Is there really a "fail" at the Royal Mail?

[TrueBlueTerrier]

https://henrytapper.com/2017/01/06/is-t ... oyal-mail/" onclick="window.open(this.href);return false;

The Royal Mail is consulting with its staff on closing its final salary scheme to future accrual. This is a public consultation, the Royal Mail are putting it to their staff that an increase of pension contributions to 50% of pensionable pay is unaffordable.

I don’t think anyone would disagree. If you are competing in a market where the market normal is 2% (1+1), it is hard to see how you can remain competitive , pay such contributions and continue to employ large numbers of sorters, postmen , counter staff , even managers. From a business perspective, such pension contributions would result in mass redundancy.

From the staff’s perspective, I suspect most would consider they could do rather better with something like a 50% increase in wages!

With both Unite and the CWU threatening industrial action, it is clear that something has gone wrong – but what?

Royal Mail says that it could not afford an anticipated rise in the annual cash cost of the plan to about £1bn starting in 2018, up from £400m at present, caused by a deterioration in financial market conditions. It is currently drawing down a surplus in the fund to supplement its contributions but expects that to be exhausted in just over a year.

The projected costs increase not because the fund is in deficit, it isn’t – but because the fund has no means of generating an investment return needed to meet future obligations – if the scheme remains open to future accrual.

The fund is almost entirely invested in bonds . Bonds have de-risked the scheme but emasculated it. If it is to close, the scheme should be no burden but if it is to stay open, it will have to become a pay as you go arrangement with the employer paying as the members go.

The scheme is in bonds with good intent. The Trustees have listened to the advice of commentators who argue that it is good economic sense to match liabilities and assets. The trustees have secured the existing members from the perils of the PPF and satisfied the Pensions Regulator in their prudence.

It is hard to blame the Trustees for doing what has become “received wisdom” but it is equally hard not to point to the absence of any growth producing assets in the fund as the root cause of the problem. The £7bn odd of the £7.6bn fund is buying various debt instruments at a time of massive demand and under supply, those assets are over priced and are producing no real yield. This is the institutional manifestation of the transfer value problem we have been looking at in recent days. The Royal Mail transfer values should be looking marvellous with the discount rate trending to zero and no insufficiency report, critical yields should be on the floor.

But the solvency of the scheme today, is at the expense of the viability of the scheme tomorrow. The only way that the Royal Mail can reverse out of this situation is with the help of the Trustees. Were the current bond positions to be unwound and the scheme reinvest with an eye to growth, then a best estimate approach to the funding position would see the eye-watering £1bn a year being demanded in future contributions , drop substantially.

But – and there is a but – this would be to unwind the current plan of the Trustees. It would be to ask people with strongly held beliefs to accept that they have been mistaken in acting with the courage of their conviction. This is a big ask.

A couple of days I met with Nigel Wilson , the CEO of L&G and I asked him what was the cause of the “pension crisis” we were in. I looked around the room expecting him to run to a computer and show me a snazzy chart showing market data. But there was no computer, there were just some books and chairs (and a lot of pictures of Newcastle United players).

Nigel Wilson thought for a second and replied.

People.

If the cause of the pension crisis is “people”, then my computer says the solution to the pension crisis is also “people”.

The problems at the Royal Mail are to do with the Trustee people’s obsession with managing economic risk – an obsession fuelled by the weight of their advisers. But they have acted blind to the long-term market lessons that over tell us that de-linking a scheme from the economic growth of the market will lead to failure.

Failure is an inability to meet what Con Keating calls “the initial grants to members”.

The 90,000 Royal Mail workers and their representatives have been granted rights to pensions based on assumptions of future accrual. When these grants were made, they were considered economically viable. To most ordinary people they still are economically viable. But to the “experts” they are not economically viable, they represent an unacceptably high risk.
I worry that, as with the pension scheme of the USS, the risk of failure of the pension scheme is dwarfed by the risk of failure of the Royal Mail (and indeed our University system). Universities have students to fall back on and state set fees, but the Royal Mail no longer has the tax-payer’s long-stop support.

The Trustees have to seriously consider whether – as people – they have got it wrong. The Trustees of the Boots scheme had to do the same after it found it could not afford a pure bonds strategy.

I was asked yesterday whether our FAB index could help, no it can’t!

Simply applying a notional discount rate based on average asset distribution (bonds and equities) to a scheme which has de-risked to bonds is living in lah lah land. the message of FABI is not to be imprudent but to look at prudency differently.

The Royal Mail pension scheme should be aiming to be around in perpetuity and so should the Royal Mail. If someone told me we didn’t need things delivered to our door, I would laugh at them. I would also laugh at the thought that postmen work for their wages on the prospect of being poor in retirement.

The expectations that the pension grants will be paid in full, is as clear as our expectation that the letters will arrive in the right place at the right time. Currently the Trustees of the Royal Mail Pension scheme have lost sight of both these things. They risk damaging the Pension Scheme and the Royal Mail through an investment strategy that however well intentioned – is wrong.

Nigel Wilson is right – people are the problem – people are the solution. The negotiations between employer-staff -unions and trustees can only be successful if conducted with grace and humour and an acceptance that

to err is to be human, to forgive to be divine!

Let’s hope that the pension can be re-set, strikes avoided and most importantly, the pension grants be paid without the destruction of jobs and a great business.

[milly]

I believe that our pension fund has only 11% of assets invested in equities which seems to be cautious in the extreme.
The trustees investment strategy has been designed so that they wouldn't lose any money at any cost and also not make much either.
But this looks highly risky as Bond prices have been at record highs in the past few years.

[k979aaa]

I believe that our pension fund has only 11% of assets invested in equities which seems to be cautious in the extreme.
The trustees investment strategy has been designed so that they wouldn't lose any money at any cost and also not make much either.
But this looks highly risky as Bond prices have been at record highs in the past few years.

Must say any pension fund that was not in trouble should not fail it is miss management at best or something else at worst!

[fishtank]

This is a very interesting take on the pension fund, it's a welcome break from the usual excuses for closing the pension, while I expect the trustees to balance risk and security it's blatantly obvious that one of the main reasons contributions have become unaffordable for the business is that the fund itself is far too risk averse and is generating very little income itself.

The trustees have to take a long, hard look at themselves, of course I doubt the union will acknowledge this poor management since they have representation on the board of trustees and that would be like admitting some culpability for this mess themselves.

We've been let down by all involved, the only blameless party in this sorry mess are the members who have continued to make their contributions in good faith and who will unfortunately pay the ultimate price.

[k979aaa]

This is a very interesting take on the pension fund, it's a welcome break from the usual excuses for closing the pension, while I expect the trustees to balance risk and security it's blatantly obvious that one of the main reasons contributions have become unaffordable for the business is that the fund itself is far too risk averse and is generating very little income itself.

The trustees have to take a long, hard look at themselves, of course I doubt the union will acknowledge this poor management since they have representation on the board of trustees and that would be like admitting some culpability for this mess themselves.

We've been let down by all involved, the only blameless party in this sorry mess are the members who have continued to make their contributions in good faith and who will unfortunately pay the ultimate price.

And lets not forget this is not just a OPG issue most managers will lose more than the OPG's even the Unite Union if you can envisage managers sticking together united for themselves are against this proposal by the business!

[SpacePhoenix]

If managers would stand to loose more could Unite ballot them if the CWU ballots us and then if both voted for industrial action have managers join OPGs on the picket lines?

[aiden01]

If managers would stand to loose more could Unite ballot them if the CWU ballots us and then if both voted for industrial action have managers join OPGs on the picket lines?

we can only dream..can't personally see it happening.

[k979aaa]

If managers would stand to loose more could Unite ballot them if the CWU ballots us and then if both voted for industrial action have managers join OPGs on the picket lines?

we can only dream..can't personally see it happening.

Well if they don't think it will not effect them they are more stupid than we all think they are.

[jetblack]

Wether blame lay with the trustees (for (investing in) low yielding bonds) is debatable IMO. This is, after all, pension provision we are talking about here, not roulette at the casino.
What can't be doubted in my view is that low taxation,low interest rates and QE are political decisions.
These decisions have favoured one section of society, a small section, and disproportionately hurt another. And its these decisions that mean we are now staring down the barrel of the old age in poverty gun.

Interest rates and bond yields will recover.

For eg., on the strength of projected future public spending on infrastructure in the US (due to a political change and a choice being made to make different decisions) the central bank (the Federal Reserve) are already planning interest rate hikes. This will, in turn, impact on bond yields, and so the viability of pension schemes heavily invested in bonds.

Of course, by the time that all this transpires in the UK, chances are that, unless we stand up and be counted, our pension scheme will already have had its doors closed.

If our scheme closes it will indeed be the fault of "people", as the article states - but it will be our fault for letting it happen and swallowing the soft soap yet again.

[fishtank]

Interest rates and bond yields will recover

Both can't recover, higher interest rates depress inflation, lower inflation reduces bond yields, at the moment QE is inflating bond prices and decreasing yields, that's why we have the double f**k of low interest rates and low bond yields meaning the only way to make money from money is the stock market, hence the record high FTSE. It's nothing to do with the value of 100 companies, just a symptom of capital flight from what most would consider a safe haven.

[jetblack]

Bond yields reflect both the price of bonds and the returns that bonds give by virtue of the interest they pay. Its complex not least because the trustees are hedging on futures.
Suffice to say that if interest rates increase then the rate of return that bonds produce (which are a function of interest rates) will increase also - and this will definitely be to the benefit of our pension scheme (the viability of) going forward.
Strictly speaking I shouldn't have said that "yields" on bonds will increase as this is different to returns on bonds - but I didn't expect that anyone would pick up on it or that it makes too much difference in the grand scheme of things.
It is the returns on investments that I think is at issue here.

You are correct about QE money going into shares.

The only way to make money from money (as you put it) is to be the banker at the casino taking a commision on each bet that the rubes (you and I) place against each other.

Or just print the f***ing stuff !!!

[fishtank]

Nobody is sure what the long term effects of QE are, it's voodoo economics but given that savers and pensions have had almost 10 years of diminishing returns I would imagine "clusterfuck" and "omnishambles" might be headlines in 2030+

[vmaxv4]

But – and there is a but – this would be to unwind the current plan of the Trustees. It would be to ask people with strongly held beliefs to accept that they have been mistaken in acting with the courage of their conviction. This is a big ask.

There's the kicker!!!
Talking down this company over decades of mismanagement & still writing off Royal Mail as a viable asset,then lumping in privatisation/pension deficit. Has brought us to this where the trustees have had to be overly cautious because of what our business is riddled with... DOOM & GLOOM...

[GRS]

Vmaxv4 - this company as you say is run on doom and gloom. Everything that is spoken about is negative and this is driven from the top by the fake yank. On another note the opening post is obviously very complicated to read for people who don't understand much on the pension side of things and this could be where we have been taken advantage of over time. Also it seems to make heavy suggestion that the Trustees may be accountable for the situation we are in with their poor decision making - when you become a Trustee of a pension fund you take on a massive liability and if this does turn out to be the case then the consequences for those people will be massive. Let's hope for all our sakes that if there are big decisions to make that they have the bottle to make them.

[vmaxv4]

The article is a great insight to an alternative approach that COULD have happened, sadly my view is nowt will change..
Fishtank.

The trustees have to take a long, hard look at themselves, of course I doubt the union will acknowledge this poor management since they have representation on the board of trustees and that would be like admitting some culpability for this mess themselves.

This is exactly my biggest fear,
Nobody is going to own up to "getting wrong". RM or CWU..