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More gain than pain in O2 pensions review

7th November 2012

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Members in O2 have voted by nearly nine-to-one to accept a major new deal on pensions that will, for the first time, see all employees benefiting from decent pension provision.

The agreement, which was strongly recommended to members by the CWU in a ballot which closed today (Wednesday), is the culmination of virtually a year of intensive negotiations between the CWU, Prospect and O2 as to how the company can best manage the dual challenge of auto-enrolment and ongoing affordability problems surrounding the O2 defined benefit or 'final salary' pension plan which closed to new members in April 2001.

Representing the most significant step-change in pension provision since O2's divestment from BT (from which the final salary scheme was inherited), the package has profound implications for all CWU and Prospect represented grades - not least members of the final salary scheme which would be closed to future accrual from March 2013 under the proposals.

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Assistant secretary Sally Bridge explains: "This latest review of O2 pensions - the second in just two years for members of the final salary scheme - contains both welcome and less welcome elements.

"On balance, however, we came to the conclusion that, given the scale of the pensions challenge facing O2, the deal has strong positive points for everyone affected.

"For the increasingly small number of active members of the final salary scheme still serving in CWU-represented grades we've negotiated some innovative additional contributions that do much to compensate them for the loss of their final salary benefits.

"Meanwhile, for the vast majority of employees in O2 - including the 4,708 individuals in CWU represented grades who currently have no pension provision at all - the deal on the table represents a huge step forward towards the establishment of pensions that are better than the industry average and genuinely worth saving for."

"While there's obviously keen disappointment that we haven't been able to persuade the company to keep the final salary scheme open, we genuinely believe that this is the best outcome we could possibly have negotiated without a major disagreement with the company.

"We wanted O2 to come up with new money for auto-enrolment, and that's exactly what has been achieved."

The details explained...

Big winners

The most obvious 'winners' under the deal include the 1,671 individuals in CWU-represented grades who are already members of O2's money purchase pension plan.

Company contribution levels to that scheme will increase significantly from March 1, 2013 - up to a maximum of 11.5% of salary.

The increases in company contributions that will be payable at employee contribution rates of 3, 6 and 9% of salary are set out below - but even those making the lowest level of contribution (3%) will see company contributions to their pension pots rise from 4% to 6% of salary - resulting in overall contribution rates of 9%.

"In itself that will take O2's contribution rates to its defined contribution plan from a position of being a paltry 'trailer' in any comparison of comparable companies' money purchase schemes to a market leader - but the really significant improvements will accrue to those paying in either 6 or 9% of their salaries," explains Sally.

"For these individuals the company's contribution rate will soar to 9 and 11.5% of salary respectively - resulting in overall contribution rates of 15% or 20.5% of salary respectively.

"Overall contribution rates of those levels push O2's defined contribution pension scheme into the 'first division' of money purchase schemes, and will certainly result in the eventual accrual of a pension pot that is well worth saving for," insists Sally.


Auto-enrolment

The other big 'winners' - though not all will necessarily immediately see it that way - are the 4,708 O2 employees in CWU represented grades who are not currently members of any pension scheme at all.

From March 1 next year all employees aged 22 or over, and earning over £8,000, will be automatically enrolled in the defined contributions pension scheme, unless they specifically request otherwise.

The default contribution will initially be set at the 1% contribution rate which attracts company contributions of 2% of salary - resulting in a total of 3% of salary being paid annually into the individuals' pension pots. (In 2017 the default employee contribution rate will rise to 2% of salary, attracting 4% company contributions - and in 2018 employee contributions rise to 3% of salary, with the employer contributing a further 6%).

"This phased implementation is intended to help individuals adjust to pension saving - but neither the employee rates nor the timescales are prescriptive," stresses assistant secretary Sally Bridge.

"Anyone being auto-enrolled has the opportunity to pay more than the minimum - and it's the view of the CWU that if individuals can afford more than 1% they should consider increasing their contribution to benefit from the higher contribution levels - as that will help them maximise their pension pot."

Indeed, just like existing members of the scheme, those being auto-enrolled are perfectly entitled to up their contribution levels immediately to either 6% or 9% - with the corresponding company contribution rates resulting in overall contributions reaching 15% or 20.5% respectively.

The move to auto-enrolment stems from legislation passed under the last Labour Government that was intended to address a ticking pensions 'time bomb' which had been predicted to result in mass pensioner poverty in the future.

Assistant secretary Sally Bridge explains: "While some individuals who are currently making no savings for their old age whatsoever may not immediately like the idea of 3% being taken out of their salaries for investment in a pension scheme, we'd urge people to think long and hard before deciding to opt out of auto-enrolment.

"Although pensions are not a 'sexy' issue, the company contributions we've been able to negotiate for our members in O2 go way beyond those required by law and rank amongst the very best being offered anywhere.
"For anyone who is already attempting to save in a different way for their retirement, participation in the pension scheme is a complete no-brainer."


Compensating the few

The only group of O2 employees who don't stand to gain from the new pension settlement are those in the final salary pension scheme, which will close for future accrual on March 1 next year.

Affecting 554 individuals in CWU represented grades, the closure of that scheme does not affect any benefits accrued up until that date, all of which are entirely ring-fenced.

Going forward, members choosing to switch to the new enhanced money purchase scheme will benefit from both significant additional employer contributions and free membership of a special insurance scheme to help compensate them for the loss of their 'final salary' benefits - or the opportunity to take the extra money in cash.

To summarise, additional company contributions worth 21% of salary lasting up until 2016 should provide for broadly comparable pension benefits to those currently enjoyed up until that date.

After 2016, those still actively contributing to the scheme will benefit from either an additional 16% of salary payment by O2 in to the new money purchase scheme, or that sum in cash, up until the date of their retirement.


Look out for a more detailed feature explaining the finer details of the deal in the next issue of the Telecoms and Financial Services Voice magazine due out for delivery later this month or visit the Telefonica O2 section of the website for membership briefings.