Stuck in the post: a Royal Mail Pension That won't deliver

[shaunthomas]

From Today’s Sunday Times Business Section:
Stuck in the post: a Royal Mail pension that won’t deliver

November 11 2018, 12:01am,
A new scheme resembles past catastrophes and should be ditched, the experts warn

James Coney, Money Editor

Retired Royal Mail workers could be hit by the revamp
Retired Royal Mail workers could be hit by the revampCARL COURT/GETTY IMAGES
At the end of March, the Communication Workers Union (CWU) hailed a “massive vote” by its members for reforms to pay, pensions and working conditions at Royal Mail.

The agreement, struck to avoid a nationwide postal strike, was seen as the crowning achievement in the reign of Moya Greene, who announced a few weeks later that she was stepping down as chief executive after an eight-year tenure.

As part of the deal, the Royal Mail, the union and the government set out plans for an entirely new “third way” in pension saving.

However, experts are now warning that postmen and women could face sharp cuts to their incomes in retirement if they signed-up to the new type of pension being proposed.

Last week, the government began consulting on legislation to create this pension, called a collective defined contribution scheme (CDC). These are viewed as a halfway house between defined benefit (or final salary) schemes and defined contribution schemes.

Pension experts have been lobbying the government to ditch the plans. They warn that CDC schemes are similar to a type of investment called with-profits that were widely mis-sold in the 1990s and resulted in millions of savers failing to get their promised payouts.

John Ralfe, a pension consultant, has highlighted the dangers of the Royal Mail scheme to the Department for Work & Pensions.

He said the idea was “structurally flawed” and that it had been cooked up for “entirely political” reasons, “to head off a strike”. He said: “It is likely pensioners could see a reduction in their incomes in retirement.

“A CDC scheme can work only with strict regulation to ensure that payouts are fair to all members and that the wheels don’t fall off. I predict it will fail.”

The attacks on the pension scheme are the latest blow to Royal Mail, which has been beset with criticism since Greene retired.

Her successor, Rico Back, who ran the firm’s German parcels division GLS, was embroiled in a row over pay. Back was handed a £5.8m “golden hello” to terminate his contract with GLS, and there were concerns that he would continue living in Zurich while running the company, which is due to update the market with half-year results on Thursday.

The pay row sparked one of the biggest investor revolts in recent years, when 70% voted against the pay policy.

Two months later, Royal Mail chairman Peter Long resigned, saying he wanted to concentrate on his other role as executive chairman of crisis-hit estate agency chain Countrywide.

Long had hailed the pension deal as “ground-breaking” when he paid tribute to Greene.

There are currently two main types of workplace pension in the UK. In the past, most companies offered defined benefit schemes. With these, workers received a guaranteed income in retirement based on length of service and final salary. However, falling gilt yields, rising life expectancy and changes to dividend taxation caused many to plunge into deficit. In September, the total deficit of all final salary schemes was £38.7bn, with 3,437 of the country’s 5,588 plans in the red, according to figures from the Pension Protection Fund.

Most companies that shut defined benefit schemes replaced them with defined contribution schemes. With these, employers and employees put their cash into a fund. The pension payout at the end is based on the value of the fund. These schemes are viewed by many workers as inferior to final salary as the burden of risk falls entirely on the employee.

In 2016, Royal Mail announced that it wanted to close its final salary pension scheme, affecting 90,000 members. Annual operating costs were forecast to balloon from £400m to more than £1bn — equivalent to 25% of the group’s entire wage bill.

The plan was immediately rejected by the CWU, and in October last year, workers voted overwhelmingly for industrial action. The strikes were due to coincide with the Black Friday sales and Christmas shopping, and were averted only after legal action by Royal Mail.

For the next three months, unions held talks with the company, and in February it was announced that an agreement had been reached to create the new CDC scheme.

With this pension — hailed at the time as “potentially ground-breaking” — all Royal Mail workers would have their savings pooled into one giant pot. Actuaries would then give steady payouts to retired members every year.

The attraction of this to unions is that it could share the risk of investment falls among members, and reduce costs. In good years, some cash would be held back, making up for years when investments performed poorly.

Royal Mail says that its scheme will be transparent and open to scrutiny so that members always know why benefits are changed.

Similar schemes already exist in Canada and Holland, but according to pension experts, a CDC pension is virtually identical to the now-tarnished with-profits scheme.

About £190bn was ploughed into these plans, sold as pensions and endowments, in the 1990s. About 11m people were promised that their annual investment returns would be smoothed out, with money held back in good years.

However, actuaries paid out too much at the start of the policies, leaving savers with paltry pensions. Tom McPhail, head of policy for the investment firm Hargreaves Lansdown, said: “Pooled funds, smoothed returns, actuarial discretions. These pensions really do bear a striking resemblance to with-profits.

“There are also serious questions about how compatible they are with pension freedoms, and the costs to members if they want to move their money elsewhere.

“And what happens if returns start falling and everyone together is asked to take a haircut? That will mean postmen being asked to take a cut to their retirement income.”

Royal Mail said: “CDC has some critical differences to with-profits that are designed to protect members.

“With-profits were also widely criticised for opacity, whereas the government’s consultation proposes that CDC’s be subject to enhanced transparency.”

The CWU failed to respond to a request for comment.

[JKSmudge]

Ah, so the 'cusp of something special' deal that so many were hoodwinked by ( Thank you Terry ) was just a ploy (along with the rest of the bad deal ) to get us to call off the strike plans.

To the 90% who voted 'YES', in the words of Mr John Lydon ' Ever feel you've been cheated? '

[stephen500]

Note that any reductions to pension in payment, will only apply to the pension after the introduction of the new CDC scheme.
If this was 2020, then that would be pensions accrued after that date. There would be no reductions to the schemes before the introduction of CDC, ie Pre 2020 (if that is when the scheme starts).
That's my reading of it.

[Jambomatt1874]

What’s actually happening with the money they’re taking off us just now for a ‘pension’?

[rambo1]

What’s actually happening with the money they’re taking off us just now for a ‘pension’?

Paying for mr back's golden handshake?? Seriously, I don't know, good question though....... Robert, where are you.

[RobertT]

What’s actually happening with the money they’re taking off us just now for a ‘pension’?

Paying for mr back's golden handshake?? Seriously, I don't know, good question though....... Robert, where are you.

Your contributions go into a big pot along with everyone else's and is invested on our behalf. When it comes to taking your pensions(NRA60 & NRA65), the little slice of that pot that belongs to you can be used to fund some or all of your tax free lump sum.

More info in your plan guide and on the pensions website.

[Jambomatt1874]

What’s actually happening with the money they’re taking off us just now for a ‘pension’?

Paying for mr back's golden handshake?? Seriously, I don't know, good question though....... Robert, where are you.

Your contributions go into a big pot along with everyone else's and is invested on our behalf. When it comes to taking your pensions(NRA60 & NRA65), the little slice of that pot that belongs to you can be used to fund some or all of your tax free lump sum.

More info in your plan guide and on the pensions website.

Sorry for being a bit thick but does this give us a good return and is it the best way to go?

[TheTrolleyMan]

Look at one of your pension statements from a few years back and compare it to the latest statement , were being ripped off !

[Phantom]

So basically companies don't want the liability of providing a pension. So now the powers that be will put time and effort in telling you it's no good and that you are better off on the DC scheme.

[RobertT]

Sorry for being a bit thick but does this give us a good return and is it the best way to go?

The DBCBS has only been going for about 7 months, so it's early days.
The target for growth is CPI + 2%, which based on today's rates, would mean a 4.2% growth rate on our money each year. Although I don't think the first bonus will be added until 2020.
It benefits from a 13.6% contribution from RM, plus another 2% to pay for ill heath benefits, etc.

The aim of the DBCBS as I said, is to fund some or all of the tax free lump sum when taking your pension. Which is particularly useful if your in section C of the RMPP because they don't get one as standard.

Whether it's the best way to go will depend on your circumstances, but for most members of the RMPP(sections A/B & C) it probably is.

[hermon]

I thought DBCBS was intended to create a wage in retirement rather than a lump sum.
Otherwise wouldnt it just be a DC scheme ?

[stephen500]

I thought DBCBS was intended to create a wage in retirement rather than a lump sum.
Otherwise wouldnt it just be a DC scheme ?

No the DBCBS is just a lump sum which is a temporary arrangement, while we wait to see if a CDC can be introduced. The CDC scheme provides for a pension in retirement and a lump sum. So the temp scheme DBCBS just raises a lump sum at around 19% of your pensionable pay. For me on night allowance, that is around £5000 per year. When that lump sum is added to the other lump sums you may have, you can then take 25% tax free, with any excess taxed at your rate of tax payable.

[hermon]

Thanks for the info !

[Navalron]

Look at one of your pension statements from a few years back and compare it to the latest statement , were being ripped off !

But we all knew that was going to be the case. RM spouted figures about how much extra they would need to pay in employers pension contributions from £400 million per year to over £1000,000,000 per year but I didn't seem to hear from the union doing their calculations about this extra money. It seems as if the union just accepted RMs figures. This new scheme is never going to happen. On the cusp of greatness. Good one.

[RobertT]

Look at one of your pension statements from a few years back and compare it to the latest statement , were being ripped off !

Are you referring to the NRA65 element of your pension by any chance?

If so, the NRA65 figures on your previous statements were estimates based on you working for RM and paying into the pension until age 65.
But the scheme closed to future accrual on 31st March 2018, so no one will have more than 8 years worth of NRA65 pension to their name!