2018 Pension Review: update - myroyalmail€¦ · 2 2018 Pension Review: update If preferred, RMPP...

1

2018 Pension Review: update

February 2018

¹ Ratification of the final agreement will be subject to a ballot of CWU members and approval of the Royal Mail Board2 Sections B and C of the RMPP close to future accrual in their current form on 31 March 2018

REMEMBER: RMPP members’ benefits built up until April 2012 are backed by Government. Benefits built up between 1 April 2012 and 31 March 2018 are backed by the RMPP’s assets and those benefits will remain in the RMPP. RMPP members can get these benefits when they come to take their pensions.

What is happening?

Royal Mail and the CWU are pleased to announce a ground-breaking agreement which aims to provide innovative retirement benefits for all Royal Mail employees.

We have committed in principle to the future introduction of a Collective Defined Contribution (CDC) scheme – subject to the necessary legislative and regulatory changes – with a Defined Benefit Lump Sum Scheme (DBLSS) sitting alongside it. The CDC scheme would provide members with an income during retirement, with the DBLSS providing a lump sum at the point of retirement.

This would provide one scheme for all Royal Mail employees. It would be the first of its type in the UK.

The new CDC and DBLSS arrangements together would target, but not guarantee, a similar level of retirement benefits to those currently provided by the RMPP2. Risk would be shared between members and the Company.

These are significant moves from the Company’s original Defined Contribution (DC) proposal, where Company contributions were less and risk rested only with members.

We are working closely with the CWU to lobby the Government to make the necessary legislative and regulatory changes to enable this form of CDC scheme to be introduced as soon as possible.

Assuming the necessary regulatory and legislative changes are made, the intention is that once the new arrangements are set up, members of the RMPP and Royal Mail Defined Contribution Plan (RMDCP) would automatically join the CDC scheme.

In the meantime, as we seek these changes, we are putting in place transitional arrangements. The transitional changes, which will continue to provide good quality retirement benefits for RMPP members, will take effect from 1 April 2018.

How do the transitional changes affect you now?

During the transitional period, the Company will implement a new scheme within the RMPP, called the Defined Benefit Cash Balance Scheme (DBCBS). RMPP members will automatically start building up DBCBS benefits on 1 April 2018. An overview of the DBCBS benefits can be found below, with further details in the enclosed booklet.

Dear Colleague,

We are writing to you as a Royal Mail Pension Plan (RMPP) member to update you on the benefits which will be provided in the RMPP from April 2018 following our 2018 Pension Review. These Company decisions directly affect you. They have been discussed and developed with the CWU, and are being recommended by the CWU to its members1. The decisions are separately being finalised with Unite/CMA.

We know that your retirement benefits are important to you. We have worked hard with our unions to continue to provide sustainable, good quality retirement benefits, a healthy Company and as many high quality jobs as possible.

This letter outlines the changes being made and how they could affect you. Please read it and the enclosed explanatory booklet carefully. They explain what will happen to your retirement benefits on 1 April 2018, and the choices you have.

2


If preferred, RMPP members can instead opt to join the improved RMDCP. The RMDCP is Royal Mail’s DC pension scheme for employees who joined the Company after 1 April 2008. You can find further information about the RMDCP, including example contribution levels, in the booklet.

If you are unsure about which scheme is right for you, you may wish to speak to an independent financial adviser. Neither the Company nor the Trustees can provide you with financial advice.

Additional contributions

If you want to pay more than 6% of DBCBS pensionable pay, you can make Additional Voluntary Contributions (AVCs) to Bonusplan or Flexiplan as now. Any contributions you currently make to Bonusplan and/or Flexiplan will continue. Any Added Years contributions you currently make will stop when current RMPP accrual ceases on 31 March 2018.

RMPP members who take their age 65 benefits and leave the Company (at any age) after 31 March 2018 will receive a one-off payment of £750 from the Company, which they can use towards the cost of obtaining financial advice on retirement. This payment will be subject to income tax and National Insurance contributions. This payment will cease to apply once the transitional arrangements end, or new arrangements are agreed with the unions.

Lump sum

The DBCBS contribution rates, which make up the lump sum, are higher than our original DC proposal. The Company contributes 15.6% of DBCBS pensionable pay (DBCBS pensionable pay has the same definition as current RMPP pensionable pay) to the scheme. Of this, 13.6% goes towards the member’s guaranteed lump sum. The member’s contributions of 6% of DBCBS pensionable pay will also go towards the guaranteed lump sum.

This means at 65 (normal retirement age), members will receive a lump sum of at least the 19.6% of DBCBS pensionable pay that has been paid on their behalf each year. In addition, the scheme targets discretionary increases to the lump sum each year, dependent on investment returns and expectations of future returns. The scheme’s DBCBS assets are pooled, and investment returns are shared across the members. Once credited, any increases are also guaranteed.

The remaining 2% of the Company’s contribution will go towards other member benefits, including death-in-service and ill-health benefits.

Defined Benefit Cash Balance Scheme (DBCBS) benefits from 1 April 2018

DBCBS benefits are based around the choices you make at retirement. 97% of RMPP members choose to take a tax-free lump sum at retirement; 86% take the maximum tax-free lump sum they can.

Under the DBCBS, the Company guarantees a minimum lump sum at age 65 - normal retirement age. We anticipate that the majority of RMPP members will be able to take all of their DBCBS lump sum as tax-free cash when they take their benefits. We are awaiting Government approval for one aspect of the DBCBS design that will allow the DBCBS benefits to work more efficiently for members. There is more information about this in the booklet on page 10.

What should you do now?

Please read the enclosed booklet together with the example illustrations carefully. It explains more about the new pension schemes.

RMDCP and DBCBS benefits work in different ways, as explained in the enclosed booklet. It is important that you do not make your decision whether to build up DBCBS benefits in the RMPP or switch to DC benefits under the RMDCP based only on contribution levels. Other factors, such as your age and your attitude to risk, should be considered.


3


If you would like to find out more about the transitional arrangements, particularly if you are considering leaving the RMPP, please contact the Pension Review Helpline:

By email: [email protected] . Please include your payroll number in your email.

By phone: 0345 850 0081. Please listen to the options carefully to ensure you go through to the appropriate adviser.

By post: Freepost MY PENSION REVIEW TEAM, Royal Mail HR Services, Pond Street, Sheffield S98 6HR

Please note: The Pension Review Helpline can tell you more about the pension arrangements but cannot advise which scheme is best for you. If you are unsure about which scheme is right for you, you should consider speaking to an independent financial adviser.

We will keep you informed of progress on CDC. In the meantime, look out for more information on myroyalmail.com/pensions and watch RMtv.

Yours faithfully,

Jon Millidge

Group HR Director Royal Mail

Important legal note: This letter is provided for information purposes only and does not guarantee or change your benefits. Benefits under Royal Mail retirement benefit arrangements are subject always to the governing provisions of the relevant plan in force from time to time. Royal Mail reserves the right to amend, suspend or withdraw all or any of its retirement benefit arrangements and/or Pension Salary Exchange at any time. The CDC scheme requires certain legislative and regulatory changes to be made before it can be established. Benefits under a CDC scheme represent targets only. They are not guaranteed and are backed only by the assets of the Scheme and not by the employer.

Once you have read the booklet, you should choose which pension scheme is right for you.

If you would like to build up DBCBS benefits in the RMPP from 1 April 2018 you do not need to do anything. This will happen automatically on 1 April 2018.

If you would prefer to opt out of the DBCBS and join the RMDCP, please complete the ‘Joining RMDCP’ form enclosed. You can do this at any time, but if you would like to start building up benefits in the RMDCP on 1 April 2018 you will need to return the form by 19 March 2018. If you return this form after 19 March 2018, you will start building up DBCBS benefits in the RMPP on 1 April 2018, but will leave the DBCBS from the next available payroll date after your form is received. By doing this you are leaving the RMPP and your benefits will be calculated accordingly (see page 13 of the enclosed booklet). You are advised to seek independent financial advice before opting out of the DBCBS, to ensure that joining the RMDCP is the best option for you.


4

THIS PAGE IS INTENTIONALLY LEFT BLANK.

5


2018 Pension Review: Members of the Royal Mail Pension Plan

Royal Mail and the CWU have been working together for many months and are pleased to announce a ground-breaking agreement which aims to provide innovative retirement benefits for all Royal Mail employees.

Royal Mail and the CWU have committed in principle to the future introduction of a Collective Defined Contribution (CDC) scheme - subject to the necessary legislative and regulatory changes - with a Defined Benefit Lump Sum Scheme (DBLSS) sitting alongside it. The CDC scheme would provide members with an income during retirement, with the DBLSS providing a lump sum at the point of retirement.

This would provide one scheme for all Royal Mail employees. It would be the first of its type in the UK.

The new pension arrangements would target, but not guarantee, a similar level of retirement benefits for all Royal Mail employees as the current Royal Mail Pension Plan (RMPP). Risk would also be shared between members and the Company in the form of the DBLSS. These are significant moves from the Company’s original Defined Contribution (DC) proposal, where risk rested only with members and Company contributions were less.

We are working closely with the CWU to lobby the Government to make the necessary legislative and regulatory changes to enable this form of CDC scheme to be introduced as soon as possible.

Assuming the necessary regulatory and legislative changes are made, the intention is that once the new arrangements are set up, members of the RMPP and Royal Mail Defined Contribution Plan (RMDCP) would automatically join the CDC scheme.

In the meantime, as we seek the changes, we are putting in place transitional arrangements. The transitional changes, which will continue to provide employees with good quality retirement benefits for RMPP members, will take effect from 1 April 2018.

Under the transitional arrangements, the Company will implement a new scheme within the RMPP called the Defined Benefit Cash Balance Scheme (DBCBS). RMPP members will automatically start building up DBCBS benefits on 1 April 2018.

RMPP members can instead choose to join the improved Royal Mail Defined Contribution Plan (RMDCP), if they wish. The RMDCP is Royal Mail’s DC pension scheme for employees who joined the Company after 1 April 2008.

During the transitional period, the Company will also offer RMDCP members, with 5 years’ Company service (including 4 years at the standard contribution level), the option of joining the DBCBS.

Please see legal note at the back of this booklet.

Words in bold are defined in the glossary at the back of this booklet.

What is happening?

REMEMBER: RMPP members’ benefits built up until April 2012 are backed by Government. Benefits built up between 1 April 2012 and 31 March 2018 are backed by the RMPP’s assets and those benefits will remain in the RMPP. RMPP members can get these benefits when they come to take their pensions.

February 2018


6


The Pensions Agreement

Royal Mail and the CWU have agreed to work together to introduce a CDC scheme – subject to the necessary legislative and regulatory changes - with a DBLSS sitting alongside it.

There would be one scheme for all Royal Mail employees. The new CDC and DBLSS arrangements would target, but not guarantee, a similar level of retirement benefits as currently provided by RMPP1. Risk would also be shared between members and the Company. These are significant moves from the Company’s original DC proposal, where Company contributions were less and risk rested only with members.

We are working with the CWU to lobby Government to make the necessary changes to enable this form of CDC scheme to be introduced as soon as possible.

What is a CDC scheme?CDC schemes have fixed contribution rates from the employer and members, and share risks such as investment and average life expectancy between members. There is a target for what the employee will receive in retirement, but this target is not guaranteed. The actual benefit payable will depend on the scheme’s investment performance (and once in payment can go down as well as up) and other factors such as average life expectancy of members. CDC schemes would pay members an income in retirement, rather than members having to buy an annuity.

What are the benefits of a CDC scheme?CDC schemes have benefits for both members and the Company. It is anticipated that a CDC scheme would provide members with significantly better outcomes than a traditional DC scheme. At the same

time, the Company would not have to face the unsustainable financial risks associated with a DB pension scheme.

Some of the expected advantages of CDC schemes over typical DC schemes are:n They can take a less conservative investment

strategy in members’ later years, allowing higher potential returns.

n They do not require members to purchase an annuity if they want to receive an income for life on retirement.

n They can benefit from an overall reduction in costs through economies of scale.

n They are simpler for members who are not faced with making decisions about investments, or what to do with their benefits at retirement.

1 Sections B and C of the RMPP close to future accrual in their current form on 31 March 2018.

7


The Pensions Agreement continued

Eligibility All employees with 12 months’ service would be eligible to join

Pensionable pay Basic pay (actual) plus pensionable allowances (there is no Lower Earnings Deduction)

Contributions Company contribution: 13.6% of pensionable pay Member contribution: 6% of pensionable pay

Normal Retirement Age 67 (as now, employees would be able to take their pension from Minimum Pension Age (currently age 55), reduced for early payment)

Target CDC Income 1/80th of pensionable pay for each year of pensionable service plus RPI revaluation

Guaranteed DBLSS Lump Sum 3/80ths of pensionable pay for each year of pensionable service, plus any revaluation (once credited)

Target revaluation for both income and lump sum before retirement

RPI

Target increases to income in payment RPI

Lump sum on death in service 4 x pensionable pay

Dependants income benefit 50% of member’s retirement income

Ill-health benefit 50% of pensionable pay, less State benefits, payable for up to 3 years, plus a lump sum payment at the end of the 3 years.

Under the proposed arrangements - assuming the necessary regulatory and legislative changes are made - risk would be shared between members and the Company. Members would bear the risks associated with the CDC scheme. The Company would bear the risk of guaranteeing a minimum lump sum at normal retirement age under the DBLSS. Together, the new arrangements would target, but not guarantee, a similar level of benefits to those currently provided by RMPP.

There are example illustrations on pages 18-23 of the possible effect of the CDC proposal, with the DBLSS sitting alongside it, on members’ retirement benefits. These benefits have been compared with the benefits members could have received under the RMPP without any changes, the DBCBS and Royal Mail’s original DC proposal.

Summary of the intended CDC scheme with DBLSS sitting alongside it

As stated above, target benefits are not guaranteed. Actual benefits would depend on factors such as investment performance and average life expectancy of members.Members would have the option of contributing an extra 1% to the DB lump sum element of the proposed CDC scheme. The Company would match this contribution with a further 1%.

8


Transitional arrangements: Benefits to be provided from 1 April 2018: A summaryThe Company is putting in place transitional arrangements from 1 April 2018, while it lobbies Government to make the necessary legislative and regulatory changes to enable a CDC scheme.

As part of these transitional changes, the Company will implement a new scheme within the RMPP, called the Defined Benefit Cash Balance Scheme (DBCBS). If preferred, RMPP members can instead choose to join the improved Royal Mail Defined Contribution Plan (RMDCP).

The transitional arrangements and what they could mean for RMPP members are explained in more detail below.

DBCBS at a glancen The DBCBS guarantees a minimum cash sum

payable at normal retirement age (65).n It also targets, but does not guarantee,

discretionary increases each year. These increases are based on investment performance (which can go down as well as up) and expectations of future investment returns. Once awarded, these discretionary increases are guaranteed and not subject to market conditions.

n The DBCBS contribution rates are higher than the Company’s original DC proposal.

n RMPP members will automatically start building up DBCBS benefits on 1 April 2018. They can choose to join the RMDCP instead at any time thereafter. If an RMPP member chooses to join the RMDCP they will not be able to re-join the RMPP.

The transitional arrangements and what they could mean for RMPP members are explained in more detail below.


9


The DBCBS seeks to reduce the impact of the 2018 Pension Review on current RMPP members and to use the RMPP to maximise benefits. DBCBS benefits are based around the choices that members make at retirement. 97% of RMPP members choose to take a tax-free lump sum at retirement; 86% take the maximum tax-free lump sum they can.

DBCBS from 1 April 2018

How the DBCBS worksn The Company contributes 15.6% of DBCBS

pensionable pay (DBCBS pensionable pay has the same definition as current RMPP pensionable pay) to the scheme. Of this, 13.6% goes towards the member’s guaranteed lump sum. The remaining 2% of the Company’s contribution will go to other member benefits including death-in-service and ill-health benefits (see below).

n The member’s contributions of 6% of DBCBS pensionable pay will also go towards the guaranteed lump sum.

n This means that at 65, normal retirement age, members will receive a lump sum of at least the 19.6% of DBCBS pensionable pay that has been paid on their behalf each year.

n The DBCBS contribution rates, which make up the lump sum, are higher than our original DC proposal.

n The DBCBS will also aim to provide increases to the lump sum up to or above inflation. This is dependent upon the scheme’s investment performance each year.

n These increases cannot be guaranteed. Each year, the scheme’s investment performance will

be reviewed and, if appropriate, discretionary increases to the lump sum will be awarded and shared across the members2. Once credited, any discretionary increases are also guaranteed.

n The DBCBS will seek to smooth the discretionary increases that are awarded. This means that if investment performance is very good, some of the returns may be held back, and awarded in later years. But if investment performance is poor, then increases may be lower than inflation, or no increase may be credited at all. Over time, however, all of the investment returns will be awarded to members.

n The remaining 2% of the Company’s contribution to member benefits will go towards providing the scheme’s death in service benefit, the ill-health benefit, the expenses of running the scheme, and a risk reserve. The risk reserve is a pool of assets which will be used, if necessary, to support the payment of guaranteed benefits.

n Expenses and the risk reserve will be managed by the Trustee. If any of these remaining contributions are not needed for these purposes, they will be used within the scheme for the benefit of members.

2 The first increase to be applied will be in respect of the year ending 31 March 2020. Members who leave part way through that year will be eligible for a pro rata increase.

10


DBCBS continued

The value of a member’s lump sum will build and may earn discretionary increases until retirement. The value of the lump sum (less any early retirement reductions) will be taken at the same time as benefits earned before 31 March 2018. Full details of options including members’ RMPP benefits and the tax position will be sent to members at that time.

Lump sum n At retirement, the vast majority of RMPP

members take the maximum 25% lump sum, which is currently tax-free. To do this, they give up some of their pension.

n These members will be able to use their DBCBS benefits to fund part or all of their lump sum. This is possible because the DBCBS is a scheme within the existing RMPP.

n In order for the DBCBS benefits to work more efficiently for members, by allowing them to take their retirement lump sums in the most tax efficient way, the Company needs Government approval for some rule changes to the Royal Mail Statutory Pension Scheme (RMSPS). This is the scheme that has responsibility for members’ benefits built up to March 2012. As the DBCBS is a transitional arrangement, with these rule changes, we expect most members would be able to take their DBCBS lump sum entirely tax-free.

n If Government does not agree to make the RMSPS rule changes, the DBCBS will still operate. However, some members would be able to take less of their DBCBS benefit entirely tax-free.

n With Government approval, the lump sum would be paid at the same time as the benefits earned

for service to 31 March 2018, either as part of the age 60 or age 65 benefits.

n The way the scheme is designed means that members with pre 31 March 2018 benefits in the RMPP or the RMSPS would not need to give up some, or even any, of their pension built up to March 2018 to get the same lump sum. So members would build up a lump sum for service after 31 March 2018, but the outcome is more pension.

n Members would also have the option to: • take the DBCBS lump sum as taxable cash,

where the lump sum is above the 25% tax-free limit

• transfer it to an external pension arrangement for drawdown

• or purchase an annuity

RMPP members, who take their age 65 benefits and leave the Company (at any age) after 31 March 2018, will receive a one-off payment of £750 from the Company, which they can use towards the cost of obtaining financial advice on retirement. This payment will be subject to income tax and National Insurance contributions. This payment will cease to apply once the transitional arrangements end, or new arrangements are agreed with the unions.

11


Key features of the DBCBS for RMPP members

* The remaining 2% contribution to member benefits will go towards death in service benefit, the ill-health benefit, scheme expenses and the risk reserve.

Company contribution A total contribution rate of 15.6% of DBCBS pensionable pay. Of this, 13.6% goes towards the member’s guaranteed lump sum.*

No change to members’ contributions

Member contributions remain at 6% of DBCBS pensionable pay. This will also go towards members’ guaranteed lump sum.

A guaranteed lump sum The Company guarantees a minimum lump sum at normal retirement age equal to the total of the Company’s and the member’s contributions.

Discretionary increases The scheme targets discretionary increases to the lump sum, dependent on invest-ment returns. Once credited, these increases are also guaranteed.

Sharing of risk The Company bears a share of the risk, as it guarantees a minimum lump sum. Members’ funds are invested collectively.

No change to pensionable pay

The same definition of pensionable pay as currently under the RMPP:• Pensionable allowances and bonuses included.• The LED deduction for Section C members continues.• Annual pensionable pay indexation at RPI up to 5%.• Promotional increases (following the changes introduced from April 2014) will still

count for future pension benefits.• Note: final salary benefits for service up to 31 March 2008 for Section C members

will be increased after 1 April 2018 by increases in RPI only up to 5% a year.• There is no change to the increase in final salary benefits for Section B members.

Early retirement • No change from the Minimum Pension Age set by HMRC (currently age 55) subject to the rules of the RMPP.

• Early retirement reductions will apply if benefits are taken before age 65 (although part of members’ benefits may be payable from age 60 without reduction if taken as a tax-free lump sum with existing NRA60 pension benefits, subject to HMRC limits and RMSPS rule changes).

Maximum service • Improvement - the RMPP’s current maximum service cap of 45 years will not be applied from 1 April 2018. Contributions will therefore continue to be paid after 45 years to build up additional benefits after this date.

• Members currently with more than 45 years’ service will restart contributions on 1 April 2018.

Normal retirement age • No change – age 65.

Additional Voluntary Contributions (AVCs)

• No change to Bonusplan and Flexiplan arrangements. Contributions cease to Addplan on 31 March 2018.

How benefits are taken • For current members of RMPP, DBCBS benefits cannot be taken separately to other RMPP benefits – DBCBS benefits have to be taken with Age 60 or Age 65 benefits (to link with RMPP and RMSPS benefits). Current RMPP members taking Age 60 benefits will be able to take part or all of their DBCBS benefits (depending on how much tax-free lump sum they can take at that point) with their Age 60 benefits and can then continue contributing towards further DBCBS benefits until Age 65 benefits are taken.

• For new members of RMPP after 1 April 2018, all DBCBS benefits have to be taken in full at the time of retirement.

Benefits on leaving No further contributions will be paid, but your retirement lump sum can continue to receive discretionary increases, dependent on investment returns, in the same way as before leaving. DBCBS members who leave the scheme will be able to transfer out their DBCBS benefits if they wish . However, there may be an adjustment to the value of DBCBS benefits on transfer to reflect market conditions at that time.

12


Lump sum on death in service*

• 4 x DBCBS pensionable pay. • Value of DBCBS lump sum at date of death.

Additional dependants benefits on death in service

• 2 x DBCBS pensionable pay ; plus • Pre-2018 benefits, with no reduction.**

Benefits on death in deferment

• Value of DBCBS lump sum at date of death; and• Pre-2018 benefits, with no reduction.**

Ill Health benefits • 50% of basic pay less Employment & Support Allowance (ESA) for up to 3 years, plus a lump sum payment at the end of the 3 years.

• Pre-2018 benefits paid from date of leaving without reduction.

Your contribution (6%)Royal Mail's contribution

(13.6%)Total contribution (19.6%)

Pensionable pay3 Annual Monthly Weekly Annual Monthly Weekly Annual Monthly Weekly

£20,000 £1,200 £100 £23 £2,720 £227 £52 £3,920 £327 £75

£25,000 £1,500 £125 £29 £3,400 £283 £65 £4,900 £408 £94

£30,000 £1,800 £150 £35 £4,080 £340 £78 £5,880 £490 £113

£35,000 £2,100 £175 £40 £4,760 £397 £92 £6,860 £572 £132£40,000 £2,400 £200 £46 £5,440 £453 £105 £7,840 £653 £151

Your contribution (6%)Royal Mail's contribution

(13.6%)Total contribution (19.6%)


£20,000 £975 £81 £19 £2,210 £184 £42 £3,184 £265 £61

£25,000 £1,275 £106 £25 £2,890 £241 £56 £4,164 £347 £80

£30,000 £1,575 £131 £30 £3,570 £297 £69 £5,144 £429 £99

£35,000 £1,875 £156 £36 £4,250 £354 £82 £6,124 £510 £118£40,000 £2,175 £181 £42 £4,930 £411 £95 £7,104 £592 £137

Death in service and ill health benefits provided by the DBCBS

3 As Section C, but without LED.

4 Before the indexed Lower Earnings Deduction (LED) is applied (£3,753).

DBCBS contributionsWe have provided below examples showing the contributions that would go towards the guaranteed lump sum for typical Section B and Section C members.

Section B members

Section C members

* Lump Sum Death in Service Benefits across all Royal Mail schemes are currently a minimum of 2 x pay and capped at 4 x pensionable pay.

** Pre 2018 benefits are your Plan and RMSPS benefits built up to 31 March 2018.

Note: the death in service and ill health benefits provided under the RMPP (for service after 1 April 2018) are the same as those provided by the RMDCP (albeit with different definitions of pensionable pay).

13


Your contribution (paid via PSE)

Improved Company contribution

Previous Company contribution

You will contribute at this rate unless you tell us you do not want to

6% 10% 9%

You could opt to contribute at these levels

5% 9% 8%

4% 8% 7%

Improved RMDCP

RMPP members can instead choose to join the RMDCP, if they wish. If a RMPP member chooses to joinRMDCP, they will not be able to re-join RMPP (see below). RMPP members who elect to join the RMDCP will be enrolled into the top standard level contribution tier of the RMDCP. This means, from 1 April 2018, members contribute 6% of RMDCP pensionable pay to their pension, while the Company contributes 10%5 . A total of 16% RMDCP pensionable pay would therefore go into your individual retirement account each year.Members who do not want to contribute 6% can instead choose to contribute 4% or 5% to their retirement account. Members who do this receive a contribution of 8% or 9% respectively from the Company. Contributions are paid, as now, via Pension Salary Exchange (PSE). These Company contribution rates are a 1% increase across each tier, as per the summary table below.

How the RMDCP works RMDCP members each have their own individual retirement account and have a choice of investment funds they can choose from. If they do not make a choice, their contributions will be invested in a standard “default” fund. The value of the member’s fund at retirement will depend on the performance of the investments chosen. There are no guarantees in the RMDCP, so members could get back less than the contributions paid in. The member’s final value at retirement might be more – or less – than the equivalent lump sum that would have been built up in the DBCBS. Under current tax rules, members are able to take 25% of their accumulated fund at retirement as a tax-free lump sum.With the balance they can:n take it as taxable cash;n transfer it to an external pension arrangement

for drawdown; orn purchase an annuity.Any RMPP member ceasing contributions to DBCBS, whether to join the RMDCP or not, will automatically

be treated as having opted out of the RMPP. If at the date of opting out they are over the age of 60, they will have part or all of their RMPP pension benefits immediately brought into payment from the date of opting out. If you are considering opting out of DBCBS you should contact the Pension Review Helpline (see page 17). Please note that because RMDCP is a completely separate scheme, RMPP members who join the RMDCP will not be able to link their RMDCP benefits to their RMPP and/or RMSPS benefits. This means that they will not be able to use the amount built up in their RMDCP retirement account to fund part or all of their RMPP and/or RMSPS lump sum.RMPP members will be able to transfer their benefits to the RMDCP. However, if the value of benefits being transferred exceeds £30,000 then before making the transfer payment the RMPP Trustee is required to obtain confirmation from the member that they have taken independent financial advice. You will be provided with more detail on this requirement if you request a transfer value.

5 Please note that the definitions for RMDCP and RMPP pensionable pay are different. Please refer to the glossary for definitions and see the tables for the contributions you may be making to each scheme.

14


Key features of the RMDCP

Company contribution A maximum of 10% of RMDCP pensionable pay to members’ retirement accounts. In addition, the Company pays the cost of death-in-service benefits, ill-health benefits, and the Trustee’s running costs.

A lump sum at retirement The value of the member’s fund. This value is not guaranteed. A maximum of 25% of the final value can currently be taken tax-free.

Sharing of risk The member bears all of the risk. Members could get back less than the contributions paid in.

Pensionable pay A different definition of pensionable pay than under RMPP:• Basic pay only - no pensionable allowances or bonuses

are included.• There is no LED deduction.

No change to members’ contributions

• RMPP members would be enrolled at 6% of RMDCP pensionable pay, but can choose to pay 5% or 4% (payable, as now, via PSE).

Normal retirement age • Age 65.

Early retirement • From the Minimum Pension Age set by HMRC (currently age 55) subject to the rules of the RMDCP.

• Members are able to take the value of their retirement account at the date of early retirement, depending on their available options.

Additional Voluntary Contributions (AVCs)

• Members are able to pay AVCs, with a range of investment funds to choose from.

How benefits are taken • The RMDCP is a separate pension scheme. So RMDCP benefits have to be taken separately to RMPP benefits. Members will not be able to use their RMDCP lump sum at retirement to fund part or all of their RMPP lump sum.

Benefits on leaving No further contributions will be paid, but your retirement account would continue to be invested. You can transfer out your benefits if you wish. The transfer value is equal to the value of your retirement account.

Please note that RMDCP pensionable pay is different from DBCBS pensionable pay. The total contribution rates of 16% for the RMDCP and 19.6% for the DBCBS are not, therefore, directly comparable. If you want to compare what contributions are paid under each scheme you should look at the contribution tables on pages 12 and 15.

15


Improved RMDCP continued

Contribution rates The examples below show the contributions that would go to the pension account of an RMDCP member, earning between £20,000 and £40,000 a year:

If you want to pay more than 6% of RMDCP pensionable pay, you can make Additional Voluntary Contributions (AVCs). Any Bonusplan or Flexiplan contributions you currently make to RMPP would cease if you choose to join RMDCP. Added Years contributions will cease for all RMPP members on 31 March 2018.

Your contribution (paid via PSE)

(6%)

Royal Mail's contribution (10%)

Total contribution (16%)


£20,000 £1,200 £100 £23 £2,000 £167 £38 £3,200 £267 £62

£25,000 £1,500 £125 £29 £2,500 £208 £48 £4,000 £333 £77

£30,000 £1,800 £150 £35 £3,000 £250 £58 £4,800 £400 £93

£35,000 £2,100 £175 £40 £3,500 £292 £67 £5,600 £467 £107

£40,000 £2,400 £200 £46 £4,000 £333 £77 £6,400 £533 £123

6 There is no Lower Earnings Deduction in the RMDCP

16


Death in service and ill health benefits provided by the RMDCP

Lump sum on death in service*

• 4 x RMDCP pensionable pay plus the value of your retirement account.

Additional dependants benefits on death in service

• 2 x RMDCP pensionable pay.

Benefits on death in deferment

• Value of RMDCP retirement account at date of death.

Ill Health benefits • 50% of basic pay less Employment & Support Allowance (ESA) for up to 3 years, plus a lump sum payment at the end of the 3 years; and

• the possibility to access your RMDCP retirement account immediately (depending on the severity of your medical condition).

* Lump Sum Death in Service Benefits across all Royal Mail schemes are currently a minimum of 2 x pay and capped at 4 x pensionable pay.

17


What do you need to do now

Do please read this booklet together with the example illustrations carefully. It contains information on the DBCBS and RMDCP and will help you make a decision on which scheme could be best for you.

RMDCP and DBCBS benefits work in different ways. You should make sure that you choose the type of scheme that is right for you. If you are unsure about which scheme is right for you, you may wish to speak to an independent financial adviser.

n If you would like to remain in RMPP and start building up DBCBS benefits, you do not need to do anything. This will happen automatically on 1 April 2018.

n If you would prefer to join the RMDCP, please complete the ‘Joining RMDCP’ form enclosed. You can do this at any time, but if you would like to start building up benefits in the RMDCP on 1 April 2018 you will need to return the form by 19 March 2018. You are advised to seek independent financial advice before opting out of the DBCBS, to ensure that joining the RMDCP is the best option for you. The Company cannot provide you with this advice.

If you would like to find out more about the transitional arrangements particularly if you are considering leaving the RMPP, please contact the Pension Review Helpline:

By email: [email protected]. Please include your payroll number in your email.By phone: 0345 850 0081. Please listen to the options carefully to ensure you go through to the appropriate adviser.By post: Freepost MY PENSION REVIEW TEAM, Pond Street, Sheffield S98 6HR.

Please note: The Pension Review Helpline can tell you more about the pension arrangements but cannot advise which scheme is best for you. If you are unsure about which scheme is right for you, you should consider speaking to an independent financial adviser. The Company cannot provide you with financial advice.

18

2018 Pension Review: updateSection B Illustrations

CDC: Example illustrations for Section B members

Aged 50 in 2018 with 30 years’ pensionable service, who is paid £25,000 a year

Annual retirement income Maximum tax-free lump sum

RMPP £13,700 £91,200

Original Defined Contribution Proposal £10,800 £78,400

DBCBS (assuming members build up these benefits until retirement)

£12,100 (with HMG approval)£11,400 (without HMG approval)


Target benefits under proposed CDC scheme with DBLSS sitting alongside it £13,300 £88,800



RMPP £13,000 £86,800








RMPP £16,400 £109,400






These example illustrations are for Section B members, whose pensionable pay is £25,000, £30,000, £35,000 and £40,000 respectively, when - assuming the necessary legislative and regulatory changes are made - they join the CDC scheme.The illustrations are provided for current RMPP members aged 50 and 55 with 30 years’ pensionable service and 35 years’ pensionable service built up to 31 March 2018 who retire at age 65.The illustrations seek to show how the target CDC benefits might (based on certain assumptions) compare with the RMPP, our original DC proposal and the DBCBS. They show the target benefits under our proposed CDC scheme with a DBLSS sitting alongside it. We have provided figures for the DBCBS if we receive HM Government approval to link the scheme through to the RMSPS and if we do not receive that approval. For the sake of consistency we have used the same assumptions as we did in our original consultation materials and Personal Illustrations. For the purposes of the illustrations, it is assumed that the CDC scheme is introduced in April 2018. In practice, there will be transitional arrangements put in place until a CDC scheme could be set up, subject to the necessary legislative and regulatory changes.All figures are rounded to the nearest hundred.As stated above, target benefits are not guaranteed. Actual benefits would depend on factors such as investment performance and average life expectancy of members, and may be higher or lower than shown in these illustrations.These figures assume the member takes the maximum tax-free lump sum.They do not include State Pension. That is on top of these numbers.

Section B benefits – pensionable pay £25,000


19




RMPP £15,600 £104,100








RMPP £19,100 £127,700








RMPP £18,200 £121,500








RMPP £21,900 £145,900








RMPP £20,800 £138,800








Section B Illustrations

20


CDC: Example illustrations for Section C members

Section C Illustrations

These example illustrations are for Section C members, whose pensionable pay is £25,000, £30,000, £35,000 and £40,000 respectively, when - assuming the necessary legislative and regulatory changes are made - they join the CDC scheme.

The illustrations are provided for current RMPP members aged 30, 40 and 50 with 10, 20 and 30 years’ pensionable service respectively built up to 31 March 2018 who retire at age 65.

The illustrations seek to show how the target CDC benefits might (based on certain assumptions) compare with the RMPP, our original DC proposal and the DBCBS. They show the target benefits under our proposed CDC scheme with a DBLSS sitting alongside it. We have provided figures for the DBCBS if we receive HM Government approval to link the scheme through to the RMSPS and if we do not receive that approval. For the sake of consistency we have used the same assumptions as we did in our original consultation materials and Personal Illustrations.

For the purposes of the illustrations, it is assumed that the CDC scheme is introduced in April 2018. In practice, there will be transitional arrangements put in place until a CDC scheme could be set up, subject to the necessary legislative and regulatory changes.

All figures are rounded to the nearest hundred.

As stated above, target benefits are not guaranteed. Actual benefits would depend on factors such as investment performance and average life expectancy of members, and may be higher or lower than shown in these illustrations.

These figures assume the member takes the maximum tax-free lump sum.

They do not include State Pension. That is on top of these numbers.

Section C benefits – pensionable pay £25,000



RMPP £13,400 £89,300








RMPP £14,800 £98,600








RMPP £16,300 £108,900






21

2018 Pension Review: update Section C Illustrations





RMPP £16,500 £110,300








RMPP £18,300 £121,800








RMPP £20,200 £134,500








RMPP £19,700 £131,300








RMPP £21,700 £145,000






22

2018 Pension Review: updateSection C Illustrations

Figures are shown in today’s money terms relative to CPI inflation and exclude State Pension.They assume DBCBS discretionary increases of 2% a year above CPI inflation, but please note that increases are dependent on the scheme’s investment performance each year. Actual increases may be higher or lower than assumed, and could be zero. Increases are not guaranteed until granted. Pay quoted is pensionable pay before the LED. The assumptions used for the “RMPP”, “Original Defined Contribution Proposal” and “DBCBS” figures are consistent with those used in the Consultation booklet examples and the Personal Illustrations previously sent to members. An exception to this is the LED for Section C members, which has been updated to the actual figure as at April 2018 of £3,753.The ‘CDC proposal’ benefits are calculated on the following assumptions: a) the new arrangement is treated separately to RMPP for tax-free cash purposes b) discretionary increases of RPI each year, but please note that these increases are not guaranteed c) an early retirement factor of 0.9 (for the pension element) and 0.98 (for the cash balance element) would apply at age 65 d) a commutation factor of 17.46 (ie in line with the Section C factor in force at the start of 2017) would apply when calculating the tax-free cash from the CDC/

DBLSS benefit for all members (ie both Section B and Section C).


Section C benefits – pensionable pay £35,000 continued



RMPP £24,000 £160,200






Aged 50 in 2018 with 30 years’ pensionable service, who is paid £40,000 a year a year


RMPP £22,800 £152,300








RMPP £25,200 £168,200








RMPP £27,900 £185,800






23

2018 Pension Review: update Section C Illustrations

Legal note: The illustrations are for information only, are not financial projections and are not guaranteed. The assumptions used for the purposes of the illustrations may or may not be borne out in practice and your benefits may be higher or lower as a result. The calculation and payment of your benefits are subject to the governing documents of the relevant plans as in force from time to time. To the extent the figures in the illustrations differ from what is required by those governing documents, the governing documents will prevail. The illustrations give no rights to benefits and should not be seen as creating any expectation of benefits or as forming part of any contract.

Glossary 2018 Pension Review: update

24

Glossary

Term Definition

Accrual(s) The rate at which you earn pension each year until 31 March 2018. RMPP members currently accrue pension at the rate of 1/60th (Section C), or 1/80th and a lump sum of 3/80ths (Section A/B).

Annuity An income in retirement, usually payable for life, purchased with a member’s accumulated retirement fund from a regulated insurance company.

Basic pay Your annual rate of basic pay, which is paid on a monthly or weekly basis.

Career Salary Defined Benefit or CSDB

These are also sometimes referred to as career average benefits. Up until 31 March 2018, you build up pension blocks for each year of pensionable service between each 1 April and 31 March (based on CSDB pensionable pay in that year) that are added to the previous years’ blocks, and revalued in the following years in line with RPI inflation up to a maximum of 5% each year.

Collective Defined Contribution (CDC)

CDC schemes have fixed contribution rates from the employer and members, and share risks between members. There is a target for what the member will receive in retirement, but this target is not guaranteed. The actual benefit payable will depend on what the scheme’s assets can afford. The benefits are not separately backed by the Company. CDC schemes pay members an income in retirement, rather than members having to buy an annuity.

Company Royal Mail Group Ltd.

CPI or CPI inflation The annual rate of increase in the Consumer Prices Index (inflation) as measured at the previous September each year.

DBCBS Pensionable pay

The same definition of pensionable pay as currently under the RMPP:• pensionable allowances and bonuses included• the LED deduction for Section C members and for joiners continues• annual pensionable pay indexation at RPI up to 5%• promotional increases (following the changes introduced from April

2014) can still count for future pension benefits• Note: final salary benefits for service up to 31 March 2008 for Section

C members will be increased after 1 April 2018 by increases in RPI only up to 5% a year.

• There is no change to the increase in final salary benefits for Section B members.

Glossary2018 Pension Review: update

25

Glossary continued

Term Definition

Defined Benefit (DB) A Defined Benefit pension scheme is where benefits at retirement are calculated using a set formula. One type of Defined Benefit scheme is a ‘Final Salary’ scheme, as described below. Another type of Defined Benefit scheme is a CSDB or career average as described above.

Defined Benefit Cash Balance Scheme (DBCBS)

Under the transitional arrangements the Defined Benefit Cash Balance Scheme guarantees a minimum cash sum payable at normal retirement age (65). It also targets, but does not guarantee, discretionary increases each year. These increases are based on investment performance. Once awarded, these discretionary increases are guaranteed and not subject to market conditions.

Defined Benefit Lump Sum Scheme (DBLSS)

The Defined Benefit Lump Sum Scheme would sit alongside the CDC scheme and guarantee a minimum cash lump sum payable at normal retirement age (67). It also targets, but does not guarantee, discretionary increases each year. These increases are based on investment performance. Once awarded, these discretionary increases are guaranteed and not subject to market conditions.

Defined Contribution (DC) A Defined Contribution (or money purchase) scheme is where the contributions paid by both members and the Company are known and are contributed to the member’s retirement account. The benefits the member can buy at retirement from his or her retirement account depend on, among other things, how much has been contributed to the account, the investment return on the account, charges and the cost of the options a member chooses at retirement.

Final Salary Is a type of Defined Benefit scheme where a member’s pension is based on their salary near to retirement and years of service. Final Salary benefits ceased to accrue in the Plan at 31 March 2008, but those benefits are currently linked to Final Salary pensionable pay at the date you leave the Plan. For Section B members, benefits accrued before April 2018 will continue to have a link to Final Salary pensionable pay beyond 31 March 2018. This is not the case for Section C members whose Final Salary benefits will be linked to RPI (up to 5% a year) from 1 April 2018 until the member leaves Royal Mail employment or he or she takes his or her benefits.

Glossary 2018 Pension Review: update

26

Glossary continued

Term Definition

Lower Earnings Deduction (LED)

LED is the annual rate of the Lower Earnings Limit (the least amount you must earn before you have to pay National Insurance). For Section C members, the LED is indexed in line with RPI inflation following the 2014 Pensions Reform and for the purposes of the figures in this booklet is £3,753, but is reduced proportionately for part-time workers.

Pension Salary Exchange (PSE)

Members accept a reduction in their salary in return for the Company paying their contributions as an additional employer contribution. Under current tax legislation this results in lower employer and employee National Insurance Contributions.

Pensionable service The period of service with the Company that is taken into account when working out your Plan pension benefits. It includes service as a member, service transferred in from other pension schemes and additional service bought by additional contributions before 1 April 2018.

Retail Prices Index (RPI) or RPI inflation

The annual rate of increase in the Government index of retail prices as measured at the previous September each year.

RMDCP pensionable pay

Your basic salary or wage (excluding allowances, overtime, bonuses or any other items) if you are employed on a full time contract. If you are contracted to work less than full time it means: your basic salary or wage for your contractual hours, plus the salary or wage that you earn for non-contractual hours worked each pay period (which is a week if you are a weekly-paid employee and a month if you are a monthly-paid employee).

Earnings for hours of work that are in excess of the number of hours normally scheduled for someone working full time in your role are not counted for the purpose of RMDCP pensionable pay. Allowances, bonuses and other items are not counted for the purpose of RMDCP pensionable pay.

Glossary2018 Pension Review: update

27

Glossary continued

Term Definition

RMDCP standard level contributions

RMDCP standard level contributions are as follows:

Royal Mail Defined Contribution Plan (RMDCP)

The RMDCP is Royal Mail’s DC pension scheme for employees who joined the Company after 1 April 2008 and for RMPP members who choose to join it.

Royal Mail Pension Plan (RMPP)

The RMPP is Royal Mail’s Defined Benefit (DB) pension scheme for employees who joined the Company before 1 April 2008.

Royal Mail Statutory Pension Scheme (RMSPS)

Means the Government backed pension scheme to which most of the Plan’s liabilities to pay benefits in respect of the period up to 31 March 2012 were transferred.

State Pension The pension payable by the Government.

State Pension age Means the age at which you will be eligible for your State Pension. It is currently age 65 for men, and for women will increase to age 65 by December 2018. It is set by the Government and is subject to change by the Government from time to time. It is currently expected to be 67 by 2028 and then reviewed by the Government every five years, based on life expectancy.

Important legal note: This booklet is provided for information purposes only and does not guarantee or change your benefits. Benefits under Royal Mail retirement benefit arrangements are subject always to the governing provisions of the relevant plan in force from time to time. Royal Mail reserves the right to amend, suspend or withdraw all or any of its retirement benefit arrangements and/or Pension Salary Exchange at any time. The CDC scheme requires certain legislative and regulatory changes to be made before it can be established. Benefits under a CDC scheme represent targets only. They are not guaranteed and are backed only by the assets of the Scheme and not by the employer.

Your contribution (paid

via PSE)

Improved Company

contribution

Previous Company

contribution

You will contribute at this rate unless you tell us you do not want to

6% 10% 9%

You could opt to contribute at these levels

5% 9% 8%

4% 8% 7%


28


2018 Pension Review: update - myroyalmail€¦ · 2 2018 Pension Review: update If preferred, RMPP...

Documents

Transcript of 2018 Pension Review: update - myroyalmail€¦ · 2 2018 Pension Review: update If preferred, RMPP...