What does the Royal Mail pension transfer mean for scheme members?

http://www.guardian.co.uk/money/2012/mar/19/royal-mail-pension-transfer-means

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The Royal Mail Pension Plan's enormous deficit, which currently stands at £9bn, has deterred prospective buyers from making offers for the business. However, the government plans to take over the scheme, which would enable it to cash in on the assets and sell the business. But what would this mean for pension scheme members and taxpayers?

What exactly is the government planning?

The £28bn of assets that belong to to the Royal Mail Pension Plan (RMPP) will be added to the government's books, enabling the chancellor to cut the annual deficit and reduce borrowing costs. At the same time it will take over responsibility for the enormous deficit.

That sounds a bit risky

Actually, for the pensioners it's a very secure source of money in their old age: they would have a state guarantee of their retirement benefits. Not surprisingly, the Communication Workers Union has supported the idea of the pension transfer, but not any privatisation.

Members' benefits built up at the point of transfer will be moved to a new scheme called the Royal Mail Statutory Pension Scheme. Pension benefits built up after that date will be accrued in the existing RMPP scheme. On retirement, members with benefits in both schemes will receive two pension incomes each month.

What other effects will there be for members?

The government is currently negotiating with unions to change the terms of public sector pension schemes, including the rate at which benefits build up, pension age, the rate of increase in the pension income paid, and conversion to an income based on career average rather than final salary earnings.

Royal Mail stipulates in a letter to scheme members sent out this month that benefits in its scheme would continue to build up in the same way as before. But if the Royal Mail scheme is to become a public sector scheme, it would presumably go through the same process.

Are there disadvantages for the taxpayer?

The government, and therefore the taxpayer, will take over responsibility for paying out pensions owed by the scheme to its members – those who have already retired and are now drawing on the scheme, those who have retired and have deferred their pension, and those who are still contributing.

The Royal Mail scheme is one of the biggest occupational pension schemes. It had 452,000 members in 2008, compared to 420,000 members in the NHS scheme and 345,000 in BT's scheme, according to a survey by Professional Pensions. Its pension liabilities are collectively worth £37bn, and although it won't show up as an immediate debt to the government, we will be paying this over the next 20-30 years.

Although the scheme has been closed to new members since April 2008, other than to employees who were under the age of 18 at that date, existing members can still pay in new contributions.

But for this plan to be controllable in terms of cost to the taxpayer, the RMPP scheme would also need to be closed to new contributions from existing members if and when Royal Mail is privatised. The Treasury is saying privatisation is a long way off and it is unable to comment on the possible closure of the scheme.

When is this likely to happen?

The Postal Services Act 2011 introduced powers for the government to take over the liabilities of the RMPP, with changes effective on 31 March 2012. The government is awaiting permission from the European commission to proceed; its response is expected imminently.