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Royal Mail is replacing its current pension scheme after finding annual contributions could triple to £1.3bn
Royal Mail PLC (LON:RMG) has proposed new two alternative pension schemes that will be a “materially lower” risk than its current plan after unions threatened possible strike action by workers.
The postal operator said in April its existing defined benefit pension scheme would end on 31 March 2018 after finding that annual contributions could triple to £1.3bn if no changes were made.
Following extensive talks with unions - Unite/CMA and the Communications Workers Union (CWU) - the company said it is offering employees a choice between a defined benefit or contribution scheme that would be funded within its current £400mln annual pension contribution.
"Royal Mail believes that the risk to the company of the proposed defined benefit cash balance scheme would be materially lower than under the current Plan and is a manageable risk for us," Royal Mail said in a statement.
Unite is planning to hold a consultative ballot to seek members's views on the proposal but is not making a recommendation.
Unite officer, Brian Scott, said: “The latest position is an improvement from the original proposal and through our discussions we have achieved these improvements.”
Royal Mail has also offered the plan to the CWU, which has previously threatened strike action over the incident, to consider.
CWU responds to Royal Mail's pension plans
The CWU has opposed the group’s decision to close the current scheme, saying employees stand to lose up to a third of their future pensions.
In response to today's announcement, CWU deputy general secretary, Terry Pullinger, said: "The CWU rejects the latest proposal from Royal Mail. It does not meet our aspiration of a wage in retirement pension scheme, but rather still promotes the conventional wisdom of a cash-out arrangement at the point of retirement.
"Whilst using elements of the CWU’s proposed Wage in Retirement Scheme, it would still represent a significant shortfall in the pensions promise and it is not something that we are prepared to recommend to our members.”
The CWU represents frontline staff that comprise the majority of Royal Mail’s 142,000-strong workforce.
Royal Mail said that under the current plan it could have an accounting deficit on its balance sheet of £18bn, more than four times its market capitalisation, after 20 years.
"In our view, from a sustainability perspective, the CWU proposal – based on investing 100% of the money in riskier assets such as shares – is too risky. We also calculate the CWU proposal would cost significantly more than we can afford," it said.
How Royal Mail's current pension plan and new schemes work
The current defined benefit scheme offers a guaranteed income in retirement according to workers’ final salary and the length of service.
Royal Mail explained that member benefits built up to April 2012 were backed by the government. Benefits built up between 2012 and 2018 were funded by the surplus from the scheme, which runs out next year.
Under the proposed new defined benefit cash balance scheme, employees will be provided with a cash lump sum linked to the value of their contributions.