UK Royal Mail ignores trustee concerns

Royal Mail chiefs have clashed with trustees over the amount of equities in the organisation’s GBP16bn pension scheme.

The employer is to maintain a high exposure to equity investment even though trustees want to reduce risk in the fund by investing in more bonds.

The scheme is to move to a 70percent equity position following a review of asset allocation. However, trustees are understood to have wanted to limit equity investment to 65percent in an attempt to control risk.

The clash highlights wider tensions between employers and trustees over asset allocation, with employers often wanting more aggressive investment strategies than trustees.

A spokesman for the Communication Workers Union (CWU) said that there was friction between the employer and the trustees and that it took several meetings for them to reach an agreement.

Although the scheme’s equity exposure is to remain high, at 70percent , the equity allocation is in fact currently higher at 80percent.

“We supported the concept of the review and wanted less risky exposure so this is a step in the right direction,” said the CWU spokesman.

Trustees have put the scheme under review and are seeking to establish a risk management strategy within the employer’s parameters.

The Royal Mail scheme – which has 440,000 members, 200,000 of whom are active – has a GBP2.5bn deficit.

The employer is to keep the scheme open by agreeing to increase its contribution to 12.6percent of salaries. This will for the first time include contributions to a defined benefit scheme closed in 1987.

The employer is also to contribute GBP140m over the next 40 years, a move welcomed by the CWU.

The disagreement between the two parties also highlights the conflict of interest issue for consultants advising both parties. Watson Wyatt, which advised the scheme, did not wish to comment.

In a Royal Mail scheme review in 2000, the fund got rid of tactical asset allocation and appointed 16 fund managers to run 33 discrete portfolios.

Fifty per cent of the assets were held in UK equities – 62.5percent of which were passively managed – with another 30percent in overseas stocks, including global emerging markets.

The current review has so far ruled out investment in commodities but has agreed in principle to an allocation of assets in hedge funds under the provison that, net of fees, the trustees consider it will add value.