Royal Mail and the Communication Workers Union (CWU) have agreed in principal to work towards introducing a collective defined contribution (CDC) scheme for all employees.
According to a statement on the London Stock Exchange today, the agreement which will be voted on by the union's members also includes closing the defined benefit (DB) scheme to future accrual.
It follows a two-day meeting this week by the union's postal executive committee to make a final decision on the proposed agreement.
However, introducing a CDC scheme will be subject to necessary legislative changes, and transitional pension arrangements will be put in place from 1 April until such a scheme can be set up.
A DB cash balance scheme will sit alongside it, and the ongoing annual cash cost of pensions will continue to be around £400m.
CDC schemes, which do not exist in the UK, have fixed contribution rates from the employer and members, but pool investment and longevity risk between members. The Pension Schemes Act 2015 introduced by the coalition government classed ‘shared risk/defined ambition' or CDC as a distinct pension category, but regulations to bring them into force have not yet been introduced.
The executive of the union recommends 110,000 CWU members vote in favour of the proposed agreement, in an upcoming ballot. The deal, which also covers pay, a shorter working week, culture and operational changes, has also been approved by Royal Mail's board.
Under the transitional arrangements until a CDC scheme is established, members of the DB scheme which will close to future accrual will go into the DB cash balance scheme as of 1 April. The company will contribute 13.6% of pensionable pay towards members' retirement lump sums, and a further 2% for other member benefits, including death in service and ill-health. Members will continue to contribute 6% of pensionable pay towards their retirement lump sums.
Members of the postal service's defined contribution scheme that have a minimum five years' service will be able to join the DB cash balance scheme. The company will increase DC contributions at each standard contribution tier by one percentage point. Current and future DC members in the standard section of the plan will be moved to the top tier of contributions - which is 10% employer contribution and 6% member contribution.
CWU's postal deputy general secretary Terry Pullinger said: "This agreement represents the successful outcome of months of talks and is testament to the strength of membership support reflected in the union's huge vote for strike action in October last year. The success of our campaign has delivered a substantial pay rise, a shorter working week and a pioneering new pension scheme that will secure our members' future employment, standard of living and retirement security."
Royal Mail chief executive officer Moya Greene hailed the agreement as a "new chapter" for the postal service and the CWU.
"Following the conclusion of a helpful mediation process and further talks, we have delivered the right result for Royal Mail and our stakeholders. This is an affordable and sustainable solution that enables us to continue to innovate and grow and to meet the intense competition with confidence."
The dispute began in 2017 when Royal Mail announced it would close its DB scheme and move workers into a DC plan. Last October, postal workers voted in favour of going on strike, but the company won a High Court injunction preventing a planned 48-hour strike.
Today's agreement came just a day after the Work and Pensions Committee's consultation on CDC closed. PP has looked at whether it could offer a viable alternative in the binary pensions system.
Last week Pullinger said at a conference that such arrangements could be set up without needing full CDC legislation, which would speed up and make the process easier.
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