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The Royal Mail wants to replace its current pension scheme as it will become unaffordable after 2018
Royal Mail plc (LON:RMG) faces higher costs and risks if it accepts a trade union's proposal for a new pension plan to replace its current scheme, analysts at Liberum said today.
The Financial Times reported yesterday that the postal delivery company was considering a recommendation from the Communication Workers Union (CWU) for a hybrid pension plan to replace its existing defined benefit scheme (DBS).
Royal Mail has said the DBS, which pledges secure income to pensioners, will become unaffordable after 2018 and wants to replace this with a less generous and more common-placed defined contribution (DC) scheme. The DBS could leave the group with a £1bn a year bill to plug the gap.
Under the DC scheme, the employer contributes but the risk of the investment is transferred to the employee.
The CWU has, however, suggested a different solution with a pension scheme that may offer employees a fairer deal with a long-term guarantee on the level of retirement income. It would include an annual assessment of investment performance to decide whether a “core promise” is increased in line with inflation.
Members would be offered more certainty over their retirement income than they would do in a DC plan.
“We suspect any hybrid solution would be likely to result in higher contributions and higher risk to Royal Mail than a DC scheme,” Liberum analyst Gerald Khoo said.
“That might be acceptable given the risk of industrial action, but expanding the hybrid arrangements to current DC scheme members would risk pushing up the cost of pension provision for those staff.”
Liberum reiterated a ‘sell’ rating and a target price of 400p.
Shares in Royal Mail fell 1.08% to 403.40p in afternoon trading.