15 December 2019
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Additional Q&As

This section includes frequently asked questions that members asked during the course of the member consultation.  

You can also find:

Questions are organised into the following topic areas: 

  • Your retirement benefits 
  • Background to our proposal
  • Terminology

YOUR RETIREMENT BENEFITS

1. Am I in Section A/B or C of the Plan?

Check your payslip or your last Benefit Illustration from the Plan Trustee to find out which Section of the Plan you are in. This information is also included in your personal illustration.

2. How would the Company’s proposal impact my current pension benefits?

Members’ benefits are made up of the following:

Pension benefits built up until 31 March 2012: these are held in a Government scheme called the Royal Mail Statutory Pension Scheme. The Government is legally responsible for these benefits and they are increased in line with RPI (up to 5% a year) until you take them or leave Royal Mail employment. There would be no change to these benefits. Our proposal relates to the way you would build up benefits in future, after 31 March 2018.

Pension benefits built up between 1 April 2012 and 31 March 2018: under the proposal, you would continue to build up benefits as you do now until 31 March 2018.

After this date, Section C members’ pre-April 2008 benefits would be linked to increases in RPI (up to 5% a year) from 1 April 2018 until they leave Royal Mail employment or take their benefits, rather than to Final Salary pensionable pay at the date they leave.

Section A/B members’ pre-April 2008 benefits would continue to be linked to the greater of:
- increases in RPI (up to 5% a year) and;
- Final Salary pensionable pay at the date they leave.

The Final Salary link is required under the Section A/B rules in order to maintain increases at RPI (up to 5% a year) in the Royal Mail Statutory Pension Scheme. This is not a requirement under the Section C rules.

For more details on how Final Salary pensionable pay is calculated, please see the decision booklet on the 2014 pension changes.

3. How would my death in service benefits be affected by the changes?

The overall death in service lump sum would still be 4 x pensionable pay. It would be based on your Defined Contribution (DC) pensionable pay from 1 April 2018. Your dependants would also receive an additional death in service lump sum of 2 x DC pensionable pay, together with the value of your retirement account. Finally, your dependants would receive death benefits based on the benefits that you earned up to 31 March 2018 in the Plan and the Royal Mail Statutory Pension Scheme.

4. What will happen to my current Flexiplan and Bonusplan funds with Zurich that have built up?

The AVCs (Additional Voluntary Contributions) you have paid to the date of any changes will not be affected and you will still be able to invest your funds in whatever way you wish in the available investment funds. Page 15 of the Consultation booklet shows three questions on AVCs.

You would be able to choose how the money in your Defined Contribution retirement account is invested. There would be a range of funds to choose from, in a similiar way as currently available for Flexiplan and Bonusplan. If the proposal went ahead, full details of the investment options available to you would be provided closer to the time when you could make a decision.

Under the proposal, members could pay more than 6% as AVCs to the Defined Contribution retirement account (in practice up to a maximum of around 80% of pay). The maximum paid by the Company (if the employee pays more than 6%) would be 10%.

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

The current redundancy arrangements will remain in place until 31 March 2018. 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.

6. Does this proposal affect my ability to take my benefits early? 

The proposal does not change your option to take your pension benefits early (i.e. after minimum pension age, which is currently age 55), nor does it affect the early retirement reductions currently used by the Trustees. You are therefore still able to access your pension benefits at any time if you wish, once you are over minimum pension age. Your Age 60 benefits for service up to 31 March 2010 will still be linked to a Normal Retirement Age of 60, and benefits earned after 1 April 2010 will still be linked to a Normal Retirement Age of 65. The proposal does not change this.

Please note, as the Company’s proposal would only affect the build-up of future pension benefits after 1 April 2018, there is no advantage in taking your pension early to avoid any changes brought about by the proposal. Taking your pension benefits early could disadvantage you in the future by reducing your ability to build up additional pension benefits.

7. Will Section C members still be able to get a lump sum on retirement?

The rules of the Pension Plan regarding cash benefits are different between Section B and Section C members. Section B members currently earn a pension of 1/80th of pensionable pay each year, plus a separate cash sum of 3 times that pension. Section C members currently earn a higher pension each year of 1/60th of pensionable pay, but with no separate cash sum.

However, Section C members can give up part of their pension in return for a cash sum. So, even though there is no separate cash sum quoted for Section C members, they can still take cash benefits by giving up part of their pension. The proposal does not change the ability of Section C members to give up part of their pension for cash. Nor does it change the general rule that the maximum cash sum currently available from the Plan is around 25% of the total value of the benefits being taken. 

8. Could I take my DC pension benefits as tax free cash? 

You would have options to take as much cash as possible from all your pension benefits when the time comes for you to take your benefits. However, you should carefully consider the tax implications if you take all of your DC benefits as cash.

9. Can I buy extra years (on a defined benefit basis) or build up pension after 45 years’ service?

It has not been possible to buy extra years’ service on a defined benefit basis since new Addplan contracts ceased from 1 April 2008. Under the Company’s current proposal, future defined benefit provision would cease after 1 April 2018, so no-one would be able to build up extra years on a defined benefit basis after 1 April 2018 if the proposal is implemented. Future pension provision would be on a defined contribution basis instead.

For anyone reaching 45 years’ service after 1 April 2018, under the Company’s current proposal, the Company’s DC pension contributions and your DC pension contributions would cease at 45 years.  The 40 year maximum pensionable service period was extended to 45 years when normal retirement age increased from age 60 to 65 for pension earned for service after 1 April 2010. There is no change to normal retirement age or the 45 years maximum service period for pension provision under the Company’s proposal.

10. I would be willing to increase my contribution level in order to keep my defined benefits.  Why can’t I pay more if I want to?  

Not everyone can afford to do this - and the actual cost would be different for people of different ages. It is not practical to offer this as an alternative to our proposal. If you want to pay extra into your pension you can do so through Additional Voluntary Contributions (AVCs). 

11. Because of the possible changes, should I pay Additional Voluntary Contributions (AVCs)? 

The payment of AVCs is a personal choice, taking into account your income and outgoings, your tax position and your future retirement needs. Making AVCs will improve your future pension benefits but other forms of saving for the future are available too and should be considered alongside AVCs, or as an alternative. If you need advice on whether AVCs are right for you, please contact an independent financial adviser before you make any decisions.

12. Would Royal Mail pay contributions into a private DC plan after 2018 so I can have a wider range of investment options?

No. The Company will only pay pension contributions to a Royal Mail pension arrangement. You would need to remain a member of a Royal Mail plan to receive Company contributions.  

13. Is London weighting, reserved rights, blocking and marked-time included in the definition of DC pensionable pay under the proposal? 

No. Under our proposal, allowances, bonuses or other payments that are not included in basic pay would not count towards DC pensionable pay.

14. Will the ill health lump sum still be payable by the business?

Yes. This lump sum would still be payable if you left service with an ‘ill health with lump sum’ medical assessment.

15. Under the proposed DC Plan, would the minimum I could get at retirement be what I have paid into it myself?

The contributions you would pay to the proposed DC Plan would be pooled with those of the Company and you would build up a personal DC retirement account, including investment returns. The benefits you eventually receive will be the value of your fund at the date you claim your benefits. There is no minimum value you could receive, but the investment returns would have to be very low indeed for your fund to be worth just what you personally paid into your DC retirement account.

16. When will the £750 cash sum be paid? Can I have it now? Will I get it if I leave the Plan, or leave service before 1 April 2018? 

The £750 payment would be made after April 2018 if the proposal is accepted. It would not be made before then and, if you leave the Plan or leave service before 31 March 2018, you would not receive the payment.

17. Can I take my money out of the Plan now?

If you are aged 55 or over, you can take benefits early under flexible retirement. As an alternative you can take a transfer from the Plan to a private arrangement.

Taking your current pension benefits early will reduce your future potential pension benefits. As the proposal would only affect the build-up of future pension benefits from 1 April 2018, 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.

Please note that no-one at the Company can give you financial advice, but it is strongly suggested that, if you are considering taking all your benefits early from the Plan, you seek professional independent financial advice first

18. I am currently going through a divorce. Will the changes affect me and if so how?  

No. The proposal would not change how your benefits are affected on divorce. 

19. Will people get new contracts to sign?  

People would not get new contracts to sign as a result of any changes to the Plan. The level of benefits provided under the Plan is not part of an employee’s contractual terms and conditions.

20. As younger people are proportionately more affected than older people by this proposal, would the Company consider including extra contribution tiers, such as members paying 10% and the Company paying 17%, with potentially higher employer contributions for younger people?  

It is regrettable that younger people would be most impacted, but this is because the proposal relates to how pension benefits are built up in future, and therefore has the most impact on those with longer periods of time remaining to retirement age. We are carefully considering all feedback as part of the consultation process.   

BACKGROUND TO THE PROPOSAL

1. Are all the changes being made because the Company took a pension 'holiday' in the late 1990s?

No. The pension transfer to the Royal Mail Statutory Pension Scheme (RMSPS) in April 2012 relieved the Company of its historic pension liabilities. This has no bearing on the current issue, which is about the future cost of your pension.

2. Is this simply about cost cutting? Why can’t Royal Mail pay 17.1% of defined contribution pensionable pay instead of 10%?  

This proposal is not about reducing what the Company spends. We expect to pay around the same amount in pension and National Insurance contributions in 2018-19 (when the proposal would take effect) as in 2015-16 (before National Insurance contributions increased as a result of the Government’s changes to the State Pension). The Company’s contribution would continue to be around 17% of pensionable pay. 

As well as an employer contribution of 10% of DC pensionable pay (which, for most members, would be higher than DB pensionable pay), the Company would pay the cost of life cover, ill-health protection and the Plan management costs, plus the additional National Insurance contributions required following changes to the State pension in April 2016. The cost of life cover and ill-health protection is currently included in the standard employer contributions paid to the Plan.

3. What is the Trustee’s investment strategy? Are they investing in the right assets?

You can find details of the Trustee’s investment strategy in the Report and Accounts statement at www.royalmailpensionplan.co.uk. It states that ‘the investment strategy of the Royal Mail Pension Plan aims to safeguard the assets and to provide, together with contributions, the financial resource from which benefits are paid’. The management of the Plan is fully audited each year.

This situation has arisen because of financial markets conditions and despite the Trustee’s best efforts in securing the financial position of the Plan. 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. Many companies have closed their Defined Benefit pension schemes in recent years. Only a few FTSE 100 companies still have a significant number of employees in a Defined Benefit scheme.

4. Are you consulting on the closure of the scheme because you are now privatised?   

No. The opposite in fact. In recent years, Plan members have benefitted from significantly more security with respect to their pension benefits.

Prior to the March 2012 pension transfer, Royal Mail was balance sheet insolvent as a result of its pension plan. The Plan threatened the company’s status as a going concern. The 2012 pension transfer and the subsequent 2014 Pensions Reform secured our members’ benefits until March 2018, regardless of the Company’s ownership.

As we said in our letter to members in June 2016, the current Plan will soon not be affordable. The Plan is currently in surplus. But, we expect this surplus will run out in 2018. At £400 million per year, Royal Mail makes one of the UK’s largest ongoing cash contributions. The level of contributions required from April 2018, if the Plan was maintained in its current form, is not affordable.

The most recent financial review indicates the Company’s contribution rate would increase from around 17 per cent of pensionable pay to over 50 per cent. This would more than double the Company’s contribution after March 2018 – to over £1 billion – if members continue to build up benefits on the current basis. This increase would not be affordable.  It is significantly more than the annual cash Royal Mail generates – around £290 million in 2015-2016. This extra cost would reverse the benefits to the Company and employees of previous actions we have taken. Those actions helped to make members’ pensions more secure, improved the viability of the company and enhanced future job security.

5. Why are pensioners and deferred members not affected by the proposed changes? 

Pension legislation usually prevents changes to benefits that have already been earned and it is not generally possible to reduce the pensions that members – whether active, deferred or pensioners - have already earned. This includes pensions already being received by members who have elected to take flexible retirement in the past. The changes would only affect the build-up of future benefits.

6. Has the Company already made its decision? 

No. A decision will not be made until after the consultation period has ended and all the feedback recorded has been analysed by the Company, and the 2018 Pension Review process has been completed with our unions.

7. Does this have any effect on the historic Plan liabilities that were transferred to the Government in 2012?

No. The benefits that current employees earned up until 31 March 2012 were transferred to Government. That included the final salary benefit built up until 31 March 2008 and was based on final salary at 31 March 2012.

This transfer made your past pension considerably more secure and that situation has not changed. Your benefits built up until 31 March 2012 are held in the Royal Mail Statutory Pension Scheme. The Government is legally responsible for the management of these benefits.

8. What happened to the £1.6bn of surplus generated in 2014?  

The surplus is being used to pay the balance of the total cost of the Plan (in addition to the Company’s contributions) for the period up to 31 March 2018. It is estimated that the surplus will run out in 2018 and the significant increase in Company contributions required from that date will then be unaffordable.

9. You say in your proposal that, for the DB scheme to continue, the cost to the Company would increase from around 17 per cent of pensionable pay to over 50 per cent. Can you give an indication of what the costs were in 2013, at the time of the last consultation?

The cost in 2013 was around 30 per cent of pensionable pay. The surplus generated by the 2014 Pension Reform enabled the Company to continue to pay 17.1 per cent of pensionable pay, which is the current rate. That rate is being reviewed as part of the Plan’s financial review as at 31 March 2015.

10. What other large employers have recently closed their DB pension schemes to future accrual?
  

Examples are Tesco, Sainsbury and ITV.

11. I have read that life expectancy calculations used by many companies have been overstated. This would have a net benefit to the Royal Mail Pension Plan and I wondered if its effect had been calculated.

Certainly people living longer adds to the costs of running schemes like our Plan. The assumptions we have used in calculating the Plan liabilities and the cost of providing future benefits are regularly reviewed in the light of new data and emerging trends in this area. There is no significant change to the Plan’s funding level from recent longevity data, certainly not enough to change the Trustee’s requirement for the Company to contribute around 50% of pensionable pay from 1 April  2018.

12. Who would the proposed DC pension contributions be invested with and who would choose the available investment funds?

If the proposal goes ahead, we expect that an external pension company would receive and invest the DC contributions in a similar way to how the current Flexiplan AVC option or the Royal Mail DC Plan operates. The Trustees would be responsible for setting up the available investment funds.  

13. How often does the Trustee check the Plan’s financial position? 

A thorough financial health check (the Actuarial Valuation) is carried out every three years, with annual updates most years in between. The Trustee may also carry out a check if there are any significant changes affecting the Company or the Plan. The Actuarial Valuation as at 31st March 2015 is expected to be completed during 2017.

TERMINOLOGY

1. What is the difference between a defined benefit and defined contribution pension?

The main difference between defined benefit (DB) and defined contribution (DC) pension schemes is how certain you can be about the amount of benefit you will get when you retire.

In a DB scheme, there is one pot of assets out of which all scheme members’ benefits are paid. Benefits are usually based on a formula using pensionable pay, pensionable service, and the rate at which you build up benefits. The amount you receive when you retire does not depend on investment returns. It is the Company that has the responsibility to ensure that the contributions paid into the scheme, along with the investment returns, are sufficient to pay all of the benefits.

In a DC scheme, each member has their own individual retirement account. Contributions from both the employee and the Company are paid into the retirement account. They are invested in order to grow. The amount you receive when you retire depends to a certain extent on the returns of these investments, as well as on charges levied. Benefits depend on the size of your retirement account when you retire as well as the cost of the options chosen at retirement. There is no guaranteed amount.

2. Why is it becoming more costly to maintain a DB pension scheme as opposed to a DC scheme? 

Money has to be set aside over a long period of time in a DB pension scheme to ensure that sufficient funds are available to provide pension benefits for the estimated lifetime of the individual. This is necessary as the amount of benefit earned each year is fixed, but the length of time over which benefits will be paid is not known in advance. People are living longer in retirement and returns from many forms of investment, including Government bonds, are lower now than in the past. This means we need to pay more money in contributions now to ensure enough funds will be available in the future when benefits are eventually paid.

The yields available from Government bonds, also known as gilts, are at very low levels at present and show no signs of improving by any meaningful degree. As the value of the pension benefits built up in DB pension schemes are measured using gilt yields, low yields mean that a higher value is placed on those future liabilities. Therefore, higher contributions are required now to meet those increased future liabilities.

In contrast, the pension contributions paid to DC pension schemes are fixed as a proportion of earnings and the benefits payable on retirement are not pre-determined. The costs are limited to the actual contributions paid into the scheme and so they are more manageable.

Please refer to the question above for an explanation of the difference between DB and DC schemes.