Royal Mail DB Cash Balance Scheme deficit rises by over £100m

The Royal Mail Defined Benefit Cash Balance Scheme (DBCBS) deficit has grown to £177m as at 31 March 2020, up from £72m at 31 March 2019.

The scheme, which has been in place since 1 April 2018, is a transitional arrangement until Royal Mail’s proposed collective defined contribution (CDC) scheme is established upon the passage of the Pension Schemes Bill, which has recently progressed to the House of Commons.

Under the scheme, DBCBS members build up a guaranteed lump sum benefit of 19.6 per cent of their pensionable pay each year and, although there are no guaranteed increases to this lump sum, the aim is to provide above inflation increases.

In regard to any increases, the report stated that, taking into account the first increase granted in March 2020, management had taken the view that there is “a constructive obligation” to provide an increase to the lump sum, as scheme members would have “a reasonable expectation of returns of CPI plus two per cent”.

The company previously signed a schedule of contributions for the DBCBS scheme on 19 July 2019, which requires the firm to make payments totalling 15.6 per cent per annum of pensionable payroll in respect of the DBCBS.

The DBCBS is one of a number of DB pension schemes operated by the group and covers some members of the firms Royal Mail Pension Plan, with section A/B and C members accruing DBCBS benefits from 1 April 2018.

Over the past year, the group also agreed a new schedule of contributions in respect to the Royal Mail Senior Executives Pension Plan (RMSEPP), which closed to future accrual in 2012.

This saw the firm pay in £500,000 to the RMSEPP in 2019-20, with a further £500,000 to be paid per annum for the period 1 April 2020 to 31 March 2025.

The group stated that further progress towards buyout and winding up of the RMSEPP plan was made in the current year, with the process expected to be completed by 2021.

The RMPP and RMSEPP had a joint accounting (IAS 19) surplus of £3.614bn as at 31 March 2020, compared to just £2.408bn in 2019.

The Royal Mail Group also outlined mitigating steps taken in in response to the ongoing consultation on reforming RPI, which was extended until late August amid the pandemic.

This saw the group adjust its assumption for this measure to an 80 bps gap being the weighted average of the expected gap over the duration of the liabilities.

According to the report, the impact of this has been approximately £65m for RMPP and £25m for DBCBS, although it stated that the RPI/CPI gap is expected to continue to decrease in future periods.

The group also noted “significant volatility” across scheme assumptions as a result of the ongoing Covid-19 pandemic.

For instance, a significant fall in corporate bond yields at the end of May led to the discount rate being 100 basis points lower than the rate at the year end for the DBCBS scheme, and 90 basis points lower than the rate at year end for the RMPP scheme.

The group clarified however, that the majority of the scheme’s liabilities are hedged with government gilts, with yields in these having decreased from 2.35 per cent to 1.52 per cent over the same period.