Financial Times analysis of RM pension fund

[jemima]

From
http://www.ft.com/cms/s/0/9775ffd2-90c0 ... ck_check=1

"Postal deal signed, but will it deliver?
By John Ralfe

Published: November 12 2007 02:00 | Last updated: November 12 2007 12:08

Royal Mail and the Communication Workers Union have just agreed a package of changes to pay, working practices and pensions to end industrial action. The Royal Mail Pension Plan is the UK's largest corporate pension scheme by members - 450,000 - and second largest by IAS19 liabilities - £28bn (€40bn) - behind its privatised cousin, BT Group.

With wafer-thin margins and increasing competition, containing £28bn of pension liabilities, a £5bn deficit and £720m annual cost of new pension promises, is crucial to Royal Mail's future.

Is the agreed deal enough?

Closing the defined benefit plan to new members will save about £20m in year one and moving from final salary to career average for future pensions saves a further £50m a year. Raising the retirement age from 60 to 65 by 2010 is the biggest saving - £160m a year - but is also the most controversial. Royal Mail is now starting a formal consultation with members on the pension changes.

Pensions for Royal Mail senior managers, who are in a separate plan, are much more generous than for other employees - the annual pension promise is 1/45th not 1/60th of salary, allowing them to earn a 2/3rds pension over 30 not 40 years. The real issue for Royal Mail is not reducing the cost of future pension promises but how to plug the £5bn deficit for pensions already promised.

Moving to career average for existing pensions - abandoned in the face of union opposition - would have meant a one-off reduction in liabilities and deficit, estimated by the Communication Workers Union as £1.6bn, 30 per cent of the £5bn deficit. Unlike a private company Royal Mail cannot borrow to make a one-off contribution. It is currently making inflation-linked deficit contributions of £260m a year - versus only £233m operating profit in 2007 - with the aim of clearing the March 2006 deficit over 17 years, as agreed with the trustees and the regulator Postcomm. A £1bn escrow account was also set up to provide extra protection for members if Royal Mail became insolvent.

But the March 2006 actuarial valuation understated liabilities and the deficit by £2.2bn against the market IAS19 position and understated the annual cash contributions required to plug the deficit. Even if this cash drain is sustainable, the payments are not enough to clear the £5bn IAS19 deficit - after 17 years there will still be a £2.9bn IAS19 deficit.

Royal Mail is relying on the continuing equity bet - 65 per cent of assets, or £15bn, are in equities - to clear its pension deficit. Are the board, the government and Postcomm managing the implications for customers and taxpayers of the huge risk in this equity bet or just keeping their fingers crossed?

Customers are already paying for the pension deficit through higher stamp prices, agreed with Postcomm in the 2006-2010 price control review. A complex mechanism also allows price rises if the deficit increases beyond a certain point - so customers remain on-the-hook and should brace themselves for further price rises.

For many years the plan held 80 per cent equities, but in the year to March 2007 it moved to 65/35 equities/bonds and property and bought £2.5bn index-linked gilts. But just to pay the £800m annual pensions needs £16bn of bonds/property at a 5 per cent yield - double the current bond/property allocation.

Royal Mail adopted tougher longevity assumptions in 2006, a four-year increase over 2005, including "medium cohort" future improvements, adding £3bn to £4bn to liabilities and deficit. These are at the tougher end of the assumptions used by most private companies, but there may be further improvements with each extra year adding about £1bn to liabilities.

The government has £2.9bn committed loan facilities to Royal Mail, supposedly at "market" interest rates. Despite EU competition rules it is difficult to see that the government could allow Royal Mail to become insolvent. If it did, the good news for members is that they would enter the Pension Protection Fund and receive compensation in line with the PPF rules. The bad news is that such a huge claim would sink the PPF - the PPF's latest consultation document discusses imposing a further levy on schemes with deficits large enough to sink it. Privatisation of Royal Mail - the last utility in public ownership - has been discussed in recent months, especially by its chairman, who is keen to see employee share-ownership. This cannot work unless the government takes over the existing pensions, which would be illegal under EU competition rules.

The government does not guarantee Royal Mail and is committed to treating it like any other commercial company. But judged on its own balance sheet, and without an implicit government guarantee, Royal Mail is, sadly, technically insolvent - £2.3bn negative net assets at March 2007, including the £5bn pension deficit.

John Ralfe is an independent pension consultant. This is based on a research note written for RBC Capital Markets."

[F0zziebear]

For a purely factual and non-emotional article this seems to be very good, and everyone should read.

The downside is the way forward on this, as it's a major problem, and may well get worse in the future.

I would not be considering retirement just yet if I was in this pension fund, and would certainly not be relying it for my pension after retirement either.

[jafferpants]

For a purely factual and non-emotional article this seems to be very good, and everyone should read.

The downside is the way forward on this, as it's a major problem, and may well get worse in the future.

I would not be considering retirement just yet if I was in this pension fund, and would certainly not be relying it for my pension after retirement either.

Once your drawing the pension it cant be removed regardless of what happens to the fund. It's covered by general pensions regulations, as evidenced by past funds that have gone to the wall. It then becomes governmemt liability.

[F0zziebear]

The current generation of pensioners have had huge property price growth and will also have a bumper pension.

It's the next generation and the one's after them that will really feel it:
1. Their pension never matures into anything even though they've been paying for years
2. Don't get a pension and then have to work til they're 75 as they had to rent as couldn't afford a property.

I can see it coming and it won't be pretty for the poorer end, even though we have bumped billions in over the last decade we don't seem to be closer to reducing the wealth gap dviide, if anythig it's got alot wider. Where did it all go wrong. Blue didn't work, red hasn't worked. Time for the yellow brigade? Or maybe it's time to have the political view called 'green' added on facebook?

Where's my DHL parcel?

[jafferpants]

to-day it was released in the press that britain pays the lowest old age pension in europe.

[dvbuk55]

to-day it was released in the press that britain pays the lowest old age pension in europe.

We have just had remembrance Sunday - check the war widows pension between our victorious army and the German army - frightening!

[chromium05]

I have been saying for over a year that RM is technically bankrupt.

The FT has just confirmed this.

Any other company with such unpayable liabilities would be under serious investigation.

NOW comes the privatisation "lifesaver"....

[baldrick]

[quote="F0zziebear"]For a purely factual and non-emotional article this seems to be very good, and everyone should read.

- But it doesn't mention the pension holiday taken by Royal Mail.

[baldrick]

The downside is the way forward on this, as it's a major problem, and may well get worse in the future.

I would not be considering retirement just yet if I was in this pension fund, and would certainly not be relying it for my pension after retirement either.

Some of us don't have much choice.

[strangler]

to-day it was released in the press that britain pays the lowest old age pension in europe.

We have just had remembrance Sunday - check the war widows pension between our victorious army and the German army - frightening!

Yes it`s scandalous. All war widows should get a decent pension whichever country they`re from, their husbands paid the ultimate price.

[cwudino]

right baldrick and it also omits to mention RM,s vr package,s 2 make way 4 part-timer,s
reducing liabilities . It also forget,s 2 mention the improvement in the deficit in the last 2yr,s.
just Gordon and buddie,s buttering up public.

first FT then the comic,s!

[chromium05]

Strikes across France start today for the very same reasons - state pensions.

[jafferpants]

Strikes across France start today for the very same reasons - state pensions.

dont talk to me about strikes in france iv'e had an oeuf of that

[dvbuk55]

Boiled or fried?

[jafferpants]

Boiled or fried?

thank god someones on my wave length