Royal Mail to freeze pension plan, set up collective defined contribution plan

Royal Mail PLC is set to freeze its pension plan and sponsor the U.K.'s first collective defined contribution plan under new proposals agreed with its representative trade union.

The postal service firm said Thursday it had reached a negotiators' agreement in principle with the Communication Workers Union on pensions, pay, a shorter working week, culture and operational changes.

The firm has been negotiating over the future of the £9.6 billion ($13.3 billion) Royal Mail Pension Plan, London.

A spokesman confirmed that the pension fund will be frozen March 31.

The proposal includes a number of changes. The CDC plan will be introduced for all employees of Royal Mail and will carry a 13.6% employer and 6% employee contribution rate.

The establishment of the CDC plan "will be subject to necessary legislative changes being enacted," said a regulatory filing Thursday.

A CDC plan has fixed employer and employee contribution rates, but investment and longevity risk is pooled between participants. Primary legislation already exists for the creation of CDC plans, but secondary legislation has not yet been enacted to allow the operation of new plans. The plans are already used in the Netherlands and Canada. Royal Mail and the CWU will lobby the U.K. government to enable changes to legislation and allow the CDC plan to be established.

Because CDC legislation is not yet enacted, the proposal includes transitional arrangements. A defined benefit cash balance scheme will also operate alongside the new CDC plan, with pension plan participants defaulted into this fund starting in April.

Royal Mail also said it will increase its contribution to the existing Royal Mail Defined Contribution Plan at each standard contribution tier by 1 percentage point. Participants in the DC plan with five years of service can also choose to join the cash balance fund in the transition period to CDC.

The size of the DC plan and current contributions could not be learned by press time.

The new retirement arrangements "will target, although not guarantee, providing a similar level of member benefits as the RMPP, while significantly reducing risk to the company," said the filing.

Royal Mail PLC's board has approved the proposed agreement, which will go to a vote of CWU members.