Royal Mail’s ‘gold-standard’ pension scheme faces closure as costs spiral

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Royal Mail’s “gold-standard” pension scheme could close by 2018 as the company readies itself for crunch talks with unions.

The formerly state-owned postal operator, which was privatised in 2013, pays around £400m a year to its defined benefit fund for two-thirds of its 140,000-strong workforce.

The company wrote to employees saying that tough market conditions meant the cost of keeping the plan open would spiral to £900m, a figure it said was “simply unaffordable”. The company reiterated a previous commitment to keep the scheme open until March 2018.

The fund currently has a surplus but Royal Mail has been running this down. It slashed the amount it contributed to the pension fund from £700 million to £400 million as part of an effort to cut costs as it deals with falling letter volumes and increased competition.

A Royal Mail spokesperson said a recent review indicated that “the Company’s contributions to the pension plan each year would have to increase from around £400 million, to over £900 million. Such an increase in costs is not sustainable. We are talking to our unions about the future of the Plan after March 2018.”

Ray Ellis, acting deputy general secretary of the Communication Workers Union, said: “We recognise the potential scale of the costs come 2018. However, we challenge some of the assumptions on the valuation — for example the strength of the employer covenant.

“Our main objective is to keep the DB scheme open to future accrual and we will continue to meet with Royal Mail to discuss the future of the pension scheme,” he added.

Most companies have scrapped so-called “gold-plated” defined benefit schemes in favour of less generous defined contribution schemes.

The announcement is the latest bad news for UK pension savers. BHS’s pensions scheme had a £571 million hole when the high street retailer collapsed. This figure has now increased to around £700 million due to unfavourable market movements, leaving 22,000 members facing cuts to their retirement income.

The British Steel pension scheme, backed by Tata, also has an estimated deficit of £700 million which has complicated the quest to find a new owner for Tata’s factories.

Record low bond yields pushed the liabilities of UK pension schemes up to an all-time high £2.3 trillion on 1 July, increasing the yawning deficit to a record £935 billion, including a £115 billion hit from the EU referendum result. The total gap equates to almost £15,000 for every person in the UK

Download a free guide to Self Invested Personal Pensions, with Independent partner, Hargreaves Lansdown