The Post Office section of the Royal Mail Pension Plan remains in surplus, its latest funding update shows, just weeks after it was closed to future accrual amid union consternation.
Representatives from union Unite said the section’s findings of a £38.9m surplus, only accurate as of March last year, proved that the scheme had been closed prematurely.
However, industry experts said the funding report may not be an accurate measure of affordability, and encouraged the scheme to take steps to ensure no deficit is recognised in the future.
In its communication to members of the Post Office section, the trustee of the RMPP also provided details of the latest triennial valuation, which showed a £62.7m surplus as at March 31 2015.
The idea that it’s sustainable in anything other than the short term I think is untrue
Hugh Nolan, Spence and Partners
At that date, the letter noted, the section was also fully funded on a buyout basis.
“Based on the funding level on 31 March 2015, the Post Office section of the Plan could meet 100% of its commitments to members in this way [through insurance policies],” it read.
The letter also sought to reassure members that the surplus, created when government took on responsibility for historic liabilities in 2012, cannot be recovered by the Post Office.
“The Trustee has also reached a legally binding agreement with Post Office that any surplus left following closure can only be used for the benefit of members in the Post Office section of the Plan. No surplus can, or will be, returned to Post Office,” the letter added.
Is it affordable?
Brian Scott, Unite officer for members in the Post Office, said the reduction in surplus was not significant enough to justify the section’s closure, which took place in March after a long period of negotiations.
“This valuation from the pension scheme confirms the concerns of Unite that the Post Office was premature in its decision to close the pension scheme. It did not need to do so and we argued this throughout the consultation process,” he said.
With the surplus being used to subsidise contributions from the Post Office and its government backing, it will eventually run out.
But Scott called for the reopening of the scheme, saying the history of the Post Office implied partial government responsibility for the scheme.
“When you think that the reason that the Post Office was to split from Royal Mail was to enable the sale of Royal Mail, then yes, we think the government has a responsibility,” he said.
Such a sizeable U-turn seems unlikely now the scheme has closed.
Hugh Nolan, president of the Society of Pension Professionals and director at consultancy Spence & Partners, noted that despite the surplus being used to fund future accrual, the Post Office has still had to contribute 17.1 per cent of pensionable pay for several years.
“So the idea that it’s sustainable in anything other than the short term I think is untrue,” he said, but conceded that the scheme may well have been closed prematurely if a surplus remains.
What next?
The dilemma for the Post Office and the trustees of the RMPP is therefore whether to wind up the section, using the surplus to insure the liabilities, or whether to continue to run it.
Ordinarily, that would seem a straightforward decision, with companies largely keen to see the back of their DB obligations.
But Nolan said the particulars of the Post Office section might cloud this judgment. “For example the benefits are largely [consumer price index] related and insurance companies don’t necessarily give great pricing [for those liabilities],” he said.
Unite plans strike ballot as Post Office mulls scheme closure
Unite, the union, is seeking a mandate for strike action from its members who work for the Post Office following proposals to close the defined benefit scheme to accrual.
Instead, it might make sense for the scheme to derisk as far as possible, until the Royal Mail Group section is also ready to be wound up, he said, making a more attractive proposition for insurers.
Bob Scott, chairman of the Association of Consulting Actuaries and senior partner at consultancy LCP, said the fact that the Royal Mail plan tops up benefits provided by the Royal Mail Statutory Scheme, which is run by government, could also complicate buyout negotiation.
Nonetheless, he said that in general, employers still view the risk-reward balance of running a scheme as skewed in favour of buyout.
“If a scheme continues to run whilst it has a buyout surplus then it’s taking a risk,” he said.
Royal Mail Pension Trustees were unavailable for comment.
