Page last updated at 14:23 GMT, Monday, 8 June 2009 15:23 UK

Postal pensions face more change

Royal Mail lorries
Management have threatened an even more drastic change than last year

Royal Mail has confirmed it may close its pension scheme to current staff if the government fails to take over responsibility for the fund.

Taking on the scheme was part of the government's wider plan to sell off a stake in the Royal Mail to bring in private management.

That idea is now in danger because no bidder has been prepared to offer enough to buy a minority holding.

The privatisation plan is also opposed by many backbench Labour MPs.

The main trade union at the Royal Mail has condemned the possible closure of the pension scheme.

A spokesman for the Communication Workers Union (CWU) said he was shocked at the idea.

"It's a bizarre statement after the changes made last year, which were supposed to make the scheme more affordable," he said.

"It would mean within the space of 18 months existing staff being moved from a final salary scheme to a career average one and then to a defined contribution scheme," he added.

Last week Barclays bank became the latest employer to announce it wanted to shut its final-salary pension scheme, to 18,000 of its current staff.

Hooper plan

The idea of nationalising the Royal Mail pension scheme, which has a huge deficit, first emerged last year when businessman Richard Hooper published his government sponsored review of the postal service and its future.

We might have to as one of the possible consequences of the government deciding not to go ahead with their plans, including their proposals to take responsibility for the historic pension deficit
Royal Mail spokesman

It was the "quid pro quo" for selling a large minority stake in the business, as a platform for bringing in new management and investment.

Hooper identified the financial burden of funding the pension scheme as the biggest obstacle to making the Royal Mail more profitable.

The fund's deficit was calculated at £3.4bn deficit in 2006.

More recently that has been put at about £6.8bn, but when the latest three-yearly valuation is published in September it is widely expected to have grown to £9bn.

This implies that the Royal Mail will have to increase its deficit payments to the fund from their current level of £270m a year, first set back in 2006.

In turn that could push total payments, including the normal pension contributions, from their current level of £850m a year to more than £1bn a year.

Close the scheme?

Royal Mail said: "Closing the final salary pension scheme is not something we would want to consider, but we might have to as one of the possible consequences of the government deciding not to go ahead with their plans, including their proposals to take responsibility for the historic pension deficit."

The structure of the Royal Mail's pension scheme was in fact changed drastically as recently as April 2008, with the aim of bringing down its long-term cost.

Existing staff, who were in a final-salary scheme, were told that from then on, their future pension entitlement would be accrued on a "career-average" basis, which is a far less generous arrangement.

And from April 2010 the retirement age of those scheme members would be raised from 60 to 65.

Meanwhile new staff, from April this year, have only been allowed to join a defined contribution scheme, in which they bear all the possible investment risks.

Their pension is determined entirely by how well their pension contributions have been invested over the years, and by the amount of pension they can buy with their pension pot after retirement.

Reduced contributions

From the company's point of view both these new arrangements are much cheaper than the final-salary set-up.

Leaving aside the deficit payments, the final salary section was costing the company 20% of staff salaries each year.

The career average section is now costing Royal Mail just 11% of salaries.

But the employer's contribution is even smaller for the new joiners in the defined contribution scheme, at between 5% and 7% of salaries, depending on how much the staff pay in.

The CWU is dismayed that the Royal Mail's chairman, Donald Brydon, is announcing his policy intentions via the newspapers.

No proposal to close the pension scheme in its current form has been put to either the pension scheme trustees or the trade unions.

And all sides have 15 months from the April 2009 valuation date in which to agree a new schedule for any increased deficit payments.

Last month the group said it had returned to a modest profit of just £49m last year.

It clearly fears that any further rise in pension contributions will simply tip the whole business back into the red.

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