PENSIONS UPDATE

[lovejoy]

Dear Colleague,

RE: PENSIONS UPDATE / GOVERNMENT REVIEW / NATIONAL BRIEFING 19th & 20th FEBRUARY

Please see attached pre-reading and the final agenda for next week’s briefing. Printed copies of this material will be supplied at the venue.

In the meantime branches should ensure the information contained in the attached documents is copied to all CWU representatives. This will serve as both a comprehensive update and useful background to a letter that will be sent to member’s home addresses.

Given the importance of the government review of liberalisation we are now encouraging branches to invite their political officers to the briefing in addition to your other attendees.

Pensions Update

Based on feedback from the consultation process we have advised Royal Mail we cannot support the consultation proposal as the final outcome.

In our discussions we are pursuing alternative and less severe ways of introducing pension changes. Moreover we are urging the company to take a step back – look at the bigger picture – and consider pensions in conjunction with the government’s announcement to review competition.

Royal Mail have advised us they remain committed to the key dates of the 1st April to implement changes for existing employees and the end of this month to close the scheme to new entrants. Therefore we are at a crucial stage in pension discussions.

If we cannot reach agreement it is likely that the company will announce their final position in the next week or so. The Union remains committed to reaching an agreement and placing any final agreement before the membership. We are also committed to reaching a satisfactory conclusion on pensions by using all available options.

A further meeting is taking place today and branches will be updated in due course.

Yours sincerely


Billy Hayes Dave Ward
General Secretary Deputy General Secretary (P)

This briefing document is intended to summarise the reasons Royal Mail is proposing change
to pension benefits, summarise the changes proposed, examine some potential alternatives
and explain the CWU position taking into account the consultation feedback.
Why is Royal Mail Proposing Change?
It is important to recognise the wider background against which Royal Mail have made their proposals
– the business has experienced a substantial loss in revenue associated with loss of bulk mailers to
competitors through downstream access, overall mail volumes are falling and the regulatory environment
is hostile. The savings the business is seeking form a key part of its Business Plan.
The 2006 scheme valuation resulted in a massive increase in the contribution required from Royal Mail
to the scheme. There are two aspects to this. The first is that the company is required to meet the shortfall
between the scheme’s assets and its current liabilities – legislation requires any deficit to be paid off
normally within 10 years, but Royal Mail has negotiated an agreement with the scheme Trustees, endorsed
by the pensions regulator, which allows a longer repayment period of 17 years. The deficit funding on
an annual basis for this period is £268 million a year rising with RPI. Additionally an Escrow account to
the value of £1 billion has been set up. Although this does nothing to reduce the deficit it does provide
added insurance in the event of Royal Mail not being able to fund the scheme.
Secondly, in order to fund future benefits, the employer contribution has risen from 12.6% of pensionable
pay to 20% of pensionable pay, equivalent to £581 million a year. This is due to an increase in life
expectancy assumptions used by the scheme’s actuaries and a reduction in anticipated investment returns.
Royal Mail argues that it cannot sustain this level of contribution. The company is therefore proposing
changes to the scheme which will reduce costs going forward – it is not possible to do this without also
reducing benefits. The net effect of the company’s proposals would be to reduce the on-going employer
contribution to 11% of pensionable pay for service going forward – as the proposal now stands there
would be no effect on the deficit, which the company would be required to continue to pay off on the
current basis. Royal Mail point out, and it is important to bear in mind, that the net effect of implementing
Royal Mail’s proposal in full would still mean that the company was paying approximately £100 million
a year more into the pension scheme than prior to the 2006 valuation.
PENSIONS 19/20.02.08
NATIONAL BRIEFING DOCUMENT
The Consultation Proposal
Care Scheme
The company is proposing two major changes to the scheme which will reduce contribution costs going
forward. The first is the closure of the final salary scheme with effect from 1st April 2008 and its
replacement with a Career Average Revalued Earnings (CARE) Scheme. Whereas in a final salary scheme
the level of pension is determined by pensionable pay at the end of the employee’s service (in the case of
the Royal Mail Scheme usually the best of the last 3 years) in a Career Average Scheme actual pensionable
earnings for each year of service are aggregated and averaged. In order to do this each year’s earnings are
revalued by an appropriate index. The company is proposing to use the Retail Price Index (capped at 5%).
RPI is the most commonly used index to uprate in a Care Scheme but other indices may be used, for
example National Average Earnings (NAE).
Royal Mail argue that uprating by RPI preserves the real value of previous earnings in the pensions
calculation, because they rise by the same rate as prices. This method of uprating would produce a saving
to the employer as the actuarial assumption used currently in the final salary scheme is that pay rises 1½ %
above RPI year on year, taking into account the effects of pay reviews and promotional increases. Under
the CARE proposal, an increase in pensionable pay has no implications for past service.
The effect of this change is to reduce the required level of contribution by about 4½ %, roughly
£130 million a year.
Retirement Age
The second major proposed change is to increase normal retirement age to 65 from 1st April 2010. This
produces a similar level of saving as the CARE proposal – around 4½ % or £130 million a year. The saving
arises from the fact that pensions will on average be in payment for 5 years less. Existing employees still
retain the right to retire at 60 or any time thereafter but with a reduced pension on future service.
Net Effect
Taken together therefore, these two measures reduce the required level of contribution by some 9%
of pensionable pay and would therefore (if the employee contribution remains unchanged) require
an employer contribution of 11% going forward.
Neither of these proposals impacts on past service benefits. Pensionable service prior to 1st April 2008
would remain linked to final salary and an unreduced pension based on service to 1st April 2010 could still
be taken on reaching the age of 60. However, service after 1st April 2008 would be calculated on the
proposed CARE basis and pension based on service after 1st April 2010 would be actuarially reduced if
taken before the age of 65.
New Starters
In addition to the above, the company intends to close the current scheme to new starters at 31st January
2008 and replace it with a defined contribution scheme, with a 1 year qualifying period. Royal Mail
portrays this as a risk management exercise rather than cost reduction. Under the current final salary
scheme (or the proposed CARE scheme) the employer is required to make good any shortfall between the
liabilities of the scheme and its assets. The scheme is already much bigger in terms of its assets than the
company. Royal Mail has expressed its determination to avoid the further growth in the liabilities of the
scheme which would arise from keeping it open to new entrants. The effect of closure
of the scheme is to transfer pension risk from the company to the employee in the case of new starters.
CWU Achievements to Date
Before considering our response to the company’s proposals based on the feedback from our branches
and members it is important to recognise the significant influence the union has already been able to
bring to bear. Most significantly, the company’s original proposal would have reduced the deficit within
the scheme by £1.6 billion by closing the scheme at 1st April 2008 and linking benefits for service to that
date to final salary in the best of the last 3 years to that point, subsequently uprating by RPI (capped at
5%). That aspect of the proposal was dropped by the company and service to 1st April 2008 will remain
linked to final salary at the point of leaving the business, at whatever time that is in the future.
The company originally proposed to increase the normal retirement age to 62 from 1st April 2008, prior
to increasing it to 65 from 1st April 2010. This interim step has been removed from the proposal.
A further very significant change to the proposal is the ability to take unreduced pension at 60 on that
element of service prior to 1st April 2010, whilst remaining a contributing member of the scheme and
building up additional pensionable service. Coupled with the increase in maximum pensionable service
from 40 to 45 years this would enable many scheme members to build up a greater level of pensionable
service whilst at the same time enjoying lump sum and unreduced pension on service accrued before
1st April 2010 from the age of 60.
Consultation Feedback
There is a general recognition that some form of pension reform is needed. However there is clearly
strong opposition to the company’s plans to cease the final salary scheme and increase retirement to age
65. There is a strong desire to find alternative options. As is to be expected different groups of members
have different priorities – it is clear that for some members the big issue is the change in the retirement
age, whilst other contributions to the debate identify the maintenance of a final salary scheme or
improvement to the CARE proposal as being key. It is noteworthy that many contributors have suggested
that the union may have been too quick to close down the option of an increase in the employee
contribution. It has been suggested that members may be prepared to pay more, either to offset the
impact of change in retirement age, or to retain a final salary scheme.
Another consistent theme has been a reluctance to accept permanent changes based on the current
valuation, when future valuations may produce an improved picture, if investment returns perform better
than expected or longevity does not increase by the rate anticipated. It has been pointed out that the
2007 interim valuation showed a reduction in the deficit and this trend may continue. If the union is
successful in advancing its case with the government as part of the review of competition this would
serve to underpin the position of Royal Mail into the future.
CWU Response
Royal Mail has accepted that it will continue to discuss its proposals with the union beyond the closure
of the formal 60 day statutory consultation exercise on 16th January. The company has indicated that the
1st April 2008 is a key date, because it needs to make financial savings in the forthcoming financial year.
The closure of the scheme to new entrants has been deferred for one month.
The union’s position has been that any change should be by agreement and the union intends to put
any final agreement to a ballot of its members in the usual way.
Clearly this is a huge issue for the company and for CWU members. It is essential that the union’s position
is fully thought through and that any changes we are seeking to the company’s proposal are deliverable
and have the support of our members.
It is true that the 2007 interim valuation indicated a reduction in the size of the deficit, but whilst it is
possible that this trend might continue through to the 2009 valuation this is by no means guaranteed.
Indeed, the recent stock market problems and reduction in long term interest rates are likely to produce
a worse position in the 2008 interim evaluation. The key issue for the company is that it has to bear the
costs arising from the defecit on the one hand and on the other the revised longevity and investment
assumptions here and now.
The CWU’s objective must be to reach an agreed position with Royal Mail, based on securing the
best possible terms going forward. It is essential that the union puts itself in a position to achieve
improvements in pensions should future valuations show an improved position and the company’s
financial position becomes stronger. Key to this will be the outcome of the review of competition.
Alternatives to the company’s proposal are examined below:
New Starters
From the outset the company has been very clear about its intention to close the scheme to new starters.
It does not regard this as an issue of cost, but rather one of risk management into the future. There has
been very little indication that the company is prepared to consider moving from its position. The union
has of course argued strongly for keeping the scheme open to new entrants. Against the background of
the other changes being proposed this is not the key issue for the majority of our members. Nevertheless,
it remains important that we do all we can to achieve the best possible outcome for new entrants. A
variety of steps can be taken to share risk such as hybrid schemes, cash balance arrangements and so on.
There has been some discussion of a nursery scheme arrangement, whereby new starters would go into
a defined contribution scheme for a period of time and then be able to join the defined benefit scheme.
Career Average Revalued Earnings (CARE) Scheme
A common feature of most of the submissions is a desire to retain a final salary scheme. The point has
been made that few unions have been prepared to accept closure of final salary schemes to existing
members (although a significant number of schemes have in fact closed to existing members, and
where final salary schemes have remained open, that has often been on the basis of reduced accrual
rates or other reductions in benefits).
The issue for the employer is one of cost. The key for the employer is the link to RPI. The actuarial
assumption is that wages rise year on year 1.5% ahead of RPI, it is the linkage to RPI that produces the
saving. Royal Mail’s alternative to a CARE scheme was a proposal which would have limited increases in
pensionable pay to RPI (capped at 5%). There were potential complications with this proposal – it would
certainly have impacted on wage bargaining, would have complicated regrading exercises and would
have impacted disproportionately on CWU members – scheme members would still get the full benefit
of promotional increases in pay but not the full benefit of increases negotiated in the annual pay review.
Royal Mail has previously indicated a willingness to consider retaining the final salary scheme but making
changes to achieve the same level of saving, for example by changing accrual rates. The view the union
has taken is that a significant change in accrual rates is not a path our members would wish to go down,
and the results of our own and the company’s consultation exercise seem to bear this out.
To retain the existing final salary scheme would require a contribution 4½ % greater than that proposed
by Royal Mail (Royal Mail’s proposed overall level of contribution going forward is 17%; 11% from Royal
Mail and 6% from employees. To retain the current final salary scheme but with a retirement age of 65
would require a contribution of 21.5%, a cost approximately £130 million a year greater than Royal Mail’s
proposal).
An alternative worth considering would be to seek to improve the CARE proposal. In principal a CARE
scheme has some benefits for CWU represented grades. It avoids the distortions which arise from a final
salary scheme which is based on a snapshot of pensionable pay at the end of employment. A final salary
scheme inevitably produces a degree of cross subsidisation from those whose earnings remain relatively
constant to those whose earnings increase during the course of their career as a result of promotion.
Arguably a scheme member “gets what they pay forâ€

[Big Daz]

Well done Billy and Dave

Keep up the good work!

[Big Daz]

I thought the following was a very good point.

The Link to the Government Review

Given that the whole subject of Pension Reform is being driven by the competitive and economic
pressures Royal Mail are facing there is a clear opportunity to link the pension debate to the Government’s
Review of competition. It is already PEC policy to adopt this approach. The simple truth is unless Royal
Mail addresses the underlying problem of competition in a meaningful way the company does not have
a viable future with or without Pension Reform. It is legitimate for the Union to insist that any final
agreement on Pension Reform should only be endorsed when and providing we are satisfied that Royal
Mail and CWU have an agreed approach to the Government’s Review.

[dvbuk55]

This was a difficult document to read. If it was set out in this fashion for the rank and file they would have given up after 2 paragraphs.

There seems to be an underlying theme for an increased contribution by the members with an ever decreasing contribution by the employer.

No one seems to have noticed that the deficit, in part at least, is down to RM and the Government and no amount of flannel detracts from that fact.

Is the £1Bn set aside part of the loan?

Even with a sliding scale of later retirement to an eventual 65 we will pay more and end up with less UNLESS we increase our contributions to offset the balance.

If the proposals were accepted and some chose to leave before 65, there would be an actuarial adjustment which is not stated but I believe to be 5% p.a. which is not an inconsiderable loss.

Finally I am not at all happy that the future pension scheme rests on an agreed plan of action for a realistic evaluation of dealing with the competition. This, at least to me, smacks of a deal in the making on a quid pro quo basis. The business plan for the future should not depend on an agreement over pension rights but should be a given, considering that we are a Nationalised business, that there is a report due on the impact of the opening of the market to competition and if the USO is to be protected. For all the posturing there is still no guarantee that the industry will survive the next ten years and in the event of a change of government privatisation IMO is certain and any agreement now on the pension would be worthless. The CWU leadership are obviously for bending - but then again their pension is assured because we provide it.

[BELIAL]

So the PEC have set their targets as

Reduced final salary scheme ,increased member contributions,increased retirement age and final salary closed to new entrants.

Pay more,work longer, for less.

Whose corner are the CWU fighting for? I'm getting confused

[BELIAL]

This was a difficult document to read. If it was set out in this fashion for the rank and file they would have given up after 2 paragraphs.

There seems to be an underlying theme for an increased contribution by the members with an ever decreasing contribution by the employer.

No one seems to have noticed that the deficit, in part at least, is down to RM and the Government and no amount of flannel detracts from that fact.

Is the £1Bn set aside part of the loan?

Even with a sliding scale of later retirement to an eventual 65 we will pay more and end up with less UNLESS we increase our contributions to offset the balance.

If the proposals were accepted and some chose to leave before 65, there would be an actuarial adjustment which is not stated but I believe to be 5% p.a. which is not an inconsiderable loss.

Finally I am not at all happy that the future pension scheme rests on an agreed plan of action for a realistic evaluation of dealing with the competition. This, at least to me, smacks of a deal in the making on a quid pro quo basis. The business plan for the future should not depend on an agreement over pension rights but should be a given, considering that we are a Nationalised business, that there is a report due on the impact of the opening of the market to competition and if the USO is to be protected. For all the posturing there is still no guarantee that the industry will survive the next ten years and in the event of a change of government privatisation IMO is certain and any agreement now on the pension would be worthless. The CWU leadership are obviously for bending - but then again their pension is assured because we provide it.

Yep, I thought it was complete bullpoo to

[dvbuk55]

Strangely enough I have received a document today signed by the two muppets which falls far short of the the posting by Lovejoy. A very much watered down version.

[kwikpost]

Strangely enough I have received a document today signed by the two muppets which falls far short of the the posting by Lovejoy. A very much watered down version.

am i reading this letter right. none of us can retire at 60 or have our pension at 60. we all have to go the hole hog till 65.

[k979aaa]

Strangely enough I have received a document today signed by the two muppets which falls far short of the the posting by Lovejoy. A very much watered down version.

am i reading this letter right. none of us can retire at 60 or have our pension at 60. we all have to go the hole hog till 65.

No you can retire but at reduced term's ie maybe lose 25% if you go early and this is why we must fight this now!. MARK MY WORD'S WE WILL BE ON STRIKE SOON!.

[jemima]

RM decided what they would do, months ago. "Consultation" meant nothing. They just said they'd talk to get past the strike problem. I don't know why people are surprised about this now.

[TrueBlueTerrier]

Strangely enough I have received a document today signed by the two muppets which falls far short of the the posting by Lovejoy. A very much watered down version.

am i reading this letter right. none of us can retire at 60 or have our pension at 60. we all have to go the hole hog till 65.

No you can retire but at reduced term's ie maybe lose 25% if you go early and this is why we must fight this now!. MARK MY WORD'S WE WILL BE ON STRIKE SOON!.

Apparently the pension accrued till Apr 08 will be protected so you wont loose 25% of that ( Until they change the rules again). However, I still thinks its a bad deal and think we may be out again this year over it. However, I don't think this strike will be as solidly supported as last time. Perhaps a work to rule, which most seem to prefer would be a better idea than striking.


However, for some reason CWU bosses don't like WTRs

[Fluke]

Strangely enough I have received a document today signed by the two muppets which falls far short of the the posting by Lovejoy. A very much watered down version.

am i reading this letter right. none of us can retire at 60 or have our pension at 60. we all have to go the hole hog till 65.

No you can retire but at reduced term's ie maybe lose 25% if you go early and this is why we must fight this now!. MARK MY WORD'S WE WILL BE ON STRIKE SOON!.

Apparently the pension accrued till Apr 08 will be protected so you wont loose 25% of that ( Until they change the rules again). However, I still thinks its a bad deal and think we may be out again this year over it. However, I don't think this strike will be as solidly supported as last time. Perhaps a work to rule, which most seem to prefer would be a better idea than striking.


However, for some reason CWU bosses don't like WTRs

WTR's are hard to enforce. Its hard enough trying to convince people not to come in or use their cars. IMO, a strike is the only thing we can use, the problem is, how effective will it be if we leave it until the summer? April/May is still a fairly busy period, what with it being the end of the financial year ect.. So it needs to be soon.

[Stormproof]

I would be prepared to strike, I've put 12 years of my life into RM (only 19 to go I hope) and don't expect my retirement plans to go tits up. I can't see Billy/Dave letting us walk after the mess they made of last years action, they are only in it for themselves and our pensions probably don't concern them, they will be long gone.

[k979aaa]

Strangely enough I have received a document today signed by the two muppets which falls far short of the the posting by Lovejoy. A very much watered down version.

am i reading this letter right. none of us can retire at 60 or have our pension at 60. we all have to go the hole hog till 65.

No you can retire but at reduced term's ie maybe lose 25% if you go early and this is why we must fight this now!. MARK MY WORD'S WE WILL BE ON STRIKE SOON!.

Apparently the pension accrued till Apr 08 will be protected so you wont loose 25% of that ( Until they change the rules again). However, I still thinks its a bad deal and think we may be out again this year over it. However, I don't think this strike will be as solidly supported as last time. Perhaps a work to rule, which most seem to prefer would be a better idea than striking.


However, for some reason CWU bosses don't like WTRs

WTR's are hard to enforce. Its hard enough trying to convince people not to come in or use their cars. IMO, a strike is the only thing we can use, the problem is, how effective will it be if we leave it until the summer? April/May is still a fairly busy period, what with it being the end of the financial year ect.. So it needs to be soon.

Too my own thinking a one day strike is a boon for royalfail the only way this time is all out indefinitely first time and this approach should be continued till the end!.FOR THIS IS FOR YOUR FUTURE AND YOUR CHILD'S FUTURE REMEMBER RIGHT'S WERE NOT GIVEN TO US BUT WERE FOUGHT FOR BY OUR ANCESTOR'S!.

[mailsort6]

I have given RM nearly 25 years of my life and there's no way I going down without a fight. When I started working for RM I accepted and signed for RM's POPS or POSS pension schemes these were terms and conditions that were part of my contract of employment, therefore, why should this be breached?