Page last updated at 00:02 GMT, Tuesday, 4 December 2007

Crunch time for Royal Mail pension plan

Analysis
By Ian Pollock
Personal finance reporter, BBC News

Postal strike in Liverpool
The pension scheme was at the heart of the recent national strike

The recent industrial dispute at the Royal Mail may have ended.

But 165,000 staff at the group, including Post Office and Parcel Force employees, still face big changes to their pension scheme.

A formal consultation is going on until the middle of January among the group's staff - including postmen and women, counter staff, parcel delivery drivers and various supervisory and managerial staff.

The bald fact is that they will face a substantial cut in their prospective pensions, or will have to work for several more years to make up the difference, if the plans go through.

"The current cost of providing future service pensions is not sustainable," says the Royal Mail.

"We have to make changes to bring future pension costs to a more affordable and sustainable level."

In fact the company has revealed it hopes to save about £850m a year, the equivalent of the extra money it is paying in to offset the scheme's deficit.

The changes

The Royal Mail scheme is the largest pension scheme in the UK in which existing members, not just new joiners, have been told by their employer that they must accept changes which will see them worse off.

Earlier this month the Royal Mail sent a 44-page booklet to every employee spelling out the impending changes.

These are

  • for a "career average" scheme to replace the current final salary version from 1 April next year
  • for the standard retirement age to rise from 60 to 65 in 2010, though only for service after that date
  • for new recruits, from January 2008, to be offered a separate "money purchase" scheme altogether
  • for staff to keep contributing at 6% of salaries a year.

So what?

Well, the booklet's many tables make it clear just how much some existing postal staff may lose.

Doing the maths

Staff who are relatively close to retirement will see little change to their prospective pension as the entitlement they have built up so far will not be altered.

Royal Mail chart
Age 40, 10 yrs service, retire at 60, or work 2yrs and 10 months more

However the vast majority of Royal Mail staff are in Section C of the scheme, which is for those who have joined since 1987.

By definition they are the ones furthest away from retirement, and whose prospective pension will be most affected by the new arrangements.

Let's take the example of a 40 year old with just ten year's service now, earning £18,000 a year, retiring at 60, with wages rising in line with inflation.

According to the Royal Mail that employee's prospective pension would be cut from £8,079 to £6,697 - a drop of 17%.

To make up the difference, they would have to work an extra two years and ten months.

Wage rises above inflation

All that is assuming that wages from now until retirement go up in line with inflation of 3% a year.

Future manager's bonuses will be pensionable
Paul Reuter, Unite

The booklet's tables spell out how pensions will be affected if, in fact, a person's wages rise each year by an average of 1% above this inflation rate.

In this case our man or woman who retires at 60 would see their prospective pension cut from £10,060 under the final salary scheme to £7,864 under the career average version - a reduction of 22%.

The booklet does not say how much longer such a member would have to work to make up the shortfall, but postal staff can ask for a personal "quote" via the Royal Mail's consultation helpline.

Most postal grades of staff stay on basic pay grades for the whole of their careers and have few promotion prospects while there.

But in reality, over the long run, wages in most industries go up more than inflation, and that has been true at the Royal Mail.

According to Incomes Data Services, basic pay deals at the Royal Mail have amounted to 33.13% since October 1997, while the retail prices index has gone up by 30.9%.

Meanwhile about 12% of the Royal Mail's staff are in its supervisory and managerial grades, and most of them started off as postmen and women, sorting and delivering mail.

So, as their promotions will have pushed their wages ahead of inflation, they stand to lose most under the new arrangements.

Paul Reuter, an official of the Unite trade union that represents supervisors and managers, says that some protection has been built in for his members.

"Future manager's bonuses will be pensionable, and they can range from £2,500 to £6,000 a year," he said.

This will partly offset the effect of the new scheme, but not totally.

Savings

The reason for the Royal Mail's changes is obvious.

Royal Mail proposal
Royal Mail pension proposal

It has already promised to make extra payments for the next 17 years to offset the scheme's massive £6.5bn deficit.

That is adding an extra 10% to its pensionable pay-bill.

And that is on top of the current 20% rate for normal contributions.

Royal Mail says it simply cannot afford to keep on with this as it adds up to a current £850m a year.

But the combined effect of bringing in the career average scheme, plus raising the retirement age to 65, will knock about 9% off that total contribution rate.

That will bring it down to about 21%, and then to 11% once the deficit contributions stop.

The scheme will be "more affordable and sustainable" says the Royal Mail.

Inflation danger

Another big wrinkle in the new scheme is the fact that any member's accumulated pension pot will be uprated in line with inflation each year, but only to a maximum of 5%.

They have woken up the membership and on a subject that is dear to their hearts
CWU official

So, if inflation runs higher than that, the value of the accumulated pension will be undermined.

Not everyone will be worse off though.

The raising of the retirement age may encourage staff to work a few years longer, so not only may they rebuild their pensions they could continue earning while doing so.

Alternatively, any staff who decide to work part-time in the last few years of their employment may find that doing so affects their pension rather less than under a final salary scheme.

The consultation exercise has only just started.

But one official of the Royal Mail's main trade union, the CWU, told me the management should not assume it will sail through unquestioned.

"They have woken up the membership," he said.

"And on a subject that is dear to their hearts."



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