Royal Mail’s pension; kick out the experts


It was all going so well…

A wage in retirement – not a dump of cash

At the back end of last week,  Royal Mail rejected the CWU’s proposal to establish a new defined benefit scheme designed to keep posties accruing a pension based on career average earnings.

Instead , they put forward a proposal to provide a defined lump sum at retirement and leave to posties to DIY their retirement income – an arrangement known as “cash balance”.

As the CWU’s principal request was that their members continued to build rights to a pension, it met the offer of cash with disdain

 “Royal Mail have released a Press Statement today which is both premature and arrogant.  It is an example of the closed-minded, idea redundant mentality that the CWU are up against.  It beggars belief that the company really do consider that this mutant Defined Contribution proposal is in any way an adequate response to the work and imagination that the Union have put into our Wage in Retirement Scheme proposal.

“The CWU have pragmatically responded to the pension challenges of our time and do not believe that the concept of a wage in retirement Defined Benefit arrangement is dead.  We have been growing intellectual and moral support for our efforts and we will not be deterred in our campaign to ensure dignity and security in retirement for our members.  In the face of conventional wisdom, dogma and shareholder self-interest, we become more resolute and this negotiation is far from over.”

Experts have got us here

The CWU will do more than negotiate;  the CWU’s conference on Tuesday endorsed

“an immediate ballot for strike action”

if Royal Mail tried to impose its plans or failed to “positively respond” to the CWU’s proposals by August.

Whoever is advising  Royal Mail is underestimating the CWU’s persistence and not listening to what it is asking for.

The experts are telling Royal Mail that there is “too much risk” in its proposals. These experts managed to convert a fully funded final salary scheme into a closed to accrual final salary scheme in a few short years. They did so by investing in what are laughingly called “risk-free” assets – the bonds and gilts that make up 90% of the now closed pension plan.

This strategy has led to 90,000 postmen losing future accrual to a final salary scheme, a further 40,000 having no option but rights to a DC scheme, a PR disaster for its human resources department and a massive hit to its share price as investors contemplate what an autumn strike will do to the P/L and balance sheet.

Please tell me which part of the “de-risking” of the pension scheme has reduced risk?

What’s done is done, the CWU are not disputing that the anticipated 52% of payroll cost of keeping accrual going is sustainable. It has moved on, the experts haven’t.

If you’re in a hole…

The experts have got us here, it seems that they want to dig us out.

Royal Mail claim that the plans are too risky. This is based on the banker’s view of pensions – that pensions are a commodity that can be valued and traded – but have no intrinsic merit.

The CWU’s proposals suppose that over time, an investment in equities will not just pay dividends to meet immediate cash-flows (e.g. people’s pensions) but will grow at a faster rate of inflation (the equity risk premium). In the long-term (which is the term that pensions are paid) there is nothing risky about equity based pension plans.

The FAB index demonstrates that if we valued pensions as pensions and not as tradable commodities, we would take less rather than more risk by investing in equities.

What is more , there is a  massive “kicker” to going the equity route, one that could return Royal Mail to its current business plan and away from a disastrous strike.

In return for taking the short-term volatility that comes with equity valuations, Royal Mail get

  1. 130,000 workers with the prospect of a decent pension
  2. A happy and consequently more productive workforce
  3. A happy HR department that can manage recruitment and retention better
  4. A contented union
  5. A share price reflecting Royal Mail’s business plan and not impending disaster

There is no denying that in terms of the annual valuations of pension scheme assets and liabilities (FRS120), a growth driven pension plan will present more volatility than a cash plan, but the CWU’s members want pensions not cash (for all the shouting about freedoms).

These ordinary people are worried than when they lay down their postbags, they will be reliant on the state pension and their works pension.

The CWU have given Royal Mail a get out of jail card, where the cash flow cost of the new pension is projected to remain at the current pension cost of 17% of salary. It has also given Royal Mail the chance to be a progressive employer.

Royal Mail’s expert advisers consider this too risky.  They do so with bankers hats on. They do not understand pensions, people or productivity. Their definition of risk is confined to the spreadsheets they analyse- they are not expert in anything else.

Intellectual and moral support

The intellectual support for this proposal comes the likes of Hilary Salt and Derek Benstead – individuals who understand people , pensions and have a wider view of risk than the bankers who advise Royal Mail could credit.

I will lend the moral support. The promises that have been made to generations of posties have been for pensions , not cash. Royal Mail has agreed to share risk with members in a joint enterprise that makes the early mornings and the yapping dogs worth it.

Kick the experts out

If one of the bankers advising Royal Mail could spend a month doing the job of a postman, they would understand that there is more to life than a spreadsheet and more to a pension than a cash balance

Further reading


FT comment on both Royal Mail’s and CWU’s press statements;

Royal Mail’s press statement putting forward its cash balance proposal

I’m posting the relevant section complete with hints at the “appropriate investment strategy” that this proposal will require (cash for cash).

Member benefits built up until April 2012 are backed by Government. Benefits built up between 2012 and 2018 are backed by the Plan’s assets. From 1 April 2018 the Defined Benefit cash balance scheme would provide members with a guaranteed lump sum at retirement. Members would be guaranteed to receive the total value of the contributions paid towards their lump sum up to retirement. In addition, discretionary increases would be applied up to retirement, subject to the investment performance of the scheme. Once applied, these increases would also be guaranteed.

Having reviewed matters with its actuarial advisers, the Company believes that the risk to the Company of the proposed Defined Benefit cash balance scheme would be materially lower than under the current Plan. The Company would also take steps to manage risk further through an appropriate investment strategy and a proportion of the Company contributions would be held as a pension risk reserve for additional security.

Royal Mail’s initial statement in January, announcing its intention to close the final salary plan;

Pensions resurgent! – comment on the Royal Mail on this blog

The CWU pension proposals-Your questions answered- comment on the Royal Mail on this blog


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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