A wage in retirement or freedom from pensions?


Yesterday I wrote about one aspect of the dispute between Royal Mail and its workers – the difference in opinion between the two sides on how postal workers are financially supported in retirement.

It appears very simple; Royal Mail want to pay a lump sum which they will guarantee to members of its pension scheme, the postal workers want the money paid as a wage. You would not think this a deal-breaker, but it is. Because of the arcane rules surrounding pensions, Royal Mail feel it is a lot more risky to pay members a wage in retirement than all the money up front. Not only is it more risky to their cash flows, it is presented as a risk on its balance sheet making it harder for the management to do the corporate deals they want to do.

The unions argue that they have done what they can to reduce the impact on the balance sheet, they’ve designed a solution that minimises the risk to future cash flows of Royal Mail and in any case, the deal with their members is that they get paid a wage not a lump sum.

Royal Mail argues that anything that ties up the company’s capacity to borrow against its balance sheet, or which could become a risk to free cash flow at a later date is putting at risk the livelihoods of the postal workers. Royal Mail have also got to consider its shareholders who should be mightily peeved that this pension dispute has recently cost them a lot of the value of their shares.

So this is at one level a dispute between workers asserting the right to have their pension rights paid as pensions and at another, the company asserting its rights to put the long term job prospects and interests of the shareholders above the wishes of current and future workers.

There is a more technical dispute going on behind the scenes which is between the pension experts. On the one hand, those advising the company are saying that the prudent investment strategy is to invest in bonds, this is in line with the way the scheme must report its funding position on its balance sheet and it means that the company will have a less bumpy road to its objectives. The member’s advisers argue that this approach limits the objectives to the limited capacity of bonds to deliver real returns over time and that time is what most postal workers have between now and meeting their maker.

The member’s advisers point to the long-term outperformance of shares (equities) over debt (bonds) and argue that because in the short term equity holders take more risk, they should be rewarded in the long-term by higher returns. The member advisers say that their members can withstand short term risk and would prefer to have a more ambitious objective (a wage in retirement), than a  cash payment at retirement.

Where it gets political

The politics of this are played out at a regulatory and governmental level and they are as polarised as anything else in this debate.  Royal Mail can point to the Pension Freedoms given to people by changes in the tax-system by George Osborne in 2015 which allow people to do what they like with their pension rights (though they may be heavily taxed for doing so). Royal Mail can argue that they are playing to these pension freedoms by handing over cash at retirement and that this is what people want.

The CWU, with the bulk of postal workers behind them are saying this is not what they want. They want a wage in retirement, which is what they were always promised by being in a pension not a savings scheme. They can now point to a strongly worded report by the Financial Conduct Authority which claims that many people in similar circumstances to postal workers are making a mess of their pension freedoms, for want of advice and distrust of the pension system.

The politics are polarising between a traditionalist position and a more modern one. Royal Mail will argue that they are on the side of the modern calls for personal financial empowerment while the Members point out that they aren’t up to managing their own wage in retirement – with evidence from the FCA.

How does this get resolved?

A traditional route to resolution of this kind of dispute would be to bring both sides together and hammer out a compromise. Unfortunately this requires wriggle-room of which there is uncomfortably little.

I understand that the CWU and its membership would like to take further risk off the Royal Mail’s table by abandoning the few guarantees that are in their proposal. But to do this , they would have to use regulations that while promised, are yet to be drafted let alone published. The delay in drafting and publication is as a result of a change of Government in 2015 and change of Ministerial outlook.

As for Royal Mail, they may feel they have already compromised by guaranteeing the lump sum and improving its generosity from its initial offer. So long as they are adamant that they can take no further risk, they will be unable to move much beyond their current position. What is clear is that offering a bigger cash sum is not the answer the Union and members are looking for.

Nobody wants a strike, nobody wants the share price of Royal Mail to continue to plummet and nobody wants to see nearly 140,000 postal workers feeling insecure about their retirement.

My blogs on this subject highlight (at least to me), that positions on pensions are currently polarised and that we are deeply divided about how we should invest, value liabilities, what responsibility members should take on themselves and to what extent a pension promise means paying a wage for life.

Personally I would like to see this dispute catch the public imagination so that we can have the proper debate on risk-sharing that we’ve been needing to have for a few years now. But for that to happen, we need to have a bit more listening and co-operation!

I’m not close enough to the dispute to know the detailed rights and wrongs but I’m quite sure  – knowing the advisers involved – that careful and constructive negotiation is better than posturing and that this dispute will best be resolved with a smile.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to A wage in retirement or freedom from pensions?

  1. Peter Beattie says:

    Henry. I see this problem as an unfortunate attitude by any government not living up to its responsibilities! It all starts by government not wanting to ‘run anything’ and are quite happy to ‘off load’ any financial problem onto the ‘private sector’ that they seem to think are ‘infallible’ and are the best people to promote trade and profits. Regretfully that is not the case when government then want to tax pension funds and we have a problem of companies becoming ‘insolvent’. That is why we have a PPF/FAS! Now with the Royal Mail problem the government had the responsibility of ensuring that postal workers pensions should of been protected on transfer to the ‘private sector’ where ‘share holders interests’ have always ‘trumped employee’s employment conditions’! So did this not happen and where did the Unions come up with the idea that ‘a pension’ could be considered as the same as ‘a wage’. What’s the difference as both are unfortunately viewed as ‘taxable income’!

  2. Bob Compton says:

    Good piece Henry, sets out the pension v cash debate very well. However the debate is really about shifting risk, off the Company balance sheet on to the shoulders of it’s retired workforce. If this issue were seen as a tragedy, the government would be forced into holding an inquiry. Should that be something the DWP Select committee could inquire into in the short term, if the government with many other problems will not contemplate an independent enquiry. I would have thought that now would be a good time to push, and frank Field may like to get his teeth into this.

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