Special Report:SECTION 1 PENSIONS

[fishtank]

SECTION 1 PENSIONS


It was reported to the Liverpool Policy Forum and Annual Conference that both Royal Mail Group and Post Office Limited had advised the Union that a serious problem had emerged regarding the cost of funding future accrual of pension benefits for members of the Royal Mail Pension Plan (RMPP). On 28 May the Union received formal proposals from both companies for changes to pension benefits designed to maintain the employer contribution at its current level (17.1% of pensionable pay).

CWU Members are entitled to feel surprised and angry that – only a few months after a pension’s settlement presented as safeguarding pension benefits – the employers are proposing further changes to benefits. There remains huge question marks over the legitimacy of these proposals and the actions of the company, Government and Trustee Board. It is impossible not to draw the conclusion that the timing of this latest pension development is directly linked to privatisation and the need to subsidise future costs for potential investors. On this aspect the Union is determined to hold the company and Government to account.

These proposals were rejected by the Postal Executive and both companies were informed that any attempt to take Executive Action on pensions would result in a National Industrial Action Ballot. Both companies have now commenced the 60 day legal consultation process on the proposed changes and this is due to conclude on the 25th August 2013. Both companies have also stressed their desire to make change by agreement with CWU and Unite and have confirmed that they will engage in negotiations both during and after the consultation has concluded. More recently Royal Mail has linked agreement to the company’s pension proposal to its offer on pay and other issues sent to the Union on 17th June 2013.

Although the Union has rejected these proposals, we also have a responsibility to ensure we have an informed debate about what the company are proposing and its potential impact on CWU members and the longevity of the overall scheme. As such the following will provide a comprehensive overview of the company’s proposal as well as setting out CWU policy.

What is the Problem?

The scheme is not in deficit. The cost of pension benefits relating to service up to April 2012 was assumed by the Government as part of the pension settlement. This removed the deficit and with it the requirement for the business to make an annual contribution to deficit reduction of £300 million per year.

The problem relates to funding future benefit accrual. The Union has been told that the assumptions the trustees are using to finalise the current scheme valuation will mean that Royal Mail’s contribution is likely to rise from 17.1% (approximately £385 million per year) to 30%, which would cost an additional approximately £300 million a year. Post Office Limited has set out the same position, albeit their numbers are proportionate to the smaller size of the company.

The companies say that the problem is due to the returns on gilts having fallen significantly since the last actuarial review to a historic low. This is important because gilt yields form the basis on which pension liabilities are calculated. The companies say that as gilt yields have fallen the trustee has reduced the discount rate used to calculate the present value of future pension payments, increasing the value of the plan’s liabilities. The companies say that this situation could not have been foreseen at the time the Government state aid submission was drawn up but even if it had been, the Government would only have been allowed to deal with the historic deficit.

What is the Proposal?

The companies considered, but discarded, options to close the plan to future accrual, increase member contributions, further increase the retirement age, or change accrual rates. Instead, they propose to link future increases in pensionable basic pay to the retail price index (RPI) capped at 5%. This does not mean that actual pay will be linked to RPI – but up-rating for pension purposes would be. In detail:

• The basic pay element (after deduction of the LED for Section C members) would be fixed at 31 March 2014. The first RPI uplift would be applied on 21 April 2014 and annually thereafter.

• Increments or broadband progression (where these are greater than RPI capped at 5%) would be applied for promotions which took place before 31 March 2014.

• Increases arising from promotions after that date would be reflected in CSDD (usually referred to as CARE) pensionable pay, but not final salary pensionable pay.

• Pensionable allowances and pensionable bonuses will continue to be included in pensionable pay at their actual values, as at present.

This would immediately put the plan in surplus – the approximately £2 billion of assets retained in the plan following the transfer of historical liabilities to the Government was based on the assumption that pensionable pay would rise by RPI plus 1%. The release of some of the £2 billion as surplus would allow the trustee to agree to the company maintaining its current contribution rate. As part of the proposal the company would:

• Seek an agreement with the Union, the conditions of which would be legally binding on the company, which would keep the plan open, subject to agreed conditions and periodic review, the first in 2018.

• Increase its contribution to the Royal Mail Defined Contribution Plan (RMDCP) by 1% at each tier. In addition, it would consult with members of that plan on removal of the lowest tier of contribution.

• Seek the agreement of the RMDCP trustees to a revised member nominated trustee process, giving CWU responsibility for running the nomination and selection process for one of the current member nominated trustee positions.

• Establish a joint governance group with the Unions as a forum to discuss pension issues.

Post Office Limited plans to make the same changes to its section of RMPP but would enter into formal discussions with the Union separately.

Who would be affected?

Members of the RMDCP. Active members of the RMPP in Royal Mail Group, Post Office Limited, Romec and Quadrant. There will be no effect on pensions in payment or on deferred pensions.

What would be the effect?

Members of RMPP

As part of the 2008 pension changes, the final salary link was ended for accrual after 1 April 2008. Pension benefits after that date are calculated on annual pensionable pay, up-rated by RPI. However, the link to final salary was retained for calculation of pension benefits for service before that date.

Service prior to 2008

The proposal would end the link to final salary for pensionable service prior to 2008. The individual effects of ending this link would vary according to circumstances and the differential over a period of time between actual basic pay and RPI.

• Someone achieving a promotion after March 2014 would be likely to lose – they would retain the benefit in pension terms in the career average calculation of post March 2008 service, but would not benefit in the calculation of pre April 2008 service.

• For someone remaining in the same grade the outcome would depend on the relationship between RPI and basic pensionable pay. If basic pensionable pay increases tend to move ahead of RPI over the period they will be worse off than under current arrangements. If RPI outstrips basic pensionable pay however, they will be better off.
• The effect of variations in pensionable allowances (e.g. shift allowance, TPM allowance etc) would be as at present. So, an individual moving onto a higher level of shift payment in the last 3 years of pensionable service would continue to receive a higher level of pension in the calculation of pre 2008 service as now.

Service after March 2008

• A member achieving a promotion after March 2014 would benefit in respect of the pension calculation for post March 2008 accrual as at present.


• For someone remaining in the same grade, the outcome would depend on the relationship between RPI and basic pensionable pay as above – if RPI increases faster than pay they will be better off in pension terms, if pay outstrips RPI they will be worse off.

• Changes in pensionable allowances will be calculated as now.

Members of RMDCP

• Members of RMDCP would be consulted on ceasing the lowest tier of contribution (member 3%, RM 5%). On the remaining two tiers Royal Mail’s contribution would increase by 1% (member 4%, RM 7%; member 5%, RM 8%).

CWU Response and Next Steps

The Postal Executive has committed to a series of steps to test the extent of the problem in funding future accrual and the legality and legitimacy of the solution proposed by the companies. The pension issue is clearly linked to the other issues addressed within this report – indeed, Royal Mail Group has sought to link agreement on pensions to a settlement on pay. The Union has adopted a robust policy covering the following:

• The Postal Executive has rejected the proposals and any link to a future pay settlement.

• Royal Mail and Post Office Limited have been advised that any attempt to introduce pension changes by Executive Action will result in an Industrial Action Ballot.

• The Union is calling for the trustees to hold an extraordinary meeting for scheme members.

• We are exploring the legality of the companies’ proposals with our lawyers.

• We intend to approach the European Commission as to its view on the legality of the issue given the linkage to approval of the state aid application.

• We are seeking support from the Labour Party and other political parties to raise the issue in parliament and ensure an enquiry into this development, its linkage to the government pension settlement and European state aid application.

• The Union is writing to all CWU members to encourage them to respond to the consultation process and reject the companies’ proposals.

• We are continuing to engage the company and government on these issues, alongside the issues covered in the “Save Our Royal Mail Campaign” and the national talks.

• We are committed to ensuring that any action to defend our members’ pensions will be co-ordinated across Royal Mail, Post Office Limited and any affected members in ROMEC and Quadrant.

Our priorities must remain:

• To fully protect all aspects of the Defined Benefit Royal Mail Pension Plan and seek the strongest legally binding agreement to ensure this.

• To significantly improve the terms of the Royal Mail Defined Contribution Plan and secure relevant protections in a legally binding agreement.

• To pursue existing CWU pension policy.

RECOMMENDATION 1: That the policy outlined under CWU Response and Next Steps be endorsed.

[nataddick]

I am pleased that the CWU and its advisers are 'on the case' concerning the intended purpose of the £2.2 billion assets left in the RMPP AFTER the date of transfer of the remaining liablities to the RMSPS. As I mentioned on 24 June under The big losers topic, RM's recent preliminary accounts make it clear that these assets were made on an RPI +1% funding assumption and yet we are only being offered RPI.

The other issue that appears not to have been addressed by the CWU in the Special Report in Section 1 is that of Contracting Out that appears on page 10 of the big red book.

The Pensions Bill is only at The Committee stage of its passage through the House of Commons - see

http://services.parliament.uk/bills/201 ... sions.html" onclick="window.open(this.href);return false;

A few issues that need to be clarified :-

1. Are RM trying to use the Pensions Consultation to officially consult with it's members on Contracting Out based on a Bill that has not completed its passage through Parliament. I am no lawyer but I would have expected the consultation to have taken place after the Bill become an Act.
2. RM are proposing to use a statutory override contained in a Bill rather than an Act to legitimately reduce scheme benefits but as I understand it, the reduction in benefits cannot exceed the increase in NIC cost and can only apply from April 2016 (or the date determined by the Act once passed)

'The increased cost to the Company of
these higher NICs has been estimated as
£75 million every year from April 2016.
The Government has proposed that
employers will be given a “statutory
override” to reduce pension benefits to
recover these increased costs.'

3. I have already questioned the issue of whether the £75 million per year of additional funding required to meet the additonal employers NIC's from April 2016 is included in the extra cost RM claim to be £300 million per year. It may be that they have factored in £150 million ( for 2016 and 2017 as the next review would take place in April 2018) and spread this across the 4 years from the date of implementation. This requires clarification.

I have already written to the Trustees and my local MP asking for documentary evidence relating to how the £2.2 billion assets left in RMPP were determined and the intended use of this fund. I will also be writing to both parties asking them to explain the inclusion of Contracting Out in the Proposal and the legal position.