The Communication Workers Union (CWU) is calling on Royal Mail to merge its defined benefit (DB) and defined contribution (DC) members into a risk sharing pension scheme.
The union has dubbed the proposal a "compromise solution" to the postal service's plans to close the DB scheme to future accrual, while at the same time bridging the gap between DB and DC provision.
The scheme would bring together 90,000 DB members and 42,000 DC members, and be DB in nature by guaranteeing a minimum wage in retirement, but inflation-linked increases would be solely dependent on investment performance.
Speaking to PP, CWU deputy general secretary Terry Pullinger said:
"We want to defend the concept of a wage in retirement while sharing the risk. We thought that the combination of making a promise 30 years out and de-risking investment strategies are leading to the death of DB. In a relatively short period of time we find ourselves in a position that although the scheme is in surplus, because of the valuation method and de-risking strategy, the company has to commit £1bn a year to continue."
The projected £1bn annual contributions from March 2018 equating to 50% of pensionable pay is more than double the current £400m or 17% of pensionable pay that Royal Mail currently pays. This is despite the scheme having a £1.8bn surplus on an IAS 19 accounting basis as of 31 March 2016.
The union argues the lack of certainty over future DB contributions would be solved through the risk-shared scheme where the company would know exactly what its contributions would be year on year.
Equally, members would still know they will get a minimum wage in retirement but how that grows each year would depend on performance in the investment strategy.
Pullinger explained: "At the end of each year there would be a sensible and mature conversation about how much increases can be given based on investment performance, making sure you're still covering the liabilities. One year we might say let's increase it to the Retail Price Index, next year the Consumer Price Index, but another year there might be no increases at all."
To generate higher returns, the scheme would be predominately or even entirely invested in equities, perhaps 50% UK equities and 50% overseas. By contrast the current DB scheme has around 90% allocated to bonds.
The CWU said it has extensively back-tested the scheme over the past 21 years, looking at what the contributions would be and how the investment portfolio would have performed, while taking the impact of financial crashes into consideration. "Over 21 years it would have performed very well - certainly comparable to DB but would have completely smashed the life out of DC," he said.
The union believes it would be possible to create such a scheme within the current rules and regulations, although Pullinger admitted it's "not going to be an easy ride" trying to get the company to set up a brand new scheme.
He said he hopes if the proposal did prove to be acceptable, it would become industry leading and give others hope that it's still possible to have a scheme that provides a decent wage in retirement.
He is very dismissive of DC, arguing it is a savings arrangement rather than a pension scheme.
"We're also taking a moral and ethical position on this because DC schemes aren't the answer and yet they're really the only option going forward with DB closing. The vast majority of DC members are not paying anywhere near enough to give them even a slight chance of getting a decent pension."
Royal Mail will consider the CWU's proposal alongside other responses to its consultation on closing the DB scheme. The proposal is a far cry from the company's plan to transfer DB members into a DC scheme on 31 March 2018, and give each a £750 one-off payment.
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