Royal Mail wraps up defined pension scheme as Union dispute comes to a close

The two parties reached an agreement over pensions, pay, reduced working hours, and culture and operational changes, drawing to a close a spat that began when Royal Mail announced its plans to save billions of pounds on its pension contributions in April.

As part of the agreement, the existing pensions scheme will close on 31 March to be replaced with a new "collective defined contribution" (CDC) plan.

Royal Mail was one of the only remaining large British firms to offer a defined-benefit pension scheme, which pays out a percentage of a member's salary based on their tenure.

The new CDC however, is a retirement plan where both the employer and employee contribute an amount to an investment fund that would then be used to buy a pension on retirement.

Royal Mail said legislative changes made the switch necessary:

"Royal Mail and the CWU will lobby the government to make the necessary legislative and regulatory changes so a CDC scheme can be established," it said.

The agreement also includes a 5% salary increase for Royal Mail employees, backdated to October 2017, and a one-hour drop in employees' working weeks from October 2018.

A further 2% increase in pay will come into effect in April 2019, as well as an additional one-hour reduction to the working week from October 2019.

Tom McPhail at Hargreaves Lansdown said: "As an employee, if you’re going to lose your final salary pension scheme, this is a pretty good way to do it. The ongoing employer contributions at £400 million and 13.6% of salary are very generous compared to the majority of Defined Contribution schemes. For members of the Cash Balance scheme, there will still be an element of certainty around their benefits. The plans to launch a CDC scheme will be watched with keen interest by the pensions industry, which has very mixed feelings about the viability of such schemes."

Royal Mail added that it was expecting to report an adjusted operating profit, before transformation costs, of no less than £680m for the 2017-2018 trading year.

At 540 GMT, the shares were up 7% to 501.80p.