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Royal Mail workers propose hybrid DC-DB pension

14 Mar 2017, 17:01

https://www.ftadviser.com/Articles/2017 ... DB-pension

The union representing Royal Mail employees has called for the firm to devise a new pension scheme that shares the risk between the business and the workers.
The call came two months after Royal Mail announced its intention to close its defined benefit scheme.

In January, the formerly publicly-owned company proposed closing the scheme to new accruals in 2018, with all future pension contributions going into a defined contribution scheme.

However, the Communications Workers Union refused to accept this deal, calling instead for a "new" style of pension fund that struck a balance between a DB scheme, where the employer takes the risk, and a DC scheme, where the risk falls on the member.

Terry Pullinger, deputy secretary general of postal at the CWU, told FTAdviser the new scheme would review investment performance once a year, and assess whether it could afford to increase pension payments in line with inflation.

He said the investment strategy would have a much higher allocation to equities than the current scheme has.

"The scale of the investment in equities is debatable, but it will be much more aggressive than the current strategy which is totally derisked," he said.

He added that he did not view DC schemes as pension schemes.

Mr Pullinger said he was not overly hopeful Royal Mail would meet the "moral challenge" of providing their workers with an income in retirement, saying he suspected they were more interested in removing the risk of a DB scheme from their balance sheet.

A Royal Mail spokesperson said the company was reviewing the CWU's proposal, alongside other proposals but said there could be "no certainty ... that we will proceed with the proposal".

"We continue to engage with our unions. No decisions will be made until we have considered all feedback and have had an opportunity to discuss this with our unions. We will write to members once a decision has been made," the spokesperson said.

The proposal comes as troubled DB schemes are increasingly finding unconventional ways to protect their members from falling into the Pension Protection Fund.

Last month former BHS owner Sir Philip Green reached an agreement with The Pensions Regulator to provide £363m for a new pension scheme for the members of the defunct BHS pension scheme.

The new scheme would have no sponsoring employer, prompting predictions so-called "zombie schemes" would become more common.

The CWU's proposal also followed the publication of a government green paper on the future of the DB sector, in which the government proposed reviewing the indexation of annual pension increases.

While the CWU claimed the hybrid pension model was new, pensions consultancy Hymans Robertson said similar models were used in the 1970s.

"Back in the 1970s DB pension schemes had these type of pressure release valves which successive layers of legislation have stripped away," Jon Hatchett, head of corporate consulting at Hymans Robertson, said.


Royal Mail workers propose hybrid DC-DB pension

14 Mar 2017, 18:18

TrueBlueTerrier wrote:
.... the new scheme would review investment performance once a year, and assess whether it could afford to increase pension payments in line with inflation.



Anyone have any clarification on this particular point ?

What happens if the equities have tanked over the preceding 12 months ? What happens to pension payments ? Presumably there would be a minimium guarantee ?

Royal Mail workers propose hybrid DC-DB pension

14 Mar 2017, 20:19

As far as I’m concerned there isn’t really anything new about the CWU’s proposals compared to any other DB pension scheme, other than the asset allocation. Any shortfall from below than expected investment returns will still mean a potential deficit and so higher contributions from RM and/or the workforce.

So in my opinion the CWU’s pension idea is more LOSRS rather than WINRS, and personally I can’t see anything other than the proposed DC scheme being implemented, with perhaps a few minor tweaks.

Royal Mail workers propose hybrid DC-DB pension

14 Mar 2017, 21:34

RobertT wrote:As far as I’m concerned there isn’t really anything new about the CWU’s proposals compared to any other DB pension scheme, other than the asset allocation. Any shortfall from below than expected investment returns will still mean a potential deficit and so higher contributions from RM and/or the workforce.

So in my opinion the CWU’s pension idea is more LOSRS rather than WINRS, and personally I can’t see anything other than the proposed DC scheme being implemented, with perhaps a few minor tweaks.


The DC scheme will not pay out enough to live on and the company will walk away leaving you to rot and it will be the workforce who are the LOSRS and RM will be the WINRS.

Royal Mail workers propose hybrid DC-DB pension

14 Mar 2017, 22:19

RobertT wrote:So in my opinion the CWU’s pension idea is more LOSRS rather than WINRS.


The CWU's pension idea means that we will still have a pension scheme.

The alternative is an ISA [with RM directing a percentage of our pay into it (which may or may not be taxed back at a later date)].

If you think that the CWU proposal is without merit/unaffordable etc then you need to put some meat on the bones.

Royal Mail workers propose hybrid DC-DB pension

14 Mar 2017, 22:34

Phantom wrote:The DC scheme will not pay out enough to live on and the company will walk away leaving you to rot and it will be the workforce who are the LOSRS and RM will be the WINRS.


That would depend (on average) on how much was being paid into the scheme. Since there isn't some super-secret asset class of investments that's only available to DB pensions, if the same amount is being paid in and the same investments made then (again, on average) the same pensions would be paid at retirement.

Royal Mail workers propose hybrid DC-DB pension

15 Mar 2017, 10:54

jetblack wrote:The CWU's pension idea means that we will still have a pension scheme.

The alternative is an ISA [with RM directing a percentage of our pay into it (which may or may not be taxed back at a later date)].

If you think that the CWU proposal is without merit/unaffordable etc then you need to put some meat on the bones.

I never said it was without merit - on paper it’s a reasonable alternative proposal. But as you said in your earlier post, there are question marks over what happens if the markets crash, particularly in the early years.

We’re not breaking new ground here! Any DB pension scheme will have unknown and ongoing costs that potentially puts the scheme in danger of deficit. Namely investments not performing adequately and increased life expectancy.

The reason I think it won’t be implemented by RM is because it’s the complete opposite to what they want to bring in. They want a scheme where they know what their costs are going to be upfront. With a DC pension they know they’re going to be paying an x %age for each employee. There’s no hidden surprises in the future.

Does anyone really think RM are going to radically change their minds at this late stage? Based on the original article, not even Terry Pullinger thinks so! And if the deputy secretary general of the CWU isn't 'overly hopeful', how can he expect the membership to be any different?

You can argue that RM (or any other employer), has a moral obligation to provide a decent pension for their workers. And they will probably argue that they are offering a better pension than our competitors and at much higher minimum contribution levels set by the government.

A DB scheme for all is an ideal for the workers, but personally I don’t think that will turn out to be the reality.

Royal Mail workers propose hybrid DC-DB pension

15 Mar 2017, 16:20

a strike might force them to change their minds, but I honestly don't think it will be a yes vote.

Royal Mail workers propose hybrid DC-DB pension

15 Mar 2017, 18:28

I'm sorry to say that the CWU proposal is just a box ticking exercise, they had to come up with a counter proposal so they have but it's not a proposal that RM can accept and the union already know that.

Basing a pension scheme around increased investment risk is not only frightening to the business and shareholders, It's also quite scary for members who've already seen what happens when a debilitating deficit almost pulls the whole pension scheme and business down. I'm not taking a political or anti-union stance here, just a pragmatic one.

Royal Mail workers propose hybrid DC-DB pension

15 Mar 2017, 18:40

fishtank wrote:I'm sorry to say that the CWU proposal is just a box ticking exercise, they had to come up with a counter proposal


Not necessarily - they could have just fought for the status quo.

I'm no expert, but I'd say, from my understanding of it at least, that the CWU proposal shows a bit of imagination - and a fair bit of compromise on our part


fishtank wrote:Basing a pension scheme around increased investment risk is not only frightening to the business and shareholders,


You say increased risk - but what is really being called for is the ability to diversify into assets that over the medium and long term have minimal risk and substantially better returns than govt. and corporate bonds.
The union are not proposing investing our funds on National Lottery tickets.

Seems fair enough to me.

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