CWU PENSIONS SEMINAR. History of Pensions and Royal Mail Pension Schemes.

CWU

PENSIONS SEMINAR

History of Pensions and Royal Mail Pension Schemes

1970 - Scheme set up“POSSS” – Move away from

civil service.

1st April 1987 - POSSS scheme closedPoPs scheme opened

2000 - Schemes merge but not benefits

2000 - Major changes to PoPs (£3328 LED / 6%)

2000 - Royal Mail DC scheme opened

Royal Mail Pension Plan

Employee Members 167,311

Pensioner Members 175,568

Deferred Members 108,988

Total Membership 451, 967

Active Membership distribution by age

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Pensioners Membership distribution by age

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Deferred Membership distribution by age

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So Why and What are the Problems?

Longevity - Men & women living longer

Low interest rates (Gilts & Bonds)

Investment returns predicted to be lower than expected (Equity / Property)

Q: What is the size of the pension problem facing Royal Mail?

A: 2003 valuation 2006 valuation

Deficit 5% 10%

Ongoing 12.6% 20%

Total 17.6% 30%Contribution

Note: Total pay bill £3.3 billion

Note: Royal Mail cost per £1 of pensionable pay 30p

Royal Mail’s Pension Cost 2006

Deficit £3.5 billion paid over 17 years agreed with scheme trustees (£268 million pa)

Future Pension Costs

Ongoing pension £581 million (pa)

contributions

Pension Plan: 5 year HistoryContribution & Assets

2003 2004 2005 2006 2007£million £million £million £million £million

Employer 248 648 670 526 789Contribution

Employees 192 176 174 182 183

Assets 11,954 15,252 17,246 21,882 23,460

2003 Valuation Assumption2003 Valuation Assumption

Life expectancy at age 60:

Category Men Women

Pensioner 22 years 25 years

Projected 2026 23.5 years 26.5 years

2006 Valuation Factual

Life expectancy at age 60:

Men Women

26 years 29 years

Projected 2026 27.5 years 30.5 years

Actuarial Valuation 31 March 2006

Employees’ Contributions

Benefits

Expenses

Actuary

Investment ReturnEmployers’Contributions(Future Service)

Employer’s(Deficiency)

86.6%

.................…………......Liabilities £25.3bn (2003 valuation £14.5 billion)

…..….........…………..............Assets £21.9bn

Q: What is Royal Mail’s objective?

A: To lower its “Risk and Exposure” to pension volatility.

3 Areas of Risk:

Past Services £3.5 billion

Future Services£580 million

New Entrants costs£1.5 billion of

£2 billion

Royal Mail De-Risking Proposal

Leaked document July 2007:

Close scheme to new starters Retirement age increased to 62 in 2008, 65 in 2010 Either – future pensionable pay increases restricted

to RPI capped at 5%Or - CARE scheme indexed to RPI capped at 5%

Service to date of change increased by RPI capped at 5%

CWU Position

Full protection of benefits accrued to date of change by maintaining final salary link

Right to retire at 60 for existing scheme members

A defined benefit scheme open to all including new starters

The Proposals

Past service protected before 1 April ’08

Pensions paid at age 60

Pension based on final salary

Royal Mail committed to paying off deficit

Change retirement age to 65

Introduce a CARE scheme

CARE Scheme

Career Average Revalued Earnings (CARE) schemes provide a level of benefit based on average salary over an entire career. Earnings from years before retirement or leaving are increased so they keep their real value.

CWU Position

“Willingness to accept changes which reduce the ongoing employer contribution on the basis that any changes should be agreed with the union prior to the formal consultation exercise with members. We have sought to fully protect accrued benefits to date and mitigate the impact of any changes going forward”

Reps Briefing 28/9/2007

What alternatives?

Increase in employee contributions?

RULED OUT

What alternatives?

Government funding?

£850 million in Escrow account – only available if company becomes insolvent

EU Rules on state aid

WOULDN’T SOLVE PROBLEM

Next Steps

Timetable

Consultation ends 16-01-08

CARE

Benefits & Detail

New Entrants

Type of scheme

Indexation

RPI vs ?

CARE Scheme

Year Start Year End Earnings Pension Revalued at 31/03/2014

4/1/04 3/31/05 £8,100 £101.25 £126.454/1/05 3/31/06 £9,600 £120.00 £146.214/1/06 3/31/07 £9,300 £116.25 £138.184/1/07 3/31/08 £9,800 £122.50 £142.064/1/08 3/31/09 £10,200 £127.50 £144.254/1/09 3/31/10 £10,500 £131.25 £144.88

4/1/10 3/31/11 £9,500 £118.75 £127.884/1/11 3/31/12 £9,100 £113.75 £119.514/1/12 3/31/13 £7,500 £93.75 £96.094/1/13 3/31/14 £8,500 £106.25 £106.25Total £1,291.76

Final Salary SchemePension Years of scheme membership X 1/80th X pensionable

earnings

Pension 10 years X 1/80th X £8,500

Total Pension £1,062.50

Pension Calculation Section B (POSSS)

Pensionable Pay £18k

Pensionable Service 25 years

2580

x £18k = £ 5,625

Lump sum calculation:

£5,625 x 3 = £ 16,875

Pension Calculation Section C (PoPs)

Pay £ 18k

Lower Earnings Deduction £ 3,328

Pensionable Pay £ 14,672

Pensionable Service 15 years

1560

x £14,672 = £3,668

Pension Supplement paid to state pension age:

1560

x £3,328 = £ 832

Total pension £ 4,500