Royal Mail warns pension plan surplus will end in 2018, looking at new arrangement

[TrueBlueTerrier]

http://www.pionline.com/article/2016111 ... rrangement" onclick="window.open(this.href);return false;

Royal Mail PLC confirmed in its half-year results that it expects to exhaust its pension plan surplus on an actuarial basis by 2018, and said it hopes to resolve issues around its future retirement arrangements by the end of the financial year, March 26, 2017.

The largest plan, the Royal Mail Pension Plan, London, was estimated to have £9.58 billion in assets ($12.5 billion) and £8 billion in liabilities as of Sept. 30, with the surplus decreasing from £1.77 billion six months earlier.

The U.K. postal service operator said in the financial report Thursday that it expects “the actuarial funding surplus to be exhausted during 2018”.

“After this time, the annual cost would be more than double the current contributions, which, (were) pointed out to plan members in a letter sent in June 2016, to be unaffordable for the company,” the same report read.

The other plan, the £410 million Royal Mail Senior Executives Pension Plan, which closed for future accrual in December 2012, recorded a surplus of £16 million and liabilities of &pouind;394 million as of March 31.

A spokeswoman was not available to comment by press time.

[jetblack]

The US Federal Reserve has just upped their interest rates by 0.25% - and is pencilling in expected rates comes 2019 of 4%.
I strongly suspect that the UK will follow suit, albeit with an 18 month gap.
What then of the affordability of the RMPP ?
Of course, by then the RMPP will be gone if RM have their way.

[RobertT]

The US Federal Reserve has just upped their interest rates by 0.25% - and is pencilling in expected rates comes 2019 of 4%.
I strongly suspect that the UK will follow suit, albeit with an 18 month gap.
What then of the affordability of the RMPP ?
Of course, by then the RMPP will be gone if RM have their way.

I thought US rates had actually increased by 0.5%.

Interest rates are bound to increase sooner or later, Mark Carney has been predicting it for as long as he’s been governor of the Bank of England. But so far he’s been wrong and that hasn’t happened, infact they’ve actually gone down!

Bond yields may well follow any interest rate rise. But the problems of increased life expectancy and the largely unknown long term costs of providing a salary based defined benefit pension scheme won’t be going away anytime soon.

[jetblack]

They upped it by 0.25% to 0.5% Robert. Yesterday their base rate was the same as ours - 0.25%.

If the 2019 prediction is correct (and it was made by the Fed - not by me) that come 2019 their base rate is at 4% - then that would be a 16x increase in the interest rate. The UK will follow in my view - I believe 4 or 5% is the long term average interest rate.

There will, as near as damnit, be a likewise 16x increase in bond interest rates - there would have to be.

Seeing as how the RMPP has half of its assetts held in bonds (circa £3.5 billion)(I think they are legally bound to ??) I'd say that an 16x increase in the returns on that £3.5billion from todays position might well be something that should be taken into account when we talk about the viability of the scheme going forward.

Its not quite as straightforward as I've just described - but it isn't far off.

[RobertT]

Ah Yes. I must have mis-read the article I was reading, I was sure it said 0.5%.

I’m no expert on bonds/gilts but their yields have actually been increasing recently, mainly it seems due to the Brexit vote. They’re not governed soley by interest rates, but as they can be traded in a similar way to shares, market conditions come into it aswell. Along with many other factors.
This article on the matter is quite interesting: http://www.telegraph.co.uk/business/201 ... nd-should/" onclick="window.open(this.href);return false;

I do agree that increased yields should make the RMPP situation look better and I would hope the CWU would use that in their negotiations. Whether it makes any difference only time will tell.

[nataddick]

The lead article is actually 'old' news ! The following is an extract from page 19 of the latest Report & Accounts published last month. Note that RM are ahead of the game by deploying a hedging strategy for RMPP thus reducing exposure to negative movements.

Pensions

The Company’s overall IAS 19 pension position at 25 September 2016 was a surplus of £4,282 million, compared with a surplus of £3,430 million at 27 March 2016. The IAS 19 accounting position and key assumptions for the valuation are provided in Note 3 to the consolidated financial statements.

The accounting liabilities have increased over the period due to the fall in corporate bond yields. This has been offset by the increase in the RMPP assets, largely due to the hedging strategy adopted by the Plan.

Royal Mail Pension Plan (RMPP)

The triennial valuation of RMPP at 31 March 2015 is still in progress. However, based on a set of assumptions which we believe are likely to form the basis for the March 2015 valuation, the RMPP actuarial surplus at 30 September 2016 was estimated to be £1,575 million, comprising of assets of £9,583 million and liabilities of £8,008 million (31 March 2016 £1,765 million).

Based on this set of assumptions, the cost of the benefits being accrued each year, based on market conditions at the end of September 2016, would currently be around £1.4 billion. This is significantly greater than the total annual contributions of around £500 million that the Company and employees make. Accordingly, we expect that the actuarial funding surplus will be exhausted during 2018. After this time, the annual cost would be more than double the current contributions, which, as we pointed out to Plan members in a letter we sent in June 2016, is unaffordable for the Company.

As part of the March 2012 actuarial valuation, the Company agreed to pay additional contributions of up to £50 million each year from April 2016 onwards if the Trustee considers these necessary to maintain the Plan’s projected funding position at March 2019, on the March 2012 valuation basis. The Trustee has carried out its assessment of liabilities at March 2016 on that basis and has confirmed that no payment is due for 2016-17.