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Royal Mail maintains pension surplus on back of strong Gilt returns

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Royal Mail’s pension plans have bolstered their funding surplus, seeing it increase by nearly £1.4bn (€1.9bn) as average funding levels within UK schemes fell by more than 2 percentage points.

According to the company’s latest annual report, covering the financial year to 29 March, the Royal Mail Pension Plan (RMPP) and the smaller Royal Mail Senior Executives Pension Plan saw a combined IAS 19 surplus of £3.2bn, up from £1.7bn in March 2014.

The increased surplus comes despite a comparable increase in liabilities of £1.3bn across both funds.

The actuarial surplus was less pronounced but still increased by £371m to nearly £1.8bn – with the Royal Mail expressing surprise that the surplus remained in place.

It also came the same month as the Pension Protection Fund 7800 index saw aggregate funding levels dip to 81.4%, although levels have since recovered.

The UK postal service saw a large share of its pension liabilities transferred to the government ahead of its 2013 listing, with the reformed RMPP subsequently reporting an IAS 19 surplus of £830m.

The company said it expected the initial surplus to decline over time, especially in light of what it accepted were worsening market conditions for defined benefit funds.

“The increase in the surplus was largely driven by the return on assets – in particular due to the increase in the market value of Gilts and derivative assets principally held to hedge inflation and interest rate risk,” the report notes.

Gilt holdings make up well over half of both funds’ £6.6bn in assets, with £3.7bn held in unit trusts – up from £2bn in March last year.

A further £195m was held in index-linked UK bonds, £525m in overseas fixed-interest bonds and £60m in UK denominated fixed-interest bonds.

The funds held an additional estimated £460m in unit trusts, with nearly £600m in direct equity holdings, £318m in listed and unlisted property and £175m in cash.

The report went on to say that the surplus would be likely to decline to the point that there was “neither a material surplus or deficit” by 2018, as the company adjusted its contribution rates to reduce the surplus.

Compared with 2014, both schemes assumed retail prices index (RPI) inflation of 3.1%, down 0.3 percentage points, an equal decrease in consumer prices index (CPI) inflation to 2.1% and a nominal discount rate of 3.5%, down by 1 percentage point.

The falling inflation assumptions are likely to have reduced liabilities by £270m, while the lower discount rate would have caused liabilities to rise by £900m, according to the company’s actuarial assumptions. 

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