 4.03.0
Group stakeholder Pension scheme 4.01.5
NEST 1.01.0

The gap between the level of contributions into final-salary pension schemes and other forms of pension saving is shown by the findings in table 1 (above). Final-salary schemes, while noted as being expensive for employers (a median 14% employer contribution, according to the research), are often acknowledged as providing the highest level of benefit in retirement. The survey also recorded the highest level of employee contributions into these pension schemes, at 6.8%.

From DB to DC

Conventional wisdom is dictating that decent pension schemes are being replaced by more insecure market based alternatives. Analysis by JLT Employee Benefits published in January 2016 found DB provisions in the FTSE 250 companies have fallen by around 16% in the last year. Their research shows that just 49 FTSE 250 companies are now providing more than a handful of their employees with DB benefits and only 11 are providing them to a significant number of their employees.

The trend away from DB schemes was also highlighted in the latest annual survey of UK workplace pension provision by the National Association of Pension Funds (NAPF). The latest report for 2014 (based on responses from 250 NAPF fund members representing 840 pension schemes throughout the UK) found that for private and ‘other public sector’ pension schemes:

The proportion of active members in DB schemes has fallen 5% since 2013, to 16% of all scheme members. This fall in active membership has been driven by the continued closure of private sector DB schemes.

Just 14% of private and ‘other public sector’ DB schemes were still open to new members but this fell to 8% among private sector schemes.

The proportion of DB schemes open to future accruals remained unchanged from 2013 at 50% for private and ‘other public sector’ schemes (53% for private sector only).

Two thirds of respondents (67%) said their funding position had improved in the last 12 months (up from 48% in 2013) and as in previous years the most common approach to improving funding positions was through higher employer contributions (47%).

Despite no increase in the proportion of DB schemes being closed to future accruals between the 2013 and the 2014 surveys, the NAPF reports that further closures of DB schemes can be expected. Two thirds of those with schemes closed to new members but open to future accruals said they anticipate further changes to their scheme. Of those:

19% said they expected to close their current schemes to future accrual in the next 5 years and switch to either a trust-based Defined Contribution (DC) scheme (11%); contract-based DC scheme (7%) or switch to an alternative scheme such as cash balance, hybrid or career-average (1%); whilst

21% expected to retain their DB scheme but offer benefits on less favourable terms to existing members (up from 15% in the 2013 survey).
As well as the move away from DB schemes we have also witnessed recent changes to some of the key public sector pension schemes.
Public Sector Pension Scheme Changes

In 2011, the coalition Government announced plans to make public sector staff pay more and work longer for their pensions in order to save billions of pounds from its pension bill. The plans led to a nationwide strike of public sector workers at the end of November 2011.

Following further negotiations, the Government announced in December 2011 that most Trade Unions had agreed in principle to new pension schemes from 2015. PCS, the biggest civil service union, refused to sign up to the Government’s proposals.

The Government then announced the details of its proposed final Agreement on 12th March 2012. The final agreed position was that increased member contributions would be phased in over the three years from 2012. From 2015 the various pension schemes under consideration would be changed to a career average basis with their normal pension ages rising in line with the state pension age.

PCS continued to oppose the changes calling them ‘unfair’ and its members voted to reject the offer in a national consultative ballot. Nevertheless, the Government legislated in the Public Service Pensions Act 2013 for a Framework to enable changes to public service pensions in line with its objectives and the recommendations of the Independent Public Service Pensions Commission.

The Act enabled the Government to introduce new public service pension schemes that would provide pension benefits based on career average rather than final salary and individuals would have a normal pension age linked to their State Pension age (except for the schemes for the firefighters, police and armed forces, which would have a normal pension age of 60).

The Act required that, except where transitional protection has been agreed for those closest to retirement, existing schemes would close for future accrual by April 2015 (2014 for the local Government schemes in England, Wales and Northern Ireland). Key measures in the Act include:
Enable the creation of career average public service pension schemes to replace the largest existing final salary schemes;

Link Normal Pension Ages to State Pension Age to manage longevity risk (with the exception of fire service, police and the armed forces);

Introduce an employer cost cap as a way of controlling unforeseen changes in cost; and

Allow for the provision of transitional arrangements and protections where necessary.

A brief overview of pensions in the civil service and the NHS is set out below:

Civil Service Pension Scheme

The Principal Civil Service Pension Scheme has five sections: Classic, Classic Plus, Premium, Nuvos and Alpha.

The Classic, Classic Plus and Premium sections are final-salary schemes. Nuvos has been the scheme offered to new joiners since 30 July 2007 and is a "career average" scheme.

Alpha is a career average scheme that was introduced on 1 April 2015 as a consequence of the Public Service Pensions Act 2013.

PCS opposed the new scheme on the grounds of cost and increased retirement age. However, they also stated that their Hands off our Pensions campaign led to negotiations on the details of the scheme which achieved the following concessions:

Protections for members closer to pensionable age. They will stay in their current scheme until they retire.

Improving the accrual rate for the new career average scheme – the rate at which your pension builds over time.

From 2015 part-time workers will only pay pension contributions on their actual earnings - not as now, based on their full-time equivalent salary.

New ‘Fair deal’ arrangements mean that, although we will continue to fight privatisation proposals, if members’ jobs are privatised, they will stay in the civil service pension scheme while doing the same work with the new employer.

Changes to the NHS Pension Scheme in 2015

Before 2015 the NHS had one pension scheme with two sections: the 1995 section and the 2008 section. For NHS staff, these both operate as final salary schemes.

As a result of the Act, the ‘2015 NHS Pension Scheme’ was introduced. The main features of the new NHS Scheme include:

A Career Average Revalued Earnings (CARE) scheme, with benefits based on a proportion of pensionable earnings each year during your career.

A build up rate of 1/54th of each year’s pensionable earnings with no limit on the number of years that can be taken into account. This is a higher build up rate than both the 1995 and 2008 sections of the NHS Scheme.

Revaluation of active members’ benefits in line with a rate set by Treasury plus 1.5 percent per annum.

A Normal Pension Age at which benefits can be claimed without reduction for early payment linked to the same age you are entitled to claim your State Pension (or age 65 if that is later).

Pensions in payment to increase in line with a rate set by Treasury.
Royal Mail Pension Plan (RMPP)

Royal Mail employees who started working before April 2008 are members of the RMPP which provides a final salary pension on retirement. For service after April 2008 this changed to a career salary defined benefit. In line with the terms of our AFG agreement, the CWU will clearly want to do all we can to safeguard the future of the DB scheme and to work with the business to look at all future options, including benchmarking with the very best final salary schemes. While we have yet to receive any formal pension proposals from the business, they are suggesting there is a major problem over future funding of the RMPP beyond March 2018.

At the recent presentation to the National Briefing in February, Jon Millidge, Royal Mail Group HR Director, said that (without a highly unlikely turnaround in market conditions) “it will not be possible to keep the DB plan open in its current form beyond March 2018 when the surplus has expired and the cash contribution rate required from the company will be over 40%” (see table on page 29). There is, therefore, a real concern that the business will be looking to cease or change the DB scheme from March 2018. RMPP Company Contribution Rate Since 2009:
EMBED Excel.Chart.8 \s
Any proposed changes to the Royal Mail DB scheme will be considered by the CWU and the members of that scheme as an ideological attack on past promises, our members’ conditions and the future welfare of their families. Any proposals to move away from ‘defined benefit’ will be seen as a deliberate cost cutting exercise which will force our members to have an increasing reliance on inadequate state pension, health and welfare benefits.

However we also need to recognise that there are real issues around future funding and contribution rates post-March 2018 and that we will need to explore a range of possible options, establish more clearly the exact funding position going forward and consider future accrual, contribution rates and pension benefits.

Royal Mail Defined Contribution Plan (RMDCP)

In addition to the 90,000 members of the Defined Benefit scheme, there are now around 44,000 CWU members in Royal Mail’s Defined Contribution Plan which was introduced in 2008. However, the latest annual presentation by the Trustees to the CWU on the current state of the DC scheme in November 2015 highlighted some major problems around the level of contributions and likely future benefits.

At present, the DC scheme is raising concerns about the required level of contributions members need to make to provide a decent pension, the number of members paying contribution rates at the highest tier and whether the scheme in general is meeting the moral and corporate responsibility standards we expect from our mutual interest employer.

The current contribution rates into the RMDCP are set out in the table below:

TierEmployee paysRM paysTotalNursery (3-12 months)1%1%2%14%7%11%25%8%13%36%9%15%
The latest figures provided by the Trustees on the level of contributions into the scheme show that:

there are still 24% of scheme members on the nursery tier (where employee and employer pay a contribution rate of just 1% each);

just over half of scheme members (54%) are at tier 1 (employee 4%/employer 7%);

16% are at the new default tier 2 (for members joining after April 2014); and

only 8% of members are at the highest tier 3 (employee 6%/employer 9%).

We believe that the current DC arrangements and pension benefits are inadequate (particularly for members at the lower tiers) and that new arrangements are required which provide far more security and a more collective DC approach to deliver an income for all CWU members and more acceptable standards of living and dignity in retirement.

Recommendation 7: In respect of pensions we will protect the Defined Benefit Scheme and seek to extend the current guarantees beyond 2018 and seek further improvements to the design of the Defined Contribution Scheme to make it more collective and give members greater confidence about pension outcome.

[POSTMAN]

Good call Rob,cheers.

[trythat]

I've read all that and still not much clearer as to what is happening. Perhaps I can ask a couple of questions -

1. I've been with RM for 25+ years, so does this mean my pre 2008 pension may change? I'm hoping to pack work in by the end of 2017 and live off saving for 5 years until I hit 60 and draw my lump sum and pension. So if it's lightly to drop I'd like to be ahead of it.

2. If as planned I finish in 2017 and they change the scheme in 2018, will they be able to alter my sums even though I've finished?

[RobertT]

I've read all that and still not much clearer as to what is happening. Perhaps I can ask a couple of questions -

1. I've been with RM for 25+ years, so does this mean my pre 2008 pension may change? I'm hoping to pack work in by the end of 2017 and live off saving for 5 years until I hit 60 and draw my lump sum and pension. So if it's lightly to drop I'd like to be ahead of it.

Your pre 2008(final salary) pension is already ring fenced and only goes up by inflation each year. That won’t change!

2. If as planned I finish in 2017 and they change the scheme in 2018, will they be able to alter my sums even though I've finished?

Nothing will change, you will have a deferred pension which will carry on increasing by inflation until you take it.

Any new scheme after 2018 will be a separate thing in a similar way to how the NRA65(post 2010) section of your pension is separate to the NRA60(pre 2010) part.

[trythat]

Thanks Robert, that was what I thought would happen, but as we all know RM is full of BS and when it comes to solid facts they have a tendency to bend the facts and blatantly lie.