Royal Mail: Decision on Pension Plan Reform (UK)

Royal Mail has announced the outcome of its consultation on changes to its pension plan – 12 months after first proposing amending the scheme.

The changes follow extensive talks with unions and employee representatives since last April, which resulted in major changes to the original proposals, followed by a formal consultation with every employee member of the pension plan lasting more than 60 days from last November to mid-January this year.

Royal Mail reiterated the announcement made last autumn that both the CWU and Unite had agreed to support the changes as part of wider agreements with each on pay, modernisation and pension reform.

Details of the changes to the plan are being sent to every employee. The key points are:
• All pension benefits earned before 1 April 2008 will be protected and linked to final salary at the time of retirement.
• Employees can continue to take their pension on reaching 60 but the normal retirement age will increase to 65 from 1 April 2010. It will be possible to draw a pension at the age of 60 and continue working while still contributing into the pension plan until the maximum level of contributions has been reached.
• From 1 April 2008, benefits building up for employee members of the plan will be earned on a Career Salary basis.
• The plan will close to new members from 31 March 2008.
• A new defined contribution scheme will be launched in April 2009 and new recruits joining the company after 31 March 2008 will be able to join it after they have worked for the company for a year. Royal Mail has announced the outcome of its consultation on changes to its pension plan – 12 months after first proposing amending the scheme.

The changes follow extensive talks with unions and employee representatives since last April, which resulted in major changes to the original proposals, followed by a formal consultation with every employee member of the pension plan lasting more than 60 days from last November to mid-January this year.

Royal Mail reiterated the announcement made last autumn that both the CWU and Unite had agreed to support the changes as part of wider agreements with each on pay, modernisation and pension reform.

Details of the changes to the plan are being sent to every employee. The key points are:
• All pension benefits earned before 1 April 2008 will be protected and linked to final salary at the time of retirement.
• Employees can continue to take their pension on reaching 60 but the normal retirement age will increase to 65 from 1 April 2010. It will be possible to draw a pension at the age of 60 and continue working while still contributing into the pension plan until the maximum level of contributions has been reached.
• From 1 April 2008, benefits building up for employee members of the plan will be earned on a Career Salary basis.
• The plan will close to new members from 31 March 2008.
• A new defined contribution scheme will be launched in April 2009 and new recruits joining the company after 31 March 2008 will be able to join it after they have worked for the company for a year.

The increasing cost of maintaining the pension fund comes as Royal Mail faces intensifying competition in the open postal market with one in five of all letters now collected by rival companies, while mail volumes fall and electronic communications increase. Tackling the pension fund challenge means Royal Mail is currently making annual payments of around £850 million to cover both ongoing contributions and the funding of the pension fund deficit – one of the largest faced by any UK employer – over 17 years.

Notes to Editors
• Royal Mail’s discussions with the unions and in a company-wide Consultation Forum, prior to formal consultation, resulted in changes to the company’s original proposal, including:

– Pension benefits earned before April 2008 will be untouched so that the pension for all service before this date will be linked to final salary at the time of retirement.
– Removing a proposed cap that limited growth in pensionable pay to RPI, recognising in particular, the impact of such a cap on younger people, in favour of a career salary defined benefit approach.
– Postponing change to the normal retirement age from 2008 to 2010.
– Allowing people to take their pension in two parts – with pension accrued before 2010 taken at the age of 60 while members can continue to work and accumulate further pension to be taken at the amended retirement age effective for benefits earned after 2010.

• In addition, the decision announced today includes changes made following a formal consultation of more than 60 days during which more than 30,000 responses were received via a dedicated helpline, email, postcards and letters, all of which have been carefully considered by the company. The changes include:

– A mechanism to allow individuals to pay more than the standard 6% contribution into the plan, building up a higher, index linked, pension with no risk to the individual.
– An increase in the current 40-year limit on contributory service to 45 years.

• The 60-day formal consultation involved a detailed booklet being sent to every employee, together with the offer to individuals of a personal illustration to show how the proposed changes would affect them personally.

• Royal Mail’s contribution to the pension fund currently amounts to the equivalent of 30% of pensionable pay, comprising 20% for future pension costs and 10% for the pension fund deficit. The cost to Royal Mail has risen rapidly in recent years – the company’s contribution to the fund amounted to 18% just 2 years ago. After the changes, the company anticipates continuing to pay contributions at a high percentage of pensionable pay – around 21%.

• Employees belonging to the pension plan continue to pay 6% and they are not required to pay a higher contribution under the changes announced today.

• The Career Salary mechanism for calculating pension benefits from 1 April 2008 means that a separate block of pension will be earned for each year based on the relevant fraction of pensionable pay (1/60th or 1/80th). Each annual block will then increase by inflation – as measured by the RPI up to a maximum of 5% – as the employee works his or her way towards retirement. One feature of the Career Salary approach is that unlike a final salary plan, people are not penalised if they earn less as they prepare for retirement, for example, by working, if they choose, fewer hours.