Royal Mail plans to close DB scheme to new recruits

Royal Mail has announced plans to close its final salary pension scheme to new recruits, subject to a six-month long consultation.

The proposal, which is contained in its five-year investment plan to strengthen its finances and improve its competitive stance, is part of a series of measures aimed at tackling its £6.6bn pensions deficit and cutting the£730m annual cost of servicing its pension fund.

Under the terms of the proposed plan, which will begin consultation in April, new employees will be offered a defined contribution (DC) pension scheme. The consultation will also look at ways of safeguarding an affordable final salary scheme for existing members. Royal Mail has already reached an agreement in principle with the scheme’s trustees to fund the deficit over 17 years.

Under the new programme, £1bn will be held in escrow accounts to provide security for the pension fund trustees, and will only be released if certain pre-determined conditions are met.

Adam Crozier, Royal Mail chief executive, said: "It is important we safeguard the future of the pension fund for our people, who regard having a final salary pension scheme as a key benefit of working for Royal Mail. But the £730m annual cost of servicing the pension fund clearly damages our competitiveness as we need to increase the price of our products and services to pay for it. Around 93% of our mail volumes come from business customers and they should not have to pay for the increased cost of our pensions – and if we ask them to do so more of them will simply go to the competition."

The cost of servicing the pension fund rose by £280m to £730m in 2006-7 which Royal Mail claims has caused its interim profits to fall from £159m to £22m in the first six months of the 2006-07 financial year, in spite of a 1.4% increase in revenue to £4.4bn.

The organisation has also announced plans to set up a phantom share scheme for employees. Under the terms of the scheme, 20% of the value of Royal Mail today will be earmarked for employees and shares will be distributed free and equally to every employee, from board members to frontline delivery staff. Employees holding shares will receive an annual profit share, which combined with the shares is said to be worth up to £5,300 per employee over five years, based on Royal Mail’s performance.

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Alistair Darling, secretary of state for trade and industry, said: "We recognise that there are a number of difficult changes that need to be made to the way the company operates, including limiting the pension liability going forward, and fully support the business in making them. It is for the management and staff to make the changes necessary to give the company a sound platform on which to build for long-term success in a competitive market."

On the trend of defined benefit (DB) scheme closures, Paul McGlone, principal and actuary at Aon Consulting, said: "It is becoming increasingly difficult for companies with defined benefit (DB) schemes to keep these open. Our research has highlighted that almost three-quarters of UK DB schemes are now closed to new entrants. Looking ahead, we expect this trend to continue and would expect the majority of open schemes to close to new entrants in the next few years."