15 December 2019
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2018 Pension Review: Consultation booklet Q&As

The Questions and Answers below can be found in the consultation booklet. Please also look at the additional Q&As page and personal illustration Q&As page.  

1. What does this mean for me?

Remember that we remain committed to not making any changes before April 2018 (subject to the conditions we told you about in 2013). Apart from the change to the Final Salary pensionable pay link for Section C members’ pre-April 2008 benefits, we are not proposing to change the benefits you build up before April 2018, or your benefits transferred to the Government in 2012. If you’re close to retirement, we expect that our proposed changes would have a smaller effect. 

There are illustrations at the back of the consultation booklet. They illustrate the possible effect (based on the assumptions listed in Section 2 of the booklet) of the Company’s proposed changes on the retirement benefits of members with a range of different ages, pensionable pay and service levels. These should help you to understand how the proposed changes might affect you (if the relevant assumptions turn out to be correct).

During the consultation process, you will receive a personal illustration based on your own individual circumstances showing the possible impact of the proposed changes on you, if they were to be implemented. The illustration is subject to certain important assumptions stated in the illustration, which may or may not turn out to be correct.

We believe our proposal, if implemented, offers a very competitive pension package compared to our industry and other large employers.

2. How does this affect my Final Salary benefits?

Under our proposal, Final Salary benefits built up by Section B members before April 2008 would continue to be linked to your Final Salary pensionable pay (while you remain employed by Royal Mail or until you take your benefits). For Section C members, this link would stop in April 2018 and Final Salary benefits would revalue thereafter in line with RPI (up to 5% a year) while you remain employed by Royal Mail or until you take your benefits.

3. How does this affect my Career Salary Defined Benefits?

You would not build up any further Career Salary Defined Benefits (CSDB) after March 2018. Your accrued benefits would, after 31 March 2018, continue to be revalued in the future in line with RPI (up to 5% a year) while you remain employed by Royal Mail or until you take your benefits. For Section B members, 2010 to 2012 CSDB blocks would also be linked to changes in Final Salary pensionable pay (if better than RPI) while you remain employed by Royal Mail or until you take your benefits.

4. How would this affect my benefits in the Royal Mail Statutory Pension Scheme (RMSPS)?

Our proposal would make no changes to your RMSPS benefits. See page 8 of the consultation booklet for more information.

5. Why is this change necessary?

The work that has been done on the Plan’s 2015 financial review indicates that from April 2018, the Company’s contributions would more than double from around £400 million a year to over £1 billion a year - if members then continue to build up benefits on the current basis. This increase would not be affordable. It is significantly more than the cash we generate each year – around £290 million in 2015-16. If we had to make this level of contributions, we could not invest to grow and provide good quality jobs for the future. It would reverse the benefits for you and the Company of the previous actions we have taken. Those actions helped to make you pension more secure, improved the viability of your Company and enhanced your future job security. So we need to decide now what form your pension benefits will take after March 2018 so that we can avoid this unaffordable increase in contributions.

6. Is the Plan invested in the right assets?

For many years, financial markets conditions for many pension schemes - like our Plan – have not been favourable. This was why we needed to introduce the Pensions Reform in 2014. Since then, financial conditions have significantly worsened and recent improvements have not materially changed that position. Financial markets are where the Plan holds, buys and sells the investments that it uses to pay member benefits. These include investments such as Company shares and Government or corporate bonds. The yields on bonds and expected future returns on other investments are used to calculate the money that should be set aside now to pay benefits in the future. In recent years, pension costs have increased due to the historically low yields on bonds and lower long-term expected returns on other assets.

Taking into consideration these worsening financial market conditions, the Plan’s investment performance has been good. However, the yields on bonds and returns on other assets are so low that the resulting increase in contributions payable by the Company means unfortunately this is not enough to prevent further changes being needed.

Many companies have already closed their Defined Benefit pension schemes in recent years. Only a few FTSE 100 companies still have a significant number of their employees in a Defined Benefit Scheme.

7. Is this just about the Company saving money?

No. It is about avoiding an unaffordable increase in contributions after March 2018. The Company expects to pay broadly the same in pension contributions and National Insurance contributions in 2018-19 (when the proposal would take effect) as it did in 2015-16 (before National Insurance contributions increased as a result of the Government’s changes to the State Pension – see question 8).

In these circumstances we believe that our proposal would be a fair outcome for members. If the proposal is implemented, the Company believes that it would:

  • be a very competitive pension package compared to our industry and other large employers;
  • help us to meet our objective of helping to protect the pension benefits you have built up;
  • provide more sustainable pension arrangements in the future; and
  • help us to continue to provide as many good quality jobs as possible.

The Company believes that this proposal is the best option available in the circumstances. But we will, of course, actively consider any other affordable proposals that members or their representatives wish to put forward during the pension review process.

8. What impact has the end of contracting-out had on the Company?

The Government’s introduction of a new, single tier State Pension in April 2016 brought an end to contracting-out for the members of many UK Defined Benefit pension schemes, including Plan members.

This has resulted in the Company having to pay around an extra £65 million in National Insurance contributions every year. As part of the Pensions Reform introduced in 2014, the Company confirmed that it would take on this additional cost without changing Plan benefits. This commitment expires at the end of March 2018.

9. Is my individual consent – or that of my union - required for the Company to implement the proposal?

No. The Company is required to consult its employees. Ultimately, the Company does not need individual member consent, or that of the unions, to implement this proposal. However, we want to hear your views.

We will consider the consultation responses and discuss them with our unions as part of our pension review process. We know how important your pension benefits are to you.

10. Why doesn’t the Company just pay the extra?

If nothing changed, from April 2018 the Company would need to pay over £1 billion a year to fund members’ pension benefits. This would increase the Company’s contributions from around 17 per cent of pensionable pay to over 50 per cent. As such, the level of contributions would not be affordable. It would reverse the benefits for you and the Company of the previous actions taken. Those actions helped to make your pension more secure, improved the viability of your Company and enhanced your future job security.

11. How do I know that my views will be taken seriously?

We want to hear from you. Although the consultation is not binding, we take the views expressed by our colleagues and their representatives seriously.

12. Can you ensure my pension is safe?

Through the pension transfer, the Government has taken legal responsibility for the benefits you built up in the Plan until 31 March 2012. There would be no changes to the benefits you would receive from the RMSPS as a result of the Company’s proposal.

The benefits you have built up in the Plan since April 2012 are currently well funded. But, we expect the current surplus will run out in 2018. To address this issue, we now need to move to the member-wide consultation phase of our pension review process. See the table on page 8 of the consultation booklet for more information on where your benefits would come from if the proposal went ahead.

13. How much would I pay under the Company’s proposal?

If you do nothing, you would continue to contribute 6% of your pensionable pay to your pension, as you currently do (or we pay the equivalent amount under Pension Salary Exchange (PSE)). But please see question 14 for how we propose to calculate pensionable pay after March 2018. Under our proposal, you could choose how much of your pensionable pay to contribute into your pension – 4%, 5% or 6%, with the Company contributing 7%, 8% or 10%, respectively.

14. How would pensionable pay be calculated if the proposal is implemented?

Currently, pensionable pay is made up of basic pay plus, in some cases, pensionable allowances and pensionable bonuses. Section C members – who make up the majority of Plan members – then have £3,328 deducted (the Lower Earnings Deduction) every year. Under our Defined Contribution proposal the Lower Earnings Deduction would not be made when calculating pensionable pay. However, allowances and bonuses would not count towards Defined Contribution pensionable pay under our proposal.

Overall, we expect the majority of members would have higher pensionable pay under our DC proposal.

15. What happens if I am promoted after 31 March 2018 under the Company’s proposal?

Promotional pay increases after 31 March 2018 would not flow through to the DB benefits you have built up under the Plan (subject to certain exceptions for Section B members). However, they would immediately flow through to your DC pensionable pay. Both you and the Company would pay more contributions into your retirement account if your pensionable pay increased.

16. I am in a grade where I get increments – what happens to them under the Company’s proposal?

Incremental pay increases after 31 March 2018 would not flow through to the DB benefits you have built up under the Plan (subject to certain exceptions for Section B members). However, they would immediately flow through to your DC pensionable pay. Both you and the Company would pay more contributions into your retirement account if your pensionable pay increased.

17. Some of my allowances are pensionable – will I still earn pension on them under the Company’s proposal?

After 31 March 2018, allowances would not flow through to the DB benefits you have built up under the Plan (subject to certain exceptions for Section B members). Allowances are not included in DC pensionable pay. Please see the glossary on page 41 of the consultation booklet for the definition of DC pensionable pay.

18. My bonus is pensionable - would I still earn pension for my bonus under the Company’s proposal?

After 31 March 2018, bonuses would not flow through to the DB benefits you have built up under the Plan. Bonuses are not included in DC pensionable pay.

19. I have taken flexible retirement – what impact does the Company’s proposal have on me?

There would be no change to the pension you are already receiving. If you are still building up further Career Salary Defined Benefit pension that would cease on 31 March 2018 and those benefits would be revalued in line with RPI (up to 5% a year), as is currently the case for active Plan members, while you remain employed by Royal Mail or until you take your benefits.

20. I am paying additional contributions to Addplan – what impact does the Company’s proposal have on me?

Under the Company’s proposal, you would not build up any further Addplan pension after 31 March 2018. The Addplan pension you have built up would be revalued in line with RPI (up to 5% a year), as is currently the case for active Plan members while you remain employed by Royal Mail or until you take your benefits. Unless you instruct otherwise, your Addplan contributions would continue, but as additional contributions to your DC retirement account instead.

21. I am paying additional contributions to Flexiplan – what impact does the Company’s proposal have on me?

Unless you instruct otherwise, your Flexiplan contributions would continue, but as additional contributions to your DC retirement account instead.

22. I am paying additional contributions to Bonusplan – what impact does the Company’s proposal have on me?

Bonusplan contributions, both yours and the Company’s, would cease on 31 March 2018.  However, as DC pensionable pay does not have a Lower Earnings Deduction, both you and the Company would pay contributions on your full basic pay to your DC retirement account.

23. What happens if I am made redundant – what impact does the Company’s proposal have on me?

The Company’s proposal is that only cash compensation would be payable from 1 April 2018. However, we would have separate discussions with our unions about the impact of the proposed changes where redundancy arrangements are governed by collective agreements before making any final decision.

 24. What happens if I am a Section A member?

The Company’s proposal would not impact you unless you opt for Section B benefits. There are very few active Section A members left in the Plan.

25. Would my pension be safer if I take it early?

As the Company’s proposal would only affect the build-up of future pension benefits, there is no advantage in taking your pension early to avoid any changes brought about by the proposal. In fact, taking your pension benefits early could disadvantage you in the future by reducing your ability to build up additional pension benefits.

Under our proposal, we remain committed to not making any changes before April 2018, subject to certain conditions. You would continue to build up benefits as you do now until 31 March 2018. No changes would come into effect before April 2018.

If our proposal was implemented, it would be a very competitive pension package compared to our industry and other large employers. The Company would continue to make a significant contribution to your pension.

Important legal note: this website, the consultation letter and its enclosures are for consultation purposes only and do not guarantee or change your benefits. Benefits under the Royal Mail Pension Plan are subject always to the rules of the Plan in force from time to time. Once we have considered the responses to the consultation and had an opportunity to discuss matters further with our unions as part of our pension review process, we will write to you with our decision and the full terms of any changes. We have the right to withdraw, suspend or amend any part of any Royal Mail pension arrangement, including Pension Salary Exchange (PSE), at any time.