Royal Mail Pensions Hilary Salt FIA 5 February

Royal Mail Pensions Hilary Salt FIA 5 February 2018 1

Background • CWU proposed setting up a Win. RS arrangement – a db scheme with pension made up of a guaranteed element and discretionary increases • RM were adamant they could not support this as the scheme would cause them significant accounting problems • After long and tough negotiations, the agreement reached combines two elements of benefit: ◦ A target pension of 1/80 th of pay with target RPI increases: there are no guarantees on this part of the benefit, and ◦ A lump sum on retirement on 3/80 th of pay – this is guaranteed – with target RPI increases • So compromises were – a non guaranteed pension but a guaranteed lump sum and, to divide these, a move from our 1/60 th pension (Section C like) to a 1/80 th pension and 3/80 th lump sum (Section A and B like) • Interim solution whilst we get the legislation 2

Agreement: 2 new benefits Common features Eligibility All employees with 12 months service, auto-enrolled Member contributions 6% Employer contributions Fixed at 13. 6% Normal Retirement Age 67 Protections Lump sum death benefit 4 x pensionable pay Ill health benefit 50% of pensionable pay less State benefits for up to 3 years, lump sum at end of 3 years 3

Agreement: The pension benefit Target benefit features Scheme type Target Career Average (Collective defined contribution) Target pension accrual rate 1/80 of basic + allowances Partner pension 50% of member’s pension Normal Retirement Age 67 Target revaluation before retirement RPI Target increases in retirement RPI 4

Agreement: The cash benefit Target benefit features Scheme type Cash balance (Defined benefit + target increases) Guaranteed cash accrual rate 3/80 of basic + allowances Normal Retirement Age 67 Target increases before retirement RPI Optional contributions • 1% from member + 1% from RM It is hoped to be agreed with the Cabinet Office that the cash sum can be put towards the cash allowance in the RMSPP. This means there is less need to exchange RMSPP pension for cash, keeping more RMSPP pension. 5

Why is it good? • Schemes will be open to all employees after 12 months • Good for RMPP members, good for RMDCP members • Much better contributions than RMDCP • More reliable (but still uncertain) benefit outcomes than from RMDCP • Extra 1% + 1% contributions to cash sum make up cost difference between NRA 65 and 67 • Pensionable pay of basic + pensionable allowances: no Section C style offset 6

Why is it good? • Open collective solution has investment advantages over RMDCP • Target benefits creates investment flexibility which RMPP does not have • Royal Mail takes sponsorship risk on the cash balance scheme • Collective DC would be new to the UK, an industry leading solution 7

Will it work? • Tested how the scheme would perform if it had been set up 20 years ago • Assumes the scheme is invested 50% in UK equities and 50% in overseas equities • The chart compares the annual increases awarded with the target increase of RPI 8