Royal Mail Pensions Proposal – Question _ Answer by dfhrf555fcg

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									                                 CWU PENSIONS BRIEF

Royal Mail Pensions Proposal – Question & Answer

What changes to pensions are Royal Mail proposing?

As part of a pay offer in the Royal Mail Letters pay talks, Royal proposed:

      Closure of the pension scheme to new members
      Increase in retirement age to 65 in 2010
      Pension accrued up to 1st April 2008 to be frozen thereafter increased annually by
       inflation as measured by the Retail Price Index capped at 5% until retirement age
      Pension accrued after 1st April 2008 calculated on the basis of career average
       revalued earnings (CARE) indexed by inflation as measured by the Retail Price
       Index capped at 5% each year
      For new starters a defined contribution pension plan to be offered after 1 years’
       service.

Why are they proposing these changes now?

Following the valuation of the pension scheme in 2006, Royal Mail’s contribution jumped
from 12.6% to just under 30%. This is split into two parts – just under 10% (£260
million per annum) as an annual contribution to pay off the deficit on current liability;
20% (£580 million per annum) to pay for each additional year of service for each
member of the scheme.

Royal Mail say that an annual contribution of 30p in every £1 of pensionable pay puts an
unsustainable strain on the business and must be reduced.

Is this a result of the 17 year contribution holiday taken by the business some
years ago?

Only in part. It is true to say that had the business paid its contribution for that 17 year
period the scheme would not now be in deficit. The £260 million per annum contribution
to pay off the deficit over the next 17 years would therefore not have been necessary if
not for the contribution holiday.

However, the 20% contribution ongoing is not related in any way to the pensions holiday
– it is the result of greater life expectancy which means that pensions remain payable for
a longer period of time and worse than expected performance from the investments
made by the scheme, largely as a result of the poor performance of the stock exchange
in recent years.

Haven’t the Government agreed to cover the deficit?

No. The Government have put money into an ESCROW account to fund pension liability
in the event that Royal Mail becomes insolvent. The money has not been paid into the
pension fund and the only circumstances in which it will be is if Royal Mail becomes
unable to sustain its ongoing deficit contribution.

The pension scheme is group-wide – why is this proposal linked to a Royal Mail
Letters pay offer?

You will need to ask Royal Mail. The union has made the point very strongly that any
agreement on pensions should not be linked to the Royal Mail pay offer, precisely
because it is an issue which affects all members of the scheme whatever part of the
business they work in. The union wants an agreement on pensions – but it must be the
right agreement – we are not in the business of making changes to the pension scheme
to fund a pay award in the Letters business.

Why does the business want to raise the retirement age to 65?

Because this will immediately reduce Royal Mail’s ongoing contribution by about 4½ %
from 20% to roughly 15.5%. Put simply, this saving arises from the fact that pensions
will be in payment for 5 years less.

If retirement age increases could I still take my pension at 60?

It is likely that you would be able to take that portion of your pension accrued up to the
date of the change (1st April 2008) unreduced at the age of 60. Any service after 1 st April
2008 would at best be payable on the basis of an actuarial reduction to take account of
the fact that it was being taken 5 years early.

What is a Career Average Revalued Earnings (CARE) scheme?

At the moment, your pension is based on your pensionable earnings in the best of your
last 3 years of service. A Career Average Revalued Earnings scheme takes pensionable
pay for each year of service, adds it up and divides by a total length of service. To take
account of inflation each year of service is revalued to take account of the change in the
RPI to the point of retirement.

Why close the scheme to new members?

To transfer risk from the business to the individual. According to Royal Mail’s own
figures, the saving from the lower contribution they plan to make to a defined
contribution plan for new members and the payment they expect to make to the pension
scheme for existing members once these changes are enacted only produces a very
small saving – 1% of pay bill in the first 5 years, rising to 3% after 10 years. The real
reason Royal Mail wants to close the scheme to new starters is to avoid future risk – if
Royal Mail is paying, say 8%, into a defined contribution scheme for new employees it
knows that it will only ever have to pay 8% unless it decides otherwise. The final pension
is based on the performance of the investments of the scheme and the cost of
purchasing annuity at the time of retirement – it is not guaranteed. In a defined benefit
scheme (such as the present final salary scheme or the proposed Career Averaged
Revalued Earnings scheme) a level of pension is guaranteed based on earnings – there is
no risk to the employee and if contributions do not cover the pension liabilities, the
employer is obliged to make up the difference.

Is it true that having a scheme which includes new starters would worsen
benefits for existing members?

The proposal which Royal Mail has tabled is based on closing the scheme to new starters.
It is totally wrong therefore to suggest that the reduction in benefits which Royal Mail
are proposing has anything to do with allowing new starters to join the scheme. There is
no reason why keeping the scheme open to new starters should produce a worse
position for existing scheme members. On the contrary, there is a real danger that
closing the scheme to new starters will be followed some years down the line by closing
the scheme altogether as a number of major companies have done in recent years, most
recently Rentokill and WH Smith.

Does this proposal affect benefits from my past service?

Royal Mail say that the proposal fully protects accrued service to the date of the
proposed change (1st April 2008). The union does not believe that this is true. After that
date, accrued benefits will be treated in exactly the same way as if the individual had left
the scheme or left Royal Mail employment. They will be uprated by inflation, capped at
5%. Past history shows that even in Royal Mail, over the medium to long term, pay rises
faster than inflation. The only way of fully protecting accrued service is to retain the link
to final salary at the point of retirement. Simply linking to RPI (with a cap) is likely to
mean that the pension payable on retirement will be less. Royal Mail’s proposal therefore
not only reduces the cost going forward from 1st April 2008, it also reduces the liability
prior to 1st April 2008. It would wipe something like £1.6 billion off the pension deficit.
Make no mistake, this money comes straight out of the projected value of the pension
benefits arising from service accrued to date. In effect, having created a deficit by not
paying into the scheme for 17 years, the employer is proposing to pay off a big chunk of
that deficit by freezing accrued benefits and only uprating them by RPI in the future.

How will this affect me?

If you are lucky enough to be retiring before 1st April 2008 it won’t. Everyone else will
see a reduction in pension benefits to some extent. This will vary according to individual
circumstances but broadly speaking, the longer you have to go until retirement the
greater the reduction in benefits you will suffer.

Why is the union even discussing this with the employer?

Because as a responsible trade union we have to acknowledge that it is difficult for any
employer to sustain an ongoing contribution of 30p in every £1 of pensionable pay into a
pension scheme. It would be dishonest to suggest to our members that the current
funding arrangements for the scheme could continue. The line that the CWU has taken is
therefore to indicate a willingness to accept changes which reduce the ongoing employer
contribution on the basis that any changes should be agreed with the union prior to the
formal consultation exercise with members. We have sought to fully protect accrued
benefits to date and mitigate the impact of any changes going forward.

What changes could the union support?

Existing accrued benefits must be fully protected, together with the right of members to
take their pension at 60.

Any new pension scheme arrangement to be based on a defined benefit scheme covering
all Royal Mail employees / CWU grades. We may be willing to consider a CARE type
scheme for future accrual – there are some attractions in this. For example, current final
salary arrangements can tend to distort pension based on changes to pensionable
earnings relatively late in employment – a late promotion can significantly enhance
pension or the loss of a pensionable allowance can significantly reduce it. Under the
present arrangements there is some element of cross subsidy from lower paid members
of the scheme to higher paid members. In a CARE type scheme, all pensionable pay, at
all periods of service, is taken into account. As things currently stand, somebody could
have worked say a night shift for their first 20 years of employment and paid their 6%
contribution on the pensionable element of that but if they are not working nights in
their final years before retirement they will receive none of the benefit. The key issue in
a CARE scheme is the index by which pay is revalued.

We have signalled our willingness to consider a change in retirement age in the context
of an agreement on every other aspect of changes to the scheme and on the basis of the
right of members to formal retirement at 60 to be maintained for existing employees
together with the right to draw accrued pension rights and the additional facility to draw
any new pension benefits covered and provided for within the new scheme
arrangements, subject to agreed terms and conditions.
Will I get a vote on this?

The law requires that any changes to company pension arrangements be subject to a
formal 60 day consultation period with scheme members. Royal Mail has indicated that it
intends to table its formal proposal and begin the 60 day consultation period with effect
from 1st October. Unfortunately, whilst Royal Mail is obliged to consult it is not obliged to
take any notice of the views of scheme members. The union is therefore insisting that
any changes to the scheme should be agreed with the CWU. The union will ultimately
ballot its members on any changes before they are finally agreed. This would not take
away the legal requirement for the 60 day consultation period, and of course managers
and other people that are not CWU members are members of the scheme. However the
union’s concern is CWU members – our approach would mean that you would have a
vote on any proposed changes prior to their implementation.


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