Royal Mail could become the first UK company to introduce a collective defined contribution (CDC) scheme after reaching an agreement “in principle” with the Communication Workers Union (CWU).

The two parties have been locked in discussions for months following Royal Mail’s decision in April 2017 to close the Royal Mail Pension Plan (RMPP), a defined benefit scheme. The company confirmed today that RMPP will close to future accrual from 31 March 2018.

Under the proposals made public by the company today, a CDC fund would replace RMPP, with a “defined benefit cash balance scheme” alongside it. Royal Mail said it would contribute 13.6% of of members’ pensionable pay, with members paying 6%. The scheme would target a level of income in retirement similar to that of RMPP, but this would not be guaranteed.

The cash balance section would fund the payment of guaranteed lump sums to members upon retirement, with discretionary increases applied depending on investment performance.

Royal Mail and the CWU will lobby government to make the necessary legislative and regulatory changes so a CDC scheme can be established. 

Royal Mail said the ongoing annual cost of the new arrangement would be roughly £400m (€457m), in line with the current cost of its existing arrangements. Last year the company warned that its annual payments were likely to hit £1bn if RMPP was not changed.

Until a CDC scheme is launched at Royal Mail, employees will save into the company’s existing defined contribution plan and the new cash balance fund.

CWU members will now vote on the proposal and have been encouraged by the union to accept the deal.

Moya Greene, Royal Mail’s CEO, said the new pension arrangement was “an affordable and sustainable solution that enables us to continue to innovate and grow and to meet the intense competition with confidence”.

Speaking earlier this week in a video posted to the CWU’s website, Terry Pullinger, deputy general secretary for postal, said: “I absolutely believe that we have now with this agreement laid the foundation for the right attitude and approach to the future of our business… When you consider where we started, I hope you will agree that this will be seen as an excellent achievement by this trade union.”

Royal Mail to close DB scheme in 2018

The birth of UK CDC

The CWU and Royal Mail plan to lobby the UK government to allow the establishment of CDC schemes – also known as ‘defined ambition’. The UK passed primary legislation to allow such schemes in 2015, but the government subsequently abandoned the idea and has not introduced the secondary legislation required to make them possible.

In November, the Work and Pensions Select Committee of the UK’s parliament launched an inquiry as to how the schemes would work.

Frank Field, chair of the committee, said: “What the Select Committee is aiming for is to retain some of the best features of company schemes in a different age when employers are no longer willing or able to sustain the burden of final salary promises to employees, who could club together and pool the risk themselves.”

The committee’s call for evidence closed yesterday with 19 responses so far made public. Respondents include academics, consultants, trade bodies and pension funds, including master trust NEST and Dutch civil service scheme APG.