Pension plan hits Royal Mail shares

The market initially responded well to the news, with Royal Mail’s shares opening almost two per cent up at 427p. However, as trading progressed and it became clear that both the Communication Workers Union (CWU) and Unite were opposed to the move, the gains were reversed, with the company’s shares ending the day at 423.9p.

While Unite said the planned changes were “cause for serious concern”, the CWU took a more robust stance, with its acting deputy general secretary Ray Ellis threatening industrial action unless the plan is withdrawn.

Nicholas Hyett, an equity analyst at stockbroker Hargreaves Lansdown, said that given Royal Mail’s “highly unionised workforce” the pension changes are “likely to prove costly” for the group.

“Whether those costs will be in the form of chunky employer contributions to a new defined contribution scheme or lost revenue from industrial action remains to be seen,” he said.

Although Mr Ellis at the CWU said the move would see the company “abandon the pension promises” made when Royal Mail was floated on the Stock Exchange in 2013, the changes have been expected by the market for some time.

Following a 2013 consultation on reforming its pension the company said it would “commit to keep the plan open to future accrual, subject to certain conditions, at least until the company concludes its next periodic review in March 2018”.

While the company’s accounts for the year to the end of September 2016 showed the pension to have a surplus of £4.3 billion, a note to the accounts said an ongoing actuarial valuation would likely bring that down to closer to £1.6bn.

It added that benefits were accruing at a rate of £1.4bn a year, which is significantly higher than the £500m of contributions that the company and employees make each year.

“Accordingly we expect that the actuarial funding surplus be exhausted during 2018,” the company said. “After this time the annual cost would be more than double the current contributions, which is unaffordable to the company.”

Royal Mail has long struggled with ballooning pension liabilities and as long ago as 2007 began consulting on how it could reduce its pension costs. It closed its final salary pension to new employees in 2008, when it also began basing benefits on the average salaries employees earned over their career with the company as opposed to what they were earning when they retired.

Responsibility for the bulk of the scheme, which had a £10bn deficit, passed to the Government in April 2012, with the pensions of 402,000 employees who had retired from Royal Mail at that point being paid out of the public sector budget. The Government will also pay any benefits accrued by current employees up until April 2012.

The Government deal meant that Royal Mail could begin life as a listed company with a fully funded pension scheme for serving employees only. In its latest announcement to the Stock Exchange the company, which has been run by chief executive Moya Greene since 2010, said that while that pension is currently in surplus “if no changes are made, the contributions [the company has to make each year] could more than double to over £1bn in 2018”.

If the unions do not block Royal Mail’s plan employees will continue to build defined benefit entitlement until next March, at which point they will start paying into the company’s defined contribution pension scheme instead.

In a defined contribution pension, employees and employers both contribute money into the employee’s individual pot, which the employee must invest and make last throughout retirement.

In a defined benefit pension workers accrue the right to receive a pension linked to their earnings and length of service, with their employer taking responsibility for ensuring the overall pension scheme has enough money to meet all its liabilities.