The board of trustees for the UK’s Royal Mail Pension Plan has agreed to the Royal Mail’s proposal to close sections B and C of the pension fund.
“This was a difficult decision for the board to take, but it was taken, reluctantly, after having heard arguments from all sides and weighing up all the relevant issues,” said Joanna Matthews, chair of Royal Mail Pension Trustees Limited in a letter to plan participants. “The trustees’ advisers found that if the plan remained open and benefits continued to build up there was a risk that the plan would be unable to pay all the benefits that have been built up by the members once the current surplus is used up.”
Matthews added that “the advice was that the plan should not rely on Royal Mail being able to afford to provide any additional funding in future.”
Section B provides benefits for members of the plan who joined after November 30, 1971, and section C provides benefits for members who joined since April 1, 1987.
The plan, which has more than 121,000 members, will be closed to future accrual on March 31, 2018, and it will only affect Royal Mail employee members of the pension. Until then, the company’s contribution rate will remain at 17.1% of members’ pensionable pay. But from April 2018, members would no longer build up future pension on a defined benefit basis, but on a defined contribution basis.
The decision came just after Royal Mail said in its most recent pension plan valuation that the cost of benefits are out clipping the the total annual contributions by £900 million ($1.16 billion). It also said that the actuarial funding surplus would be depleted during 2018 if the plan remained in its current form. After 2018, Royal Mail said the annual cost would be more than double the current contributions.
“The cost of benefits being accrued each year, based on market conditions at the end of March 2017, would currently be around £1.3 billion,” Royal Mail said in its 2018 pension plan valutaion. “This is significantly greater than the total annual contributions of around £400 million that the company and employees make.”
The Communication Workers Union (CWU) has condemned Royal Mail’s decision to close its current defined benefit pension plan.
“In place of the current defined benefit scheme, Royal Mail plan to put all members into inferior money purchase alternatives,” said the CWO in a statement. “On average, employees face losing up to a third of their future pensions. For a 50 year old Section C member earning £25,000 a year and retiring at 65, this would equate to a loss of £4,392 a year (£109,800 over 25 years).”