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UK roundup: Royal Mail pension costs, Standard Life-Aberdeen merger latest

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Royal Mail’s pension scheme contributions will reach £1.3bn (€1.5bn) from next year, higher than initially expected, according to its latest valuation.

The company, which runs the UK’s postal network, announced the closure of the Royal Mail Pension Plan (RMPP) to future accrual earlier this year. This is due to take effect from 31 March 2018.

In a statement to the stock exchange on Monday, Royal Mail said the defined benefit (DB) scheme had a surplus of £1.7bn as of 31 March 2017. However, combined employer and employee contributions to the scheme were estimated to be higher than the £1bn the company estimated when it announced the closure of RMPP. The company currently pays £400m a year into the scheme.

“Accordingly, we expect that the actuarial funding surplus would be exhausted during 2018 if the plan had remained open in its current form,” Royal Mail said. “After this time, the annual cost would be more than double the current contributions, which, as we have pointed out to plan members in a number of communications, is unaffordable for the company.”    

The company added that it would “continue to work closely with our unions on a sustainable and affordable solution for the provision of pension benefits after 31 March 2018”.

The Communication Workers’ Union (CWU) proposed an equity-heavy risk-sharing scheme in March. Royal Mail rejected this plan but retained some elements of it in another proposal, which formed one of several options being considered for a replacement pension arrangement.

Both the CWU and Unite unions have threatened industrial action, including strikes, in relation to the DB scheme’s closure.

‘Standard Life Aberdeen’ to cut 800 roles post-merger

The planned merger between Aberdeen Asset Management and Standard Life Investments – which would create one of the biggest asset managers in Europe – moved a step closer this week as the two companies issued official documents.

The two companies said in the scheme documents for the merger that they expected to remove roughly 800 roles from their combined workforce of approximately 9,000 during the integration process.

The companies said they aimed to achieve annual savings of up to £200m.

The combined entity would be called Standard Life Aberdeen, the companies announced.

Aggregate DB shortfall climbs in April

The combined deficit of UK corporate DB pension funds rose by 8.4% in April to £245.6bn, according to data from the Pension Protection Fund (PPF).

This was the highest figure recorded by the PPF’s 7800 index of DB schemes since October 2016.

Total liabilities rose during last month, while assets fell.

Andrew Tunningley, head of UK strategic clients at BlackRock, said many schemes were “underhedged”.

“UK index-linked gilt yields – crucial to determining pension liability values – are driven by a powerful force that is sometimes underappreciated: supply and demand,” Tunningley said. “The proliferation of liability-driven investing among the pension community has caused demand for linkers to grow at a much faster pace than supply.”

He added: “We estimate that over the next five years demand for index-linked bonds could be around four times the projected supply available to pension schemes… In our view, this persistent imbalance could act as a powerful anchor preventing a sustained pick-up in yields. Today’s low real yield environment will prevail for some time, meaning that materially better market levels at which to hedge liabilities may not arise any time soon.”

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