Pensions FAQ
Q: What is a pension and
why should we have one?
A: A pension, in simple terms, is an income paid to you when you retire. The concept is quite simple: while you are at work earning money, you put some of it aside to provide for an income in retirement. An important part of any pension arrangement is that the government gives tax relief on the money paid in and that an element of the pension, when it comes to be paid, can be paid as a tax-free lump sum. Additionally, in an occupational scheme the company will also make a level of contribution into the scheme. A pension is also an integral part of the remuneration package offered to employees. Up until the recent changes the Union have always seen pensions as a partnership arrangement between the employee / Trade Union, the employer (Royal Mail) and the Government. The pension you will receive in retirement is your deferred pay.
Q: What is a CARE scheme or Career Average Defined Benefit scheme?
A: Both of these schemes are effectively the same. Within both schemes, rather than linking benefits to salary at retirement, benefits are based on pay in the year in which they are earned. These accrued benefits are then revalued in accordance with some form of index - usually the Retail Price Index (RPI) or National Average Earnings (NAE). If the accrual rate is maintained this will only serve as a cost saving measure to the extend that the chosen index rises at a lower rate than actual salaries. The fundamental difference between a CARE scheme and a Final Salary arrangement is that the pension is earned over the lifetime of the membership of the pension plan as opposed to taking the best year in the last three to determine the pension benefits which are going to be paid.
Q: Is my pension safe?
A: It is important to understand the difference between benefits which have already built up and those which you expect to earn in the future. If a change in benefit provision is to be implemented no aspect of an employees pension benefits already earned, prior to the date of change can be altered. Only the benefits that will be earned for future pensionable service starting from the date of change will be built up and will be subject to any new regulations and rules as defined in any new scheme introduced. In terms of the security of benefits, pensions are funded by the pension scheme assets which are administered and controlled by an independent board of trustees; however, the fact that the current Royal Mail scheme is in deficit does mean we are dependent on the future profitability of the business to maintain its covenant and its commitment to continue to fund the scheme so that benefits are paid in the future.
Q: What happens to my pension if the Company goes bankrupt?
A: In the event that the company became insolvent, benefits within the pension scheme are protected to a certain degree by the Pension Protection Fund which was set up under recent government legislation.
Q: Why did Royal Mail want to close the current pension scheme?
A: It has been part of the Royal Mail Group board's cost cutting exercise in that there has been a pre-determined decision to reduce the operational and business costs wherever possible. The current Royal Mail board is made up of people who do not support the policy of providing good retirement benefits and pensions. They do not like the open ended nature of the commitments that a final salary scheme places upon the company and the level of risk and exposure to future costs in this area. On the evidence to date, the long term business plans, as far as Royal Mail are concerned, in respect of pensions, is that they are designed to shift the commitment and responsibility that the company has previously had in this area to you, the employee.
Q: One of the reasons Royal Mail say they need to change the scheme is because people are living longer and they use the phrase "longevity" - what is this?
A: Longevity is a term used when describing the fact that members of pension schemes are living longer than the present actuarial models used when schemes are valued. With people living longer, this places unforeseen pension liabilities, which have not been factored and funded into the scheme arrangements, on the company. It is a fact that people are living longer and that these costs now have to be factored into the funding arrangements of all pension schemes.
Q: Royal Mail have changed the age of retirement going forward - what does this actually mean?
A: One of the major changes that Royal Mail made as far as pension arrangements are concerned is that they have increased the Normal Retirement Age to 65 from the 1st April 2010. The Union has estimated that this will make a tremendous saving as far as the company is concerned. The saving arising from the fact that pensions will, on average, be paid for five years less than currently allowed for.
Q: Has the Union established what the Net affect of the changes are that Royal Mail have introduced to the Royal Mail scheme in terms of financial cost reductions?
A: Taking all of the changes together the Union has estimated that Royal Mail's pension contributions will be reduced by some 9% of pensionable pay and would therefore require an employees contribution of approximately 11% going forward. It is important to note that none of the changes that have been introduced will impact on pensionable service and accrued benefits prior to the 1st April 2008. These will remain linked to the final salary determined under current rules and paid at age 60. However, for service after the 1st April this will be calculated on those proposed as far as the CARE scheme is concerned and if taken before age 65, after the 1st April 2010, will be paid on an actuarially reduced basis.
Q: So new starters are going to have a scheme which is different from the current schemes on offer? Has the Union agreed these changes?
A: The simple answer is no, we have not agreed these changes. Once again Royal Mail have embarked upon the introduction of this pension scheme arrangement without formal agreement with the CWU. The Union anticipates that the scheme that is going to be on offer; however, will be a standard Defined Contributory arrangement where the employee will be expected to take the majority of the risk as far as the exposure to investments is concerned.
Q: Were there any improvements introduced when Royal Mail closed the existing schemes?
A: As far as Section C, Death in Service, is concerned the lump sum benefit payable will increase from three times to four times pensionable salary. This was a long outstanding Union claim and had been detailed to Royal Mail on a number of occasions.
Please follow the link for access to the Royal Mail Pensions web site: http://www.royalmailgroup.com/pensions
This site will provide you with information on the main Royal Mail Pension schemes, the Retirement savings Plan and the four Additional Voluntary Contributions (AVC) options. The site also incorporates calculators for both plans and AVC options and investment performance returns.
Other useful links:
DWP - Department for Work and Pensions: www.dwp.gov.uk
OPRA - Occupational Pensions Regulatory Authority http://www.opra.gov.uk/
NAPF - National Association of Pension Funds www.napf.co.uk/
FSA - Financial Services Authority www.fsa.gov.uk/
OPAS - Office of the Pensions Advisory Service www.opas.org.uk/
Some useful contact numbers:
For general enquiries about the CPP or CRSP, telephone the Royal Mail Pensions Helpline on 0845 603 0043.
If you have any problems regarding your Royal Mail pension, contact your local Branch Secretary or e-mail Lionel Sampson at CWU Headquarters: lsampson@cwu.org
For Independent Financial Advice, contact the IFA Helpline on 0117 971 1177.
