UK automobile and aircraft engineer manufacturer Rolls-Royce has reached a new pension deal with unions that will keep its defined benefit plan open to existing members until 2024, and increase benefits to younger workers beginning in 2021. The move is expected to save the company £145 million ($196.1 million) over the next three years, according to The Financial Times.
As part of the deal, the company is reducing contributions to its defined benefit pension over the next three years in exchange for agreeing to allow benefits to accrue for the defined benefit plan’s 12,500 existing members until the beginning of 2024.
“It helps us to keep our defined benefit scheme going, at a time when more and more companies are fully closing theirs,” Joel Griffin, head of global pensions and benefits at Rolls-Royce told the FT. “It will also meaningfully improve retirement prospects for younger Rolls-Royce employees, helping them to be better prepared for the future.”
The company is also making changes to its defined contribution plan, which includes increasing its contributions to approximately 10,000 employees beginning in 2021. Under its previous plan, Rolls-Royce’s contribution levels were based on an employee’s age, with the base contribution set at 6% for a younger employee contributing 3% for a total contribution of 9%. However, under the new plan, this could potentially double with a base contribution as high as 12%, with employees kicking in 6%, for a combined total of 18%.
Rolls-Royce estimates that this could translate to a 20% boost to a young worker’s final pension total, depending on the returns produced by the investments chosen by the employee.
However, this still leaves Rolls-Royce with a two-tier system with defined benefit members still likely to end up with larger pensions than those in defined contribution plans.
“The current DC maximum contribution of just 6% is stingy for a blue-chip company, especially when the annual benefit to employees in the DB scheme is 30% of salary,” John Ralfe, an independent pensions consultant, told the FT. “Doubling the maximum contribution to 12% from 2020 is obviously an improvement but is not at the top end, and new joiners will get less.”
UK Union Unite and other unions representing Rolls-Royce’s 22,000 UK workers voted last week to accept the plan.