Defined Benefit  

Experts dismiss Royal Mail hybrid pension proposal

Experts dismiss Royal Mail hybrid pension proposal

An expert has dismissed as "badly thought out" a union proposal that would see Royal Mail create a hybrid pension scheme combining elements of defined benefit and defined contribution.

Independent pension consultant John Ralfe said the Communication Workers Union proposal, revealed yesterday (14 March), failed to accept the fact that the DB model was "dead".

According to the proposal, the new Royal Mail scheme would pay members a guaranteed income in retirement, but would not guarantee annual indexation of benefits, either in the accumulation phase, or the retirement phase.

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Instead, the trustees would review the scheme's investment returns annually, and decide accordingly whether it could afford to increase benefits that year.

Terry Pullinger, deputy secretary general of postal at the CWU, told FTAdviser this would allow the scheme to invest much more heavily in growth assets, putting as much as 100 per cent in equities..

"The scale of the investment in equities is debatable, but it will be much more aggressive than the current strategy which is totally derisked," he said.

But Mr Ralfe said such an investment strategy would simply not work.

"This is a badly thought-out proposal from the CWU," he told FTAdviser.

"It requires the Royal mail pension scheme to invest heavily in equities, which simply increase the risk of a deficit for the company - exactly what it is trying to avoid.

"If the CWU wants the company to bet on equities, well say so, and suggest they play the futures market," he said.

He said that even with no inflation guarantee, the annual company cost would be high and would have to be invested in matching bonds to make sure there was little risk of a deficit.

This, he said, meant there would be no potential upside to pay inflation increases.

"The CWU and other unions should accept that DB is dead in the private sector. Rather than trying to get Royal Mail to continue to take the risk of running a DB scheme, CWU should negotiate a more generous DC contribution than 10 per cent," he said.

John Broome Saunders, actuarial director at pension consultancy Broadstone, agreed that the company was unlikely to accept that much risk.

"If you were investing in DC, you might well invest in 100 per cent in equities. But as soon as you introduce a minimum guarantee, the risk of equities certainly looks rather high."

He said for a conditional indexation model to work, it would require very specific agreements on exactly how the risk was shared to avoid future disputes between employee and employers.

Overall, he said he did not see such hybrid models taking off.

"They've been talked about for a while, but nobody has a model that works. Most employers have had their fingers burnt with DB, and they don't want to take on anymore pensions risk."

Mr Broome Saunders added that pension freedoms had "cemented" the move towards DC.