City versus unions: Royal Mail Group's pension plan closure move will likely divide both

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Nicholas Hyett, equity analyst at Hargreaves Lansdown "with a highly unionised workforce, which has in the past shown itself willing to flex its muscle in defence members’ rights, introducing an alternative plan is likely to prove costly”

The City may seem to like Royal Mail Group PLC’s (LON:RMG) move to close its current pension scheme from March 31 2018, but employees and unions probably won’t and that could mean industrial action and further worries for the firm’s share price.

The move followed a consultation on the future of the Royal Mail Pension Plan, which ended on 10 March 2017, and received feedback from scheme members and its unions, the Communication Workers Union (CWU) and Unite/CMA.

This included a proposal put forward by the CWU for a hybrid pension plan to replace the existing defined benefit scheme.

But Royal Mail concluded that there is “no affordable solution” to keeping the plan open in its current form as although the plan is currently in surplus, it expects that to run out in 2018.

Alternative plan ...
Nicholas Hyett, equity analyst at Hargreaves Lansdown said: “Despite the scheme currently running a surplus, an impending review of company contributions has been hanging over the group for some time.

“Royal Mail’s current contributions to this scheme alone are about 10% of total salary costs, including wages of staff who are not members of the scheme.

“These were expected to more than double to over £1bn in 2018, equivalent to around 25% of the group’s entire 2015/16 UK wage bill.”

“However”, the analyst added, “with a highly unionised workforce, which has in the past shown itself willing to flex its muscle in defence members’ rights, introducing an alternative plan is likely to prove costly.”

He concluded: “Whether those costs will be in the form of chunky employer contributions to a new defined contribution scheme or lost revenue from industrial action remains to be seen.’

Industrial action …
Liberum Capital analyst Gerald Khoo was also cautious about the union’s reaction.

In a note to clients, he said: “This move was expected, with the current arrangements being financially unsustainable.

“However, the imposition of the closure of the scheme without agreement on replacement arrangements, while necessary, may be a trigger for industrial action. How the unions react will be crucial.”

Reiterating a ‘sell’ rating on Royal Mail shares, the analyst added: “Although pensions are a key short-term catalyst, with risks skewed to the downside, our bear case is focused on the parcels market where we view Royal Mail as not well positioned for the faster growing premium market.”

Royal Mail shares have been out of favour since a poor third quarter mail volume update In January, with investors worried about the post-Brexit environment and the prospect of strike action.

By late morning trading, Royal Mail shares had halved an earlier 2% advance, and were up 1%, or 3.7p to 422.9p.

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It must be awful for those in the City - its all the not knowing you know

There's a new mood in western democracies. I know I shouldn't mention it, I know I'll get scorn for it, I know we aren't supposed to believe in it nor acknowledge it - but the days of ordinary people bending over and taking it are showing signs of coming to an end. There is a nasceant grass roots movement - that is both politicised and active.

If this could be mirrored in the response of ordinary members of the CWU - and I'm struggling to find a good reason at this point why it shouldn't be, all things considered - then those hedging on a dead certain race to the bottom for the ordinary working postie may well end up crying into their cocaine wraps