Big cuts in store for Royal Mail and Post Office workers' pensions

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Nearly 100,000 workers at the Royal Mail and the Post Office are likely to be the victims of turmoil in markets as the companies plan big cuts to their “simply unaffordable” pension schemes.

One manager in his 40s at the Post Office was told that his projected pension at retirement will collapse from £38,000 a year to just £18,000.

Currently, Royal Mail pays around £400m a year into its “defined benefit” scheme, which guarantees a pension based on a postal worker’s average salary over his or her lifetime, rather than what happens on the stock market.

But the company said financial market conditions had deteriorated so much that the cost of keeping the plan fully open would balloon to £900m over the next few years. Although the cuts were first mooted just before the EU referendum, historic lows in bond markets since the vote have made the pensions even less affordable to companies.

A Post Office spokesman said the changes to the pension scheme were announced in February.

A ballot among Communication Workers Union (CWU) members of the 3,500-strong Crown Post Offices pension scheme is expected to agree to strike action when the result emerges next week. Unite is also planning a ballot starting on 15 August of its members in the Post Office.

Royal Mail bosses are now braced for a similar backlash over its much larger pension scheme, which has about 90,000 workers affected by the cuts.

Andy Furey, CWU national officer, said: “We are confident of a big yes vote to the ballot from Post Office workers. Our members have been receiving projections about what it means to their pensions, and there has been a huge outcry. They are really, really angry.”

Big cuts to final salary pensions are coming not just at former state-owned enterprises but also at the few private companies that still operate so called “gold-plated” schemes. Marks & Spencer is currently consulting on cuts that will affect the pensions of about 11,000 longstanding shop workers.

At both the Royal Mail and M&S, final salary-style pension schemes have already been closed to new joiners, but existing staff have continued to accrue benefits and retire with a pension based on their final salary. It is these future accruals that are now under threat.

It is understood that the Royal Mail and Post Office defined benefit schemes cost the employers the equivalent of 45% of salary. M&S said its pension scheme costs 34% of salary, but that the proposed replacement would be capped at a maximum of 12%.

The companies argue that the cost of maintaining the pension schemes has become unsustainable, in part because of big increases in longevity but also because of falls in gilt and bond yields, which mean they have to pay in more to keep them financially afloat. These gilt and bond yields have hit historic lows since Brexit, making the pension schemes even more expensive to maintain.

In a statement, the Royal Mail said: “We understand how much our people value their pension benefits. We committed to keep the Royal Mail pension plan open to future accrual on a career average basis for existing members without further changes, at least until March 2018.

“Early indications from the latest triennial valuation of the plan suggest that the company’s contributions to the pension plan each year would have to increase from around £400m to over £900m. Such an increase in costs is not sustainable. We are talking to our unions about the future of the plan after March 2018.”

Pensions experts warn that the likely outcome of a review of the Royal Mail and M&S pensions will be significantly less generous “defined contribution” style schemes, where the outcome is dependent on the performance of the stock market, without any guarantees on the level of income on retirement.

But Royal Mail will face the challenge of explaining why it needs to slash its pension, when the scheme is one of the few major ones in the UK which has been running a surplus. It says the surplus will disappear by 2018.

Unions say an agreement struck in 2012 allowed the Royal Mail to keep its pension contributions at just 17.1% of salary, and use the surplus in the scheme to finance the gap.

Royal Mail reported a 5% rise in profits to £742m in the UK in the year to March 2016 and awarded its chief executive, Moya Greene, an annual pay package of £1.5m, similar to the year before.

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Royal Mail is facing a battle with its 140,000 workers after unions threatened a campaign of action against plans to slash pension benefits.

Royal Mail’s plan to switch 90,000 workers out of their current pension arrangements into a new scheme that will pay out lower benefits emerged on Wednesday. If the cuts are similar to plans at the Post Office’s near-identical pension scheme, it could see some workers lose up to half their projected pension.

The Communication Workers Union (CWU), which represents most of Royal Mail’s workforce, said it overwhelmingly rejected the pension changes.

Terry Pullinger, CWU deputy general secretary, said: “It is unfortunate that Royal Mail’s actions have resulted in this issue being in the public domain prior to any formal consultation.

“The CWU do not accept that closure of the Royal Mail Pension Plan is inevitable and will explore every avenue to defend it. We will challenge any convenient leap by the employer to close the scheme and move the entire onus on to our members.”

Royal Mail said the cost of its pension scheme will balloon from £400m to £900m a year unless it cuts the scheme. It wants to prevent workers from building up any future entitlement to the current career average-based pension scheme, and switch them to a pension where the outcome is entirely dependent on stockmarket movements.

Pullinger added: “It is very concerning that the recent press articles, which have prompted this statement, give an impression of fait accompli. Royal Mail will need to bring far more imagination into these ongoing discussions and should be in no doubt that the CWU will use every means at our disposal to encourage the company to think again and secure an agreement that defends our members’ incomes and dignity in retirement.”

Royal Mail said an existing agreement runs out in March 2018 and it welcomed talks. In a statement it said: “We are committed to constructive, ongoing talks with our unions about the future of the plan after March 2018.”

The CWU is already engaged in a battle with the Post Office, which split from Royal Mail on privatisation in 2012, over changes to its pension scheme. It called a strike ballot over changes to the Post Office pension, and other working arrangements at crown post offices, and said it expects a resounding vote in favour of action.


Post Office 'heading for extinction' amid plan to cut 600 jobs, say unions
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Severe cracks are appearing in many final salary-style pension schemes because what appear to be esoteric movements in gilt yields – interest paid on government bonds – are having a dramatic impact on the financial viability of pensions.

Since the EU referendum result, gilt yields have plummeted to historic lows, with interest rates on some government bonds turning negative.

This hits pension funds, as gilt yields are a major component in valuing the future liabilities of a scheme. Each time yields fall, the gap between assets and liabilities grows, throwing many schemes into deficit.

Figures earlier this week from the Pension Protection Fund revealed that the total deficit at nearly 6,000 of the UK’s biggest company pension schemes had widened by more than £24bn in a month to reach a new high of £408bn.

The latest rise in the deficit of schemes covered by the pensions lifeboat points to the difficulty in tackling troubled schemes including BHS, where former owner Sir Philip Green is battling to “sort” the problem, and Tata Steel, where a pensions restructuring could be key to a rescue bid.

The latest deficit estimate comes after a 31% rise announced last month in the wake of the Brexit vote but before this month’s decision by the Bank of England to cut interest rates to 0.25% and start pumping money into the economy.

A spokesperson at the Pension Protection Fund said: “Record lows in gilt yields continued to put pressure on pension scheme funding.

“Total liabilities increased in cash terms but the ratio of assets to liabilities is still above the all-time low of 76.4% in May 2012.”