Royal Mail’s defined benefit pension scheme is facing part-closure and swingeing cuts, as workers are told it is not fit for purpose beyond 2018.
According to a report in parent publication the Financial Times, the UK’s postal operator pays around £400m each year towards the defined benefit scheme, which guarantees an income to two-thirds of its 140,000 employees.
Due to a decline in market conditions, the annual cost of employees is likely to more than double to £900m.
Royal Mail wrote to employees in June, to alert them to the fact that an increase in the costs of keeping the plan open was “simply unaffordable” and that it could not continue to run the plan in its present form beyond 2018; which it had committed to previously.
The postal service had previously told investors prevailing economic conditions suggested the plan would not be affordable beyond this commitment date.
According to the Financial Times, the change is a sign Royal Mail, which was privatised in 2013, is leaving behind its public sector heritage by adopting a form of retirement provision now commonplace in the private sector.
In a statement to FTAdviser, a spokesperson for the Royal Mail responded it is “committed to keep the Royal Mail Pension Plan open to future accrual on a career average basis for existing members without further changes, at least until March 2018”.
“Early indications from the latest triennial valuation of the plan suggest that the company’s contributions to the pension plan each year would have to increase from around £400m, to over £900m.
“Such an increase in costs is not sustainable,” it stated, adding: “We are talking to our unions about the future of the plan after March 2018.”
Daren O’Brien, director at London-based Aurora Financial Solutions, pointed out that with the historic lowering of the Bank of England base rate to 0.25 per cent and the recent bad press on defined benefit schemes liabilities, he could only envisage more defined benefit schemes closing.
“We’ve had members from other defined benefit schemes enquiring about transferring out to access cash now, which will only compound the pressure and problems for defined benefit administrators and their ongoing costs.”