Page 1 - Royal Mail Case Study

Case Study
First Actuarial joins forces with Royal Mail and CWU to introduce groundbreaking CDC pension scheme
Key outcomes
Happy membership – 90% of workforce voted for a CDC wage in retirement plus DB lump sum, within the Four Pillars of Security agreement
Cost efficiencies for Royal Mail – Fixing Employer contributions while offering an attractive pension scheme
A new chapter in industrial relations at Royal Mail – Union and management united in support for CDC
The Communication Workers Union (CWU) enlisted the help of First Actuarial when Royal Mail proposed replacing its Defined Benefit pension fund with individual Defined Contribution arrangements. Negotiations shaped First Actuarial’s innovative proposal into Collective Defined Contribution (CDC) – a DC scheme paying an income for life, without the drawbacks of individual-based DC. Royal Mail and their advisers, CWU and First Actuarial, are now working with government on legislation to facilitate CDC.
The CWU opposes Royal Mail’s challenge DC pension scheme proposal
With privatisation, Trustees of the Royal Mail Pension Plan lost the security of government backing
and adopted a cautious investment approach. This resulted in diminished returns that did not support future member benefits. An increase in Employer contributions loomed.
Viewing such an increase as unaffordable, Royal Mail proposed abandoning the Defined Benefit
(DB) scheme and moving to
Defined Contribution (DC) pension arrangements. This worried the CWU
a great deal. “DC seemed to place unacceptable burdens on individual members,” says Terry Pullinger, Deputy General Secretary (Postal) at the CWU.
DC also presented difficulties for Royal Mail. It is now illegal to retire people on age grounds, so if a pension scheme produces an inadequate income then the employer is left with elderly staff who have no alternative but to carry on working.
Recognising that some degree of change was inevitable, the Union set down two principles. “Firstly, people needed a wage in retirement to give
them dignity in their old age,” says Terry. “But DC, in the form that Royal Mail was proposing, would not provide this.”
Secondly, the CWU was committed to equality of pension provision for all.
The DB scheme had closed to new entrants over 10 years previously, so every joiner from that point went into a DC scheme. “We wanted a new scheme that would give equal pension provision to everyone, including the 40,000 DC members,” says Terry.
First Actuarial worked closely with the CWU to produce an alternative DB scheme design that would replace guaranteed annual pension increases with discretionary benefits. The CWU, though concerned about the reduced guarantee of member benefits, acknowledged that this was a better option than individual DC.
In the protracted negotiations that followed, however, Royal Mail rejected the proposal. They believed that
even a mix of DB and discretionary benefits would run the risk of technical insolvency by generating a funding deficit on the business’s balance sheet.