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Mediators Report: Pensions

06 Dec 2017, 19:42

The Royal Mail currently has two pension schemes in operation for its workforce, a Defined Benefit (DB) Scheme which will close on 31 March 2018 and a Defined Contribution (DC) Scheme which employees have joined after the DB scheme was closed to new members in 2008. There are 85,000 active members in Royal Mail’s DB scheme and 45,000in its DC scheme. New starters are placed in what is referred to as the ‘nursery’ section and require a year’s service in the nursery section before joining the standard section of the Defined Contribution Scheme.

The present DC scheme has three contribution tiers. Employees individually select the level of contribution they wish to make. For members who choose a highest contribution rate of 6% the Company contributes 9%, for those who contribute 5% it contributes 8% and for those contributing 4% it contributes 7%. Prior to the mediation, Royal Mail had offered an increase in its contribution rate of 1%across all three tiers resulting in the Company’s maximum contribution rate increasing to 10% from 1 April 2018.

The pensions issues presented for mediation stemmed from the closure of Royal Mail’s defined benefits scheme to future benefit accrual on 31 March 2018. This resulted in a period of formal consultation with the Union about the future pension provision for those in the closing DB scheme. These discussions led to a proposal from the Union of an alternative single scheme to take the place of the closing DB scheme and the present DC scheme which it saw as providing inadequate outcomes for its members upon retirement.

The Union’s position throughout has been that there should to be a single pension scheme for CWU grades which offers a ‘wage in retirement’. With this mind, it put forward to the Employer a proposal for an alternative pension scheme for all employees known as WinRS. Under current legislation this type of scheme would fit within the legislative framework and regulatory rules applicable to defined benefit schemes. This WinRS scheme was recognised by the Employer to be an innovative proposal and, as a result, it reported investing considerable time exploring its viability. Unfortunately, it was identified that as a large defined benefit scheme WinRS would be vulnerable to volatility which would impact on the funding of the scheme and, under current accountancy regulations, the Company would quickly be shown as technically insolvent on its balance sheets.

It was established during the mediation that Employer supported the principle of a single pension scheme for all employees which would provide a wage in retirement and gave a commitment that it would work together with the Union in the development of a scheme that could be categorized as a collective contribution scheme(CDC/Defined ambition)once the necessary regulations were enacted. Such a scheme would offer better pension provision to its members but not present the risks to organisational viability of a defined benefit scheme under current legislation.

A major constraint facing the parties in developing a new scheme is that, at the present time, the regulations supporting the Pensions Act 2015which would enable the development of Collective Contribution schemes, have not yet been implemented. These regulations would, if drafted appropriately, remove the key barriers for organisations in the adoption of such schemes. There was a commitment from both the Union and the Employer of the need to work together and to seek the involvement of a broad coalition to include other employers, pensions experts and the TUC to lobby government for the enactment of these regulations as a matter of urgency.

Discussions and joint working between the parties, which included the respective pensions advisers, led to the Employer putting forward a proposal, subject to the appropriate regulatory framework being in place, for a single pension scheme. The Company’s proposed scheme would combine a collective defined contribution scheme with a defined benefit cash balance lump sum, a scheme which could best be described as a ‘DC scheme plus’ in that it would provide income during retirement but also a lump sum. Royal Mail’s proposed single pension scheme solution as put to the Union during the mediation process is set out in Appendix A. The Union’s response to this proposal was that an agreement was in ‘touching distance’ but more time needed to be spent on it.

Transitional Arrangements

Prior to the mediation the Employer had put forward a proposal for a Defined Benefit Cash Balance Scheme (DBCBS) for members currently in Royal Mail’s closing defined benefits scheme who would have the option of joining this or the existing Defined Contribution Scheme following the closure of the DB scheme. The DBCBS scheme would allow past DB members to build up a guaranteed lump sum that could be taken as part of the RMPP arrangement. A limitation of this proposal for was that, for the reasons of funding risk and the critical accounting problem already referred to, the size of the scheme was critical and it would only be available to those who were in membership of the closing RMPP scheme.

As the principle of having one scheme which offered retirement income was agreed and a proposed scheme was on the table for further discussion, the issue of transitional arrangements until such single scheme could be implemented was then considered. As part of these discussions the adoption of the cash balance scheme proposal as a transitionary option was revisited. A possible alternative approach was suggested for exploration by the First Actuarial adviser but, after due consideration by the pensions advisers, it was reported that this was not a viable option.

The Employer’s proposed transitional arrangement, while a new single pension scheme was being developed and the necessary regulations implemented, is attached as Appendix B. This provides for those employees who met the qualifying period to have the option of joining the proposed DB Cash Balance Scheme. This option would be available to all RMPP members and employees who had completed 5 years in the DC scheme. In addition, it was proposed that all employees with 12 months service would be auto-enrolled onto the top contribution tier of the DC scheme at the proposed employer contribution rate of 10% of pensionable pay. It is noted that this could develop into a large scheme which could lead to the same problems occurring under the present regulatory framework as identified earlier in this report. This is identified as a driver for lobbying government for the regulations to enable the provisions of the 2015 Pensions Act to be put in place as quickly as possible.

Summary Position

The parties agreed that:

a) the employer’s pension proposal, detailed in Appendix A, reflected the parties’ shared goal of one scheme for all and a wage in retirement but agreed that more time needed to be spent on this with the assistance of pensions experts,

b) the Employer and Union would work together to lobby government to enact the regulations to support the adoption of collective contribution pension schemes(CDC/Defined Ambition),

c) the transition arrangements set out in Appendix B to be the subject of further discussion between the parties.


Appendix A

Royal Mail Pension Proposal -the longer term solution

Combining a Collective Defined Contribution (CDC) “Wage in Retirement” Scheme and a Defined Benefit Cash Balance Scheme (DBCBS) lump sum.


Keys Features:

A target career average scheme

Eligibility - 12 months’ service
Pensionable pay - Basic pay (actual) plus pensionable allowances
Contributions – members 6% of pensionable pay
Contributions - employer 13.6% of pensionable pay
Target CDC Pension - 1/80thof pensionable pay plus RPI revaluation*
Guaranteed DBCBS Lump Sum - 3/80thsof pensionable pay, with revaluation to date
Target revaluation before retirement - RPI (pension and lump sum)
Target increases to pensions in payment - RPI
Normal Retirement Age --67 (similar to WinRS, but frozen at 67)
Lump sum on death in service - 4 x pensionable pay
Dependants pension - 50% of member’s pension
Ill-health benefit - 50% of pensionable pay, less State benefits, payable for up to 3 years
* assumes asset returns of CPI+3.5% pa

Under this proposal:

•Single scheme for all employees with at least 12 months’ service (new employees in an autoenrolment compliant nursery scheme as currently)
•Targeted benefits are very similar to the current Section B design.
•Current Section B members benefit from having pension increases in payment targeted at RPI rather than the current CPI
•Current Section C members benefit from not having the Lower Earnings Deduction applied to their pensionable pay
•Current DC members would benefit from a guaranteed lump sum and a CDC pension expected to be well above DC annuity levels
•Royal Mail bears the risk of guaranteeing the DBCBS lump sum
•Royal Mail’s contributions would be £400m in 2018/19 on current projections (if 6,146 members choose to stay in nursery scheme)

Next steps:

As discussed, the above can only be implemented if the appropriate regulatory framework is in place. The Company is willing to commit resources to working jointly with the CWU to achieve this in as short a timeframe as possible. We think this should start with the setting up of a Joint Pensions Forum to initiate a targeted CDC work programme. A possible framework for this could be: Steering Board –high level sponsorship from both Company and CWU Responsible for:

I. Setting the remit of the Forum

II. Monitoring the overall direction and progress of the working groups, and acting as a point of escalation for any issues that cannot be resolved within those groups.

III. Engaging with like-minded bodies and organisations to encourage them to join in lobbying activities for the passing of legislation/regulations enabling the establishment of collective benefit schemes.

IV. Monitoring progress of the sub-groups


Scheme Design Group – working group including professional advisors –actuary, investment advisor, accountants etc. Responsible for:

I. The detailed design of the scheme, including the target benefits and governance structure.

Lobbying Group - Responsible for - Engaging with influential bodies/individuals in order to persuade government to put in place the appropriate collective benefits legislation/regulations.

Appendix B

Royal Mail Pension Proposal -the transitional arrangements

From 1 April 2018, a single DB Cash Balance Scheme will be made available to all employees who have worked for Royal Mail for a qualifying period. This is a Collective arrangement with a single asset pool for members. An enhanced DC pension scheme will be provided for employees during the qualification period.

Key features:

DBCB lump sum scheme, from 1 April 2018

Eligibility - RMPP members. Other employees who have completed 5 years contributions to the DC plan following elevation from the nursery scheme will be given the option to join.
Pensionable pay - As for the current RMPP Section C definition, except Section B members will retain their current definition.
Contributions – members 6% of pensionable pay
Contributions -employer 15.6% of pensionable pay
Guaranteed Lump Sum - 19.6% of pensionable pay, plus annual revaluations once awarded
Target revaluation before retirement - CPI +2% per annum
Lump sum tax free subsidy - Scheme would be a section of the RMPP, so that members can take tax-free cash from the DBCB, and avoid commuting existing DB pension

Normal Retirement Age - 65, although benefits will be payable from 60 without reduction if taken with existing NRA60 pension benefits

Lump sum on death in service - 4 x pensionable pay Dependants lump sum Additional 2 x pensionable pay Ill-health benefit 50% of pensionable pay, less State benefits, payable for up to 3 years

Improved DC scheme, from 1 April 2018

Eligibility - 12 months’ service (employees with less than 12 months service are in the nursery section with the statutory level of contribution)
Pensionable pay - Actual basic pay (as for current RMDCP)
Contributions employee - 6% of pensionable pay (members can opt to pay 5% or 4%, with lower employer contribution)
Contributions employer - 10% of pensionable pay (new top tier contribution)
Auto-enrolment - Members will be auto-enrolled at the top contribution tier
Benefit options - Lump sum, flexible drawdown or annuity purchase
Lump sum on death in service - 4 x basic pay
Dependants lump sum - Additional 2 x pensionable pay

Under this proposal:

•Royal Mail’s total pension contributions, including an allowance for risk benefit costs and expenses, would be £400m in 2018/19 in 2018/19 on current projections (if 6,146 members choose to stay in nursery scheme)

•Cash balances would be higher than previously proposed, corresponding to the higher pension spend

•Royal Mail’s risk grows over time as more members join the DBCB scheme, leading to a very large scheme if accrual does not cease within five years


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