Royal Mail’s new collective defined contribution scheme is anticipated to increase its annual cash payroll costs by around £30mn, its half-year accounts have disclosed.
In August, providers in Great Britain became able to apply to launch CDC schemes. Under these schemes, employers and employees pay a fixed rate of contributions, collected in a manner similar to defined contribution schemes.
Benefits are paid with a target in mind, similar to defined benefit schemes, but with the prospect of variable increases — and the possibility of decreases.
Royal Mail appears set to become the first CDC scheme next year, having submitted its application for authorisation. The authorisation process is capped at six months.
The main reason for the increase is that although the estimated cost of the RMCPP as a percentage of pensionable pay will remain broadly the same as in 2018, payroll costs have increased
Royal Mail
‘Payroll costs have increased’
The Royal Mail Collective Pension Plan’s design was agreed in 2018, with a fixed employer contribution rate of 13.6 per cent of pensionable pay.
Standard employee contributions will sit at 6 per cent. The scheme will have an additional 1 per cent rate for employees who choose to save for an additional lump sum payment.
“The expected cost of the RMCPP based on pensionable payroll at that time was approximately the same as the cost of the existing schemes, at around £400mn per year,” Royal Mail said.
“The main reason for the increase is that, although the estimated cost of the RMCPP as a percentage of pensionable pay will remain broadly the same as in 2018, payroll costs have increased.”
It added that since the DB Royal Mail Pension Plan scheme closed to accrual in 2018, the cost of the existing plans had been reducing over time compared with overall pay costs, as members of the Defined Benefit Cash Balance Scheme leave and are placed by new employees who join the Royal Mail Defined Contribution Plan at a lower employer contribution rate.
The RMCPP will replace the DBCBS and the RMDCP.
RMPP accounting surplus dives
The group recorded an IAS19 deficit of £188mn on its balance sheet, down from £390mn on March 27.
It emphasised that the scheme is not in funding deficit, and explained that the drop in the deficit was “largely due to a considerable increase in the ‘real’ discount rate… as a result of a large increase in corporate bond yields at the balance sheet date, versus the year-end which has had the effect of significantly reducing liabilities”.
The pre-withholding tax accounting surplus of the RMPP’s legacy section, meanwhile, plummeted to £2.9tn as of September 25, from £4.18tn as of March 27.
DWP aims to consult on multi-employer CDC this year
The Department for Work and Pensions will consult on multi-employer collective defined contribution schemes before the end of 2022, according to a senior civil servant.
“This was the result of a significant increase in index-linked gilt yields, against which the RMPP liabilities are hedged, driving a large proportion of the £3,805mn reduction in the value of this section’s assets,” Royal Mail said.
“This movement was, however, to a large degree offset by a significant increase in the ‘real’ discount rate driving a large proportion of an overall £2,520mn reduction to the value of the RMPP’s calculated liabilities versus the year-end.”
Royal Mail added that while the surplus had fallen in absolute terms, its funding level on an accounting basis had risen since the year-end owing to the sharp drop in liabilities.
