Royal Mail has announced that it will close its defined benefit (DB) pension plan next year when the scheme is set to slip from surplus into deficit.
The company stated that there is “no affordable solution” to keeping the existing plan open in its current form and so will close on 31 March following Trustee approval.
Royal Mail’s annual pension contributions currently total around £400m, but if no changes are made these contributions could more than double to over £1bn in 2018.
Although the plan currently operates with a £1.78bn surplus, Royal Mail expects this will run out into a deficit next year.
A replacement pension plan has not yet been announced, but the company said that it will work with unions to find a “sustainable and affordable” scheme.
Royal Mail stated: “We know how important pension benefits are to our colleagues.
"We continue to work closely with our unions on a sustainable and affordable solution for the provision of future benefits. We will write to plan members once further decisions have been made.”
Brian Scott, Unite union officer for Royal Mail, condemned the closure of the DB scheme as “a cause for serious concern for the dedicated workforce”, and added that that the union would consider strike action if the company does not provide a satisfactory replacement pension plan.
“We will study the implications of today’s announcement very carefully and consider all the options going forward. If we don’t achieve a satisfactory outcome, we can’t rule out an industrial action ballot on this issue,” Mr Scott said.
Royal London’s director of policy Steve Webb said that a defined contribution (DC) scheme that will likely replace the DB scheme will cost around about the same as the old plan, but it will give Royal Mail certainty about costs going forward that it would not have with the previous set up.
“It’ll give them that cost certainty and that’s what employers want,” Mr Webb said.
Scott Gallacher, chartered financial planner at Rowley Turton Privae Wealth Management, said the closure of the final salary pension scheme was “inevitable” after the company went private due to the high costs associated with running DB schemes, and added that it is “somewhat embarrassing” for Royal Mail as it won DB Scheme of the Year at the Pension Scheme Awards last year.
“The scheme was already closed to new employees, which limited the liability of the scheme somewhat but this also makes it somewhat more expensive to run, as the older members’ benefits / contributions are no longer subsidised by newer younger members,” Mr Gallacher said.
Tom Selby, senior analyst at AJ Bell, said that although it may seem counterintuitive to close a scheme that has a surplus, such decisions are all about risk.
“Deficits are essentially accounting measures and can vary wildly depending on economic circumstances, but the reality is most employers are simpler no longer willing to shoulder the uncertainty of underwriting guaranteed pensions for workers,” Mr Selby said.
Last month the Communication Workers Union (CWU), a union representing Royal Mail workers, proposed a hybrid scheme that would see pension scheme risks shared between the business and the workers, but this was quickly dismissed by independent pension consultants.
Royal Mail first proposed closing its DB scheme in January this year when it first launched its review into its final salary scheme, just more than three years after the business was privatised.
julia.faurschou@ft.com
