A with-profits pension for the posties.

Royal Mail 4

One of the most encouraging stories I have read in a time appears in the FT this morning.

The Communication Workers Union, who act for many of the Royal Mail Staff, currently facing a switch from a final salary DB pension to a defined contribution scheme, have come up with a compromise solution.

Jo Cumbo writes

 Instead of offering a long-term guarantee on the level of retirement income, the CWU’s plan envisages an annual assessment of investment performance to decide whether a “core promise” is increased in line with inflation.

Those of us with long-memories will remember that this is how with-profits pensions used to work. The insurance company (rather than the trustees) offered a core benefit which was locked in. The annual assessment of investment returns and the calculation of what bonus could be awarded was the job of an actuary.

The idea was simple enough, the actuary would exercise prudence in good years, so that there was money to fall back on in bad years. Sadly some actuaries got carried away and over-distributed – but that was because of commercial pressures from the marketing department. With-profits worked because policyholders participated in a much larger pool of money managed by the insurer, got economy of scale and got the benefits of a long-term investment strategy that invested in real assets (shares, property and the like).

The CWU idea seems equally simple. It would bring together the 40,000 members of staff who are currently in a DC scheme with the 90,000 in a DB arrangement and offer a single deal for all.

The key issue is with investment. Currently the Royal Mail’s DB scheme is 90% invested in bonds, it is hard to see how such a strategy could produce any kind of acceptable bonus beyond the core benefit plus whatever could be purchased at current annuity rates. Bonds are simply not the right investment if you are trying to accrue benefits for the longer-term.

So John Ralfe would be right if he was talking of a conventional DB arrangement (again a debt is due to the FT)

However, John Ralfe, an independent pensions expert, was sceptical about the plan: “The company would require all of the money to be invested in matching bonds, so there would be no risk of a deficit, but at the same time no potential inflation reward for members.”

But John has missed the key phrase in the CWU’s proposals – “risk-sharing”. For as with a with-profits approach, the fact that the inflation reward is not guaranteed from year to year means that the fund does not have to be invested in matching bonds but can invest in real assets.

This may not appeal to John’s pure asceticism, but it is precisely the kind of pragmatism that appeals to ordinary people. Faced with a choice of taking all the risk or sharing some of the risk with a large employer and its large pension fund, I bet the vast majority would prefer to risk-share.

I am not sure of the details of the arrangement, but this looks to me like the first positive attempt by a union to find a third-way solution between the extremes of DB and DC. I very much hope that the core-benefit includes all rights to date and that the proposals offer a decent degree of certainty going forward.

I await with a great deal of interest the results of the negotiations. If sponsor, trustees and members can move forward on this basis, I will be delighted. in principal the deal appears innovative , exciting and replicable. Dare I say it- it looks like the basis of future settlements elsewhere.


Jo Cumbo’s article can be read in full here ; https://www.ft.com/content/465fcda4-05bd-11e7-aa5b-6bb07f5c8e12?desktop=true&segmentId=d8d3e364-5197-20eb-17cf-2437841d178a&hash=myft:notification:instant-email:content:headline:html

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to A with-profits pension for the posties.

  1. Harry Lime says:

    “Those of us with long-memories will remember that this is how with-profits pensions used to work.”

    Indeed. And I also remember that it was a with-profits scheme that brought down Equitable Life in 2000, causing financial pain and hardship for a large number of people. Including myself. The Equitable Life debacle irrevocably tarnished the with-profits brand.

    As someone directly affected by this, I vowed at the time to never, ever have anything to do with with-profits funds in future, and I’ve stuck to this. If I were a “postie” being offered a with-profits pension, I would do my utmost to resist.

    Liked by 1 person

  2. henry tapper says:

    Harry, I understand your feelings, but the prejudice you have against with-profits is about the mismanagement of with-profits. I hope that you can see beyond the arrogance of Roy Ransome and the Equitable Life management and recognise that the with-profits approach can be used by large independent entities such as Royal Mail to deliver better pensions than those most of us are currently getting

    Liked by 1 person

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