Defined BenefitFeb 1 2018

Royal Mail to shut defined benefit pension

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Royal Mail to shut defined benefit pension

Royal Mail will close its defined benefit (DB) pension fund to future accrual on 31 March 2018, as the company reached an agreement in principle with its trade union to create a new collective defined contribution (CDC) scheme for all employers.

However, since new legislation will need to be introduced to create this scheme, transitional pension arrangements will be put in place from 1 April until such pension fund can be created.

In a market update issued today (1 February), Royal Mail said that this will consist of a DB cash balance scheme and an improved defined contribution (DC) plan.

“The ongoing annual cash cost of pensions will continue to be around £400m,” the company said.

CDC schemes differ from defined benefit pensions in the sense they do not guarantee certain incomes in retirement.

Instead, CDC have a target amount they will pay out, based on a long term, mixed risk investment plan.

These schemes also differ from the traditional DC plans, since they do not produce individual pension pots.

Instead they invest savings in a larger collective pot, which provides an income to individuals during their retirement.

The Pension Schemes Act 2015 created by the coalition government defined CDC as a distinct pension category, but secondary legislation to bring them into effect was never introduced.

According to the Communication Workers Union (CWU), which represents members of the Royal Mail scheme, the new pension arrangement will cover the company’s 80,000 DB members as well as its 40,000 DC members, and will combine a cash balance DB scheme with a CDC plan.

Under the cash balance plan, Royal Mail will contribute 13.6 per cent of pensionable pay towards members' retirement lump sums, and a further 2 per cent for other member benefits, including death in service and ill-health.

Members will continue to contribute 6 per cent of pensionable pay towards their retirement lump sums, and workers in the DC plan with a minimum of five years' service will have the option of joining the DB cash scheme.

Royal Mail and the CWU will lobby government to make the necessary legislative and regulatory changes so a CDC scheme can be established, the company said.

Terry Pullinger, CWU’s deputy general secretary, said previously that the union will wait a year to see some advances in this area.

He said: “If nothing has changed within a year, or we can't see it coming into the horizon, then we have to take a judgement to see if whether our dispute is actually resolved or not.”

FTAdviser reported last month that the government believes now isn't the time to introduce the concept of CDC schemes in the UK, as the market "needs time and space to adjust to other reforms underway," said minister for pensions and financial inclusion Guy Opperman.

According to Tom McPhail, head of policy at Hargreaves Lansdown, if an employee is going to lose its final salary pension scheme, “this is a pretty good way to do it”.

He said: “The ongoing employer contributions at £400m and 13.6 per cent of salary are very generous compared to the majority of DC schemes.

“For members of the cash balance scheme there will still be an element of certainty around their benefits. The plans to launch a CDC scheme will be watched with keen interest by the pensions industry, which has very mixed feelings about the viability of such schemes.”

maria.espadinha@ft.com