2018 Pension Review: our proposal · The posting of this booklet marks the start of the formal, member-wide consultation phase of our pension review process. The member consultation

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2018 Pension Review: our proposal

Who is this for?The Company’s proposal would affect active members of the Royal Mail Pension Plan (‘the Plan’). There are illustrations at the back of this booklet which, on the basis of the assumptions set out at the end of Section 2, illustrate the possible effect of the Company’s proposed changes on the retirement benefits of members with a range of different ages, pensionable pay and service levels.

We recognise that our proposal would, if implemented, be a significant change. We want to help you understand the potential impact of the proposed changes as well as we can. We are therefore also preparing a personal illustration showing the possible impact of the proposed changes on you, if they were to be implemented, based on your individual details and the assumptions stated in the illustration. You will receive your personal illustration shortly.

You will have recently received your annual Benefit Illustration from the Plan Trustee for the year ended 31 March 2016. The Company is consulting employees on proposed changes to the Plan, that could mean that you may no longer build up future benefits on a Defined Benefits basis, from April 2018. If the proposed changes go ahead, this Benefit Illustration would not accurately reflect your future pension.

The proposed changes would not affect deferred members or the Plan or pensioners who have brought all of their benefits into payment by 31 March 2018.

What if I have a question?If you need further explanation of the Company’s proposal, or your personal illustration once you receive it, you can call the Pensions Consultation Helpline on 0345 850 0081. Lines are open Monday-Friday, 8.30am-5pm, not including bank holidays. We will also be regularly updating the Question & Answer section on our website: www.myroyalmail.com/pensions

How do I have my say on the Company’s proposal?We want to hear your views. Please provide your feedback by post or email. The posting of this booklet begins the formal member consultation phase of our 2018 pension review process, which will end on 10 March 2017. Once the consultation closes, we will consider your responses and discuss these with our unions before making any decisions. By post: Freepost MY PENSION, Pond Street, SHEFFIELD, S98 6HR.Email: [email protected] (“mypension” in your Outlook address menu). Please write FEEDBACK in the email subject header.

Feedback will not be taken over the phone, as we want your views to be properly recorded and considered at the end of the consultation.

If you wish to provide feedback via your union representatives, then you should contact them through the normal channels.

General enquiries For general enquiries, not related to the proposed changes, please contact the Plan’s Helpline: By phone: 5456 4545 (Postline) 0114 2414 545 (external) (Monday to Friday, 8.30am-5pm, not including bank holidays). Web: www.royalmailpensionplan.co.uk

Terms in bold are defined in the glossary.

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Section 1 2018 Pension Review: our proposal What is happening? 4

Summary of our proposal 6

Why we need to take action now 7

Our proposal in detail 8

Have your say 11

Your questions answered 12

Section 2 Retirement benefit examples under our proposal 16

Section 3 Member contribution examples under our proposal

Section 4 Glossary 40

Contents

Important legal note: this booklet is for consultation purposes only and does not guarantee or change your benefits. Benefits under the Royal Mail Pension Plan are subject always to the rules of the Plan in force from time to time. Once we have considered the responses to the consultation, and had an opportunity to discuss matters further with our unions as part of our pension review process, we will write to you with our decision and the full terms of any changes. We have the right to withdraw, suspend or amend all or any part of any Royal Mail pension arrangement, including Pension Salary Exchange (PSE), at any time.

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Section 01 2018 Pension Review: our proposal

What is happening?


Introductionn We know how important your pension benefits

are to you. Since the Pensions Reform in 2014 we have worked very hard to keep the Royal Mail Pension Plan (‘the Plan’) open until at least March 2018. We are still confident we can keep that commitment (subject to the conditions we told you about in 2013).

n We wrote to you in June 2016 to say we had started talking with our unions, CWU and Unite/CMA, to review the future of the Plan after March 2018. We are now setting out our proposal for the Plan’s future after that time, for consultation with all active members. We will feed the outcome of that consultation back into our pension review process.

n We are very sorry that we now have to write to you to say that we believe the current Plan will soon not be affordable. Despite all our best efforts, financial market conditions make the Plan unsustainable. Our proposal is designed so that your interests – and the Company’s – are at the heart of it. It is about continuing to provide sustainable, good quality pension benefits, a healthy Company, and as many high quality jobs as possible.

nWe believe our proposal, if implemented, offers a very competitive pension package compared to our industry and other large employers.

nHowever, before we make any decision, we want to hear your views and the views of your representatives. We will carefully consider your feedback and any affordable proposals you or your representatives may have.

Why are we proposing changes?n The Plan is currently in surplus. But, we expect

this surplus will run out in 2018. We need to take action before then. The Company currently contributes around £400 million a year in ongoing pension contributions. The most recent financial review indicates the Company’s contribution rate would increase from around 17 per cent of pensionable pay to over 50 per cent. This would more than double the Company’s contribution after March 2018 – to over £1 billion a year – if members continue to build up benefits on the current basis beyond that date.

n This increase would not be affordable. It is significantly more than the cash we generate each year – around £290 million in 2015-16. It would reverse the benefits for you and the Company of the previous actions we have taken, which improved the viability of your Company and enhanced your future job security.

n With our unions, we have been actively exploring possible changes to potentially enable us to keep the Plan open on a Defined Benefit basis after March 2018 as part of our 2018 pension review process. Unfortunately, we have not been able to find an affordable way of doing this so far.

Section 012018 Pension Review: our proposal

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What is happening? continued

What would be the new changes? n In the absence of an affordable alternative, from

April 2018, we are proposing you would no longer build up future pension on a Defined Benefit basis. Instead, you would build up future benefits on a Defined Contribution basis. This could be either in a new section of the Plan or in the Royal Mail Defined Contribution Plan.

n The proposal is not about reducing what the Company spends. It is about avoiding an unaffordable increase in costs.

n The Company would continue to make a significant contribution to your pension. We would expect to pay around the same amount in pension contributions and National Insurance contributions in 2018-19 as we did in 2015-16.

n Active Plan members as at 31 March 2018 would be given a one-off £750 payment, if the proposal is implemented.

What happens next?n We have already explained the Company’s

position to our unions as part of our pension review process.

n The Company believes this proposal is the best option available. Please take the time to read this booklet carefully. You will also shortly receive your personal illustration of the possible effects of the proposed changes on your benefits.

n We will consider your views and discuss these with our unions. We will also consider any other ideas put forward by our unions. In any event, under our proposal, no changes would come into effect before April 2018.


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Summary of our proposal

nWe believe that our proposal would be a fair outcome for members. If the proposal is implemented, the Company believes that it would:• be a very competitive pension package compared to our

industry and other large employers; • help us to meet our objective of helping to protect the

pension benefits you have built up;• provide more sustainable pension arrangements in the

future; and• help us to continue to provide as many good quality jobs

as possible. nWe remain committed to not making any changes before

April 2018 (subject to certain conditions we told you about in 2013). If you’re close to retirement, we expect that our proposed changes would have a smaller effect.

n You would continue to build up benefits in the Plan as you do now until 31 March 2018.

nThe age at which you can take your Plan benefits would stay the same. You would also have the same options for taking your benefits early - and taking a cash lump sum - as now.

n There would be no changes to the benefits transferred to the Government scheme. The Government is legally responsible for the benefits you built up until 31 March 2012, held in the Royal Mail Statutory Pension Scheme (RMSPS).

nFrom April 2018, you would be provided with Defined Contribution pension benefits. This could be either in a new section of the Plan or in the Royal Mail Defined Contribution Plan. The Company would keep making a

significant contribution to your pension (see table on page 9).n You would, on reduced terms, be provided with benefits

if you die in service, or if you have to leave service due to serious ill-health. The Company would meet the cost of these benefits, in addition to its contribution into your retirement account. We would have separate discussions with our unions about the impact of the proposed changes where ill-health arrangements are governed by collective agreements before making any final decisions.

n The benefits you build up in the Plan until 31 March 2018 would remain unchanged and you can get these benefits when you come to take your pension. The exception would be that from 1 April 2018, Section C members’ pre-April 2008 benefits would be linked to the Retail Prices Index (RPI) (up to 5% a year) until they leave Royal Mail employment or take their benefits, rather than to Final Salary pensionable pay.

nSalary changes after 31 March 2018 would immediately flow through to your Defined Contribution pensionable pay. Both you and the Company would pay more contributions into your retirement account if your pensionable pay increased.

nActive Plan members as at 31 March 2018 would be given a one-off £750 payment, if the proposal is implemented (see page 9).

nYou will receive your personal illustration of the possible effects of the proposed changes on your benefits (based on your individual details and the assumptions stated in the illustration), shortly.

We will continue discussions with our unions during and after the consultation as part of our pension review process. We will carefully consider your feedback and any affordable proposals you or your representatives may have. No decisions will be made until the consultation process is completed, we have considered your views and we have had an opportunity to discuss these with our unions.


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Why we need to take action now

nIt is a legal requirement for the Trustee and the Company to review the financial position of the Plan every three years.

nAt the time of the 2012 review, financial markets conditions for many pension schemes - like our Plan - were not favourable. Conditions have significantly worsened since then and recent improvements have not materially changed that position.

nMany companies have already closed their Defined Benefit pension schemes in recent years. Only a few FTSE 100 companies still have a significant number of their employees in a Defined Benefit scheme.

nThe returns we can expect from Plan investments – which along with the contributions paid by you and the Company fund your retirement benefits - have fallen significantly, as a result of the financial market conditions mentioned above. This means the cost of keeping the Plan open, on a Defined Benefit basis, has increased a great deal.

nThese issues have now come to a head. The Company and the Trustee are legally required to finalise the 2015 three-yearly financial review of the Plan.

nIn February 2015, as part of its preparations for the 2015 review, the Trustee sent us an estimate of the funding position of the Plan as at 31 March 2015. This estimate showed that, while the Plan remains well funded now, the surplus generated by the 2014 Pensions Reform would be likely to run out in 2018. Unless the Plan is changed, the Company’s contribution rate would then have to go up significantly.

nSince receiving that estimate we have, with our unions, CWU and Unite/CMA, been reviewing the future of the Plan.

nDuring the course of this review process, we received a number of further funding estimates from the Trustee. The latest one, which set out the preliminary results of the 2015 financial review of the Plan, confirmed 2018 as the time the Plan surplus would likely run out. It made clear that once that happened, the Company’s contribution rate would more than double from around 17 per cent of pensionable pay to around 50 per cent. In cash terms, this would mean that, unless we make changes to the Plan from April 2018, the Company’s ongoing pension contributions would, after March 2018, go up from the current level of around £400 million a year to over £1 billion a year.

nThis increase would not be affordable. It is significantly more than the cash we generate each year – around £290 million in 2015-16.

nIn this booklet, we are setting out our proposal - as part of a consultation with all active members - for the future of the Plan.

nIn summary, from April 2018, we are proposing you would no longer build up future pension on a Defined Benefit basis. Instead, you would build up future benefits on a Defined Contribution basis. This could be either in a new section of the Plan or in the Royal Mail Defined Contribution Plan.

nOur proposal is designed to help the Company to continue to provide sustainable, good quality pension benefits, a healthy Company and as many high quality jobs as possible.

nThe Company believes this proposal is the best option available. But we will, of course, consider any other affordable proposals that members or their representatives wish to put forward during the pension review process. Please take the time to read this booklet carefully – we want to hear your views.


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Our proposal in detail

Now until 31 March 2018nWe remain committed to not making any changes

before April 2018 (subject to the conditions we told you about in 2013). If you’re close to retirement, we expect that our proposed changes would have a smaller effect.

n You would continue to build up benefits as you do now until 31 March 2018.

nThe age at which you can take your Plan benefits would stay the same. You would also have the same options for taking your benefits early - and taking a cash lump sum - as you do now.

nActive Plan members as at 31 March 2018 would be given a one-off £750 payment, if the

proposal is implemented.nThere would be no changes to the benefits

transferred to the Government scheme - the Royal Mail Statutory Pension Scheme - in 2012. The Government is legally responsible for the benefits you built up until 31 March 2012.

n The benefits you build up in the Plan until 31 March 2018 would remain unchanged and you can get these benefits when you come to take your pension. The exception would be that from 1 April 2018, Section C members’ pre-April 2008 benefits would be linked to RPI (up to 5% a year) until they leave Royal Mail employment or take their benefits, rather than to Final Salary pensionable pay.

Where your benefits would come from if the proposal went ahead

From 1 April 2018nYou would no longer build up your future pension

on the current Defined Benefit basis. Instead, you would build up future benefits on a Defined Contribution basis (see explanation on page 10). This could be either in a new section of the Plan or in the Royal Mail Defined Contribution Plan.

nUnless you tell us otherwise, you would continue to pay a 6% contribution, as you do now1. The Company would pay a contribution of 10% into your Defined Contribution retirement account.

nYou could choose another contribution level. If you were to pay in 4% or 5%, the Company would pay in 7% or 8%, respectively (see table overleaf). If you choose to contribute a lower percentage of your pensionable pay, you may end up with lower pension benefits when you retire.

nYou could continue to make contributions by Pension Salary Exchange (PSE), which may mean that you make National Insurance contribution savings2.

Royal Mail Statutory Pension Scheme (backed by Government)

Royal Mail Pension Plan (backed by the Plan’s assets, and by Royal Mail)

Defined Contribution arrangement

Defined Benefit (DB) benefits earned up until 31 March 2012.

Increased in line with RPI (up to 5% a year) until you take them or leave Royal Mail employment.

Defined Benefit (DB) benefits earned between 1 April 2012 and 31 March 2018.

Increased in line with RPI (up to 5% a year) until you take them or leave Royal Mail employment.

Defined Contribution (DC) benefits built up from 1 April 2018.

Increases until you take your benefits would depend on, among other things, investment returns (and charges) in your retirement account.

1 Or we pay the equivalent amount under Pension Salary Exchange (PSE).

2 Please note that the availability of Pension Salary Exchange (PSE) is governed by tax legislation, and that legislation may change in the future.


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Our proposal in detail continued

nSalary changes after 31 March 2018 would immediately flow through to your Defined Contribution pensionable pay. You and the Company would pay more contributions into your retirement account if your pensionable pay increased.

nYou would be provided with benefits, on reduced terms, if you die in service, or if you had to leave the Company due to serious ill-health. The Company would meet the cost of these benefits, in addition to its contribution into your retirement account. • Death-in-service benefit – a lump sum

of four times your pensionable pay, plus an additional two times pensionable pay if you leave financial dependants.

• Serious ill-health – an income benefit, payable for up to three years, of half your pensionable pay less any Employment & Support Allowance you receive. A lump sum would be paid to you at the end of the three years if you were still assessed to be in serious ill-health.

nBefore making any final decision, we would have separate discussions with our unions about the impact of the proposed changes where ill-health arrangements are governed by collective agreements.

nIf the proposal is implemented, the Company would make a one-off payment of £750 to each active Plan member as at 31 March 2018. If paid as a PSE pension contribution to a member’s new Defined Contribution

account, there would normally be no income tax or National Insurance contribution (NIC) deductions. If paid as cash, it would be subject to income tax and NIC deductions.

Investment options and taking your pensionnYou would be able to choose how the money

in your Defined Contribution retirement account is invested. There would be a range of funds to choose from. If you did not make a choice of your own, then a decision would be taken for you (the default option). If the proposal went ahead, full details of the investment options available to you would be provided closer to the time when you could make a decision.

nYou would be able to take money from your Defined Contribution retirement account from the minimum pension age (currently age 55). You may also have flexibility about how you take the money. Under current tax legislation, up to 25% of your Defined Contribution retirement account could be taken as a tax-free lump sum and you could take the rest of your Defined Contribution retirement account as cash as well, but you would pay tax on that portion.

nFor your benefits built up on a Defined Benefit basis, under current tax legislation, you can also take up to 25% of the value of your benefits as a tax-free lump sum, but the rest could only be taken as a taxable pension from the Plan.

Your contribution choice The Company contribution

4% 7%

5% 8%

6% 10%


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Our proposal in detail continued

Other options we have explored We considered our proposal very carefully. And we know that you, like us, will be very disappointed that we cannot continue to build up future benefits the way we have previously. The Company has been considering a number of other options and discussing these with our unions, including:n lowering the rate at which you build up benefitsn capping pensionable pay for higher earners n asking you to contribute moren increasing your retirement age. Unfortunately, the increase in contributions that would be required, on a Defined Benefits basis, to keep the Plan open is so large that none of these options are affordable.

For example, we looked at reducing the accrual rate at which members build up benefits in the Plan, so that the cost to the Company remained the same as now. But this would mean reducing the rate at which members build up benefits to a level

What’s the difference between Defined Benefit (DB) and Defined Contribution (DC) pension schemes? The main difference between DB and DC pension schemes is how certain you can be about the amount of benefit you will get when you retire. In a DB scheme, there is one pot of assets out of which all scheme members’ benefits are paid. Benefits are usually based on a formula using pensionable pay, pensionable service, and the rate at which you build up benefits. The amount you receive when you retire does not depend on investment returns. It is the Company that has the responsibility to ensure that the contributions paid into the scheme, along with the investment returns, are sufficient to pay all of the benefits.

In a DC scheme, each member has their own individual retirement account. Contributions from both the employee and the Company are paid into the retirement account. They are invested in order to grow. The amount you receive when you retire depends to a certain extent on the returns of these

investments, as well as on charges levied. Benefits depend on the size of your retirement account when you retire as well as the cost of the options chosen at retirement. There is no guaranteed amount.

How would pensionable pay be calculated under the proposed Defined Contribution (DC) scheme? Currently, pensionable pay is made up of basic pay plus, in some cases, pensionable allowances and pensionable bonuses. Section C members – who make up the majority of Plan members – then have £3,328 deducted (the Lower Earnings Deduction) every year. Under our DC proposal the Lower Earnings Deduction would not be made when calculating pensionable pay. However, allowances and bonuses would not be pensionable when calculating DC benefits under our proposal.

Overall, we expect the majority of members would have higher pensionable pay under our DC proposal. See Section 3 for more information.

that would be below the legal minimum for DB pension schemes.

We also considered asking members to pay more. Even if members’ contributions were doubled, or even tripled, that would still require the Company to contribute 20% of pensionable pay over and above the amount we are already contributing, which we could not afford.

Based on what we understand about the likely increase in our contribution rates, the Company does not believe we can continue to provide benefits on a Defined Benefit basis beyond March 2018. We believe the proposal set out in this booklet is the best option to provide as many good quality jobs as possible and give you an affordable pension scheme in the future. But we will, of course, consider any other affordable proposals that members or their representatives wish to put forward during the pension review process. We know how important your pension benefits are to you. We want to hear from you.


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Have your say

n We will continue discussions with our unions during and after the consultation as part of our pension review process.

n We will consider your views and discuss these with our unions. In any event, under the Company’s proposal, no changes would come into effect before April 2018.

n We will give you further information once the Company has made a decision.

n Your views are important, and we want to hear them. If you have any questions, comments or feedback on the proposed changes, please send them to the Company using the contact details on page 2. If you want to provide feedback via your union representatives, then you should contact them through the normal channels.

n We cannot promise to adopt your suggestions. But, we will carefully consider what you say.

The examples on pages 19-36 illustrate the possible effects of the proposed changes on example members (based on the assumptions set out at the end of Section 2). You will also receive a personal illustration of the possible effects of the proposed changes on you (based on your individual circumstances and the assumptions set out in the personal illustration), shortly.

As we explained in our June letter, we have been reviewing the future of the Plan after March 2018 with our unions.

The posting of this booklet marks the start of the formal, member-wide consultation phase of our pension review process. The member consultation phase will end on 10 March 2017. For more information on how you can take part in the consultation, go to page 2.

Please take the time to read this booklet carefully. The changes we are proposing are important.


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Your questions answered

1 What does this mean for me?Remember that we remain committed to not making any changes before April 2018 (subject to the conditions we told you about in 2013). Apart from the change to the Final Salary pensionable pay link for Section C members’ pre-April 2008 benefits, we are not proposing to change the benefits you build up before April 2018, or your benefits transferred to the Government in 2012. If you’re close to retirement, we expect that our proposed changes would have a smaller effect. There are illustrations at the back of this booklet. They illustrate the possible effect (based on the assumptions listed in Section 2) of the Company’s proposed changes on the retirement benefits of members with a range of different ages, pensionable pay and service levels. These should help you to understand how the proposed changes might affect you (if the relevant assumptions turn out to be correct). You will shortly be sent a personal illustration based on your own individual circumstances showing the possible impact of the proposed changes on you, if they were to be implemented. The illustration is subject to certain important assumptions stated in the illustration, which may or may not turn out to be correct. We believe our proposal, if implemented, offers a very competitive pension package compared to our industry and other large employers.

2 How does this affect my Final Salary benefits?Under our proposal, Final Salary benefits built up by Section B members before April 2008 would continue to be linked to your Final Salary pensionable pay (while you remain employed by Royal Mail or until you take your benefits). For Section C members, this link would stop in April 2018 and Final Salary benefits would revalue thereafter in line with RPI (up to 5% a year) while you remain

employed by Royal Mail or until you take your benefits.

3 How does this affect my Career Salary Defined Benefits?You would not build up any further Career Salary Defined Benefits (CSDB) after March 2018. Your accrued benefits would, after 31 March 2018, continue to be revalued in the future in line with RPI (up to 5% a year) while you remain employed by Royal Mail or until you take your benefits. For Section B members, 2010 to 2012 CSDB blocks would also be linked to changes in Final Salary pensionable pay (if better than RPI) while you remain employed by Royal Mail or until you take your benefits.

4 How would this affect my benefits in the Royal Mail Statutory Pension Scheme (RMSPS)?Our proposal would make no changes to your RMSPS benefits. See page 8 for more information.

5 Why is this change necessary?The work that has been done on the Plan’s 2015 financial review indicates that from April 2018, the Company’s contributions would more than double from around £400 million a year to over £1 billion a year - if members then continue to build up benefits on the current basis. This increase would not be affordable. It is significantly more than the cash we generate each year – around £290 million in 2015-16. If we had to make this level of contributions, we could not invest to grow and provide good quality jobs for the future. It would reverse the benefits for you and the Company of the previous actions we have taken. Those actions helped to make you pension more secure, improved the viability of your Company and enhanced your future job security. So we need to decide now what form your pension benefits will take after March 2018 so that we can avoid this unaffordable increase in contributions.


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Your questions answered continued

6 Is the Plan invested in the right assets?For many years, financial markets conditions for many pension schemes - like our Plan – have not been favourable. This was why we needed to introduce the Pensions Reform in 2014. Since then, financial conditions have significantly worsened and recent improvements have not materially changed that position. Financial markets are where the Plan holds, buys and sells the investments that it uses to pay member benefits. These include investments such as Company shares and Government or corporate bonds. The yields on bonds and expected future returns on other investments are used to calculate the money that should be set aside now to pay benefits in the future. In recent years, pension costs have increased due to the historically low yields on bonds and lower long-term expected returns on other assets. Taking into consideration these worsening financial market conditions, the Plan’s investment performance has been good. However, the yields on bonds and returns on other assets are so low that the resulting increase in contributions payable by the Company means unfortunately this is not enough to prevent further changes being needed. Many companies have already closed their Defined Benefit pension schemes in recent years. Only a few FTSE 100 companies still have a significant number of their employees in a Defined Benefit scheme.

7 Is this just about the Company saving money?No. It is about avoiding an unaffordable increase in contributions after March 2018. The Company expects to pay broadly the same in pension contributions and National Insurance contributions in 2018-19 (when the proposal would take effect) as it did in 2015-16 (before National Insurance contributions increased as a result of the Government’s changes to the State Pension – see question 8).

In these circumstances we believe that our proposal would be a fair outcome for members. If the proposal is implemented, the Company believes that it would: n be a very competitive pension package compared to

our industry and other large employers; n help us to meet our objective of helping to protect

the pension benefits you have built up;n provide more sustainable pension arrangements in

the future; andn help us to continue to provide as many good quality

jobs as possible.

The Company believes that this proposal is the best option available in the circumstances. But we will, of course, actively consider any other affordable proposals that members or their representatives wish to put forward during the pension review process.

8 What impact has the end of contracting-out had on the Company?The Government’s introduction of a new, single tier State Pension in April 2016 brought an end to contracting-out for the members of many UK Defined Benefit pension schemes, including Plan members. This has resulted in the Company having to pay around an extra £65 million in National Insurance contributions every year. As part of the Pensions Reform introduced in 2014, the Company confirmed that it would take on this additional cost without changing Plan benefits. This commitment expires at the end of March 2018.

9 Is my individual consent – or that of my union - required for the Company to implement the proposal?No. The Company is required to consult its employees. Ultimately, the Company does not need individual member consent, or that of the unions, to implement this proposal. However, we want to hear your views. We will consider the consultation responses and discuss them with our unions as part of our pension review


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process. We know how important your pension benefits are to you.

10 Why doesn’t the Company just pay the extra?If nothing changed, from April 2018 the Company would need to pay over £1 billion a year to fund members’ pension benefits. This would increase the Company’s contributions from around 17 per cent of pensionable pay to over 50 per cent. As such, the level of contributions would not be affordable. It would reverse the benefits for you and the Company of the previous actions taken. Those actions helped to make your pension more secure, improved the viability of your Company and enhanced your future job security.

11 How do I know that my views will be taken seriously?We want to hear from you. Although the consultation is not binding, we take the views expressed by our colleagues and their representatives seriously.

12 Can you ensure my pension is safe?Through the pension transfer, the Government has taken legal responsibility for the benefits you built up in the Plan until 31 March 2012. There would be no changes to the benefits you would receive from the RMSPS as a result of the Company’s proposal. The benefits you have built up in the Plan since April 2012 are currently well funded. But, we expect the current surplus will run out in 2018. To address this issue, we now need to move to the member-wide consultation phase of our pension review process. See the table on page 8 for more information on where your benefits would come from if the proposal went ahead.

13 How much would I pay under the Company’s proposal?If you do nothing, you would continue to contribute 6% of your pensionable pay to your pension, as

you currently do3 - but please see question 14 for how we propose to calculate pensionable pay after March 2018.

Under our proposal, you could choose how much of your pensionable pay to contribute into your pension – 4%, 5% or 6%, with the Company contributing 7%, 8% or 10%, respectively.

14 How would pensionable pay be calculated if the proposal is implemented?Currently, pensionable pay is made up of basic pay plus, in some cases, pensionable allowances and pensionable bonuses. Section C members – who make up the majority of Plan members – then have £3,328 deducted (the Lower Earnings Deduction) every year. Under our Defined Contribution proposal the Lower Earnings Deduction would not be made when calculating pensionable pay. However, allowances and bonuses would not count towards Defined Contribution pensionable pay under our proposal Overall, we expect the majority of members would have higher pensionable pay under our DC proposal.

15 What happens if I am promoted after 31 March 2018 under the Company’s proposal?Promotional pay increases after 31 March 2018 would not flow through to the DB benefits you have built up under the Plan (subject to certain exceptions for Section B members). However, they would immediately flow through to your DC pensionable pay. Both you and the Company would pay more contributions into your retirement account if your pensionable pay increased.

16 I am in a grade where I get increments – what happens to them under the Company’s proposal?Incremental pay increases after 31 March 2018 would not flow through to the DB benefits you have built up under the Plan (subject to certain exceptions for Section B members). However, they would immediately flow

3 Or we pay the equivalent amount under Pension Salary Exchange (PSE).


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through to your DC pensionable pay. Both you and the Company would pay more contributions into your retirement account if your pensionable pay increased.

17 Some of my allowances are pensionable - will I still earn pension on them under the Company’s proposal?After 31 March 2018, allowances would not flow through to the DB benefits you have built up under the Plan (subject to certain exceptions for Section B members). Allowances are not included in DC pensionable pay. Please see the glossary on page 41 for the definition of DC pensionable pay.

18 My bonus is pensionable - would I still earnpension for my bonus under the Company’s proposal?After 31 March 2018, bonuses would not flow through to the DB benefits you have built up under the Plan. Bonuses are not included in DC pensionable pay.

19 I have taken flexible retirement – what impact does the Company’s proposal have on me?There would be no change to the pension you are already receiving. If you are still building up further Career Salary Defined Benefit pension that would cease on 31 March 2018 and those benefits would be revalued in line with RPI (up to 5% a year), as is currently the case for active Plan members, while you remain employed by Royal Mail or until you take your benefits.

20 I am paying additional contributions to Addplan – what impact does the Company’s proposal have on me?Under the Company’s proposal, you would not build up any further Addplan pension after 31 March 2018. The Addplan pension you have built up would be revalued in line with RPI (up to 5% a year), as is currently the case for active Plan members while you

remain employed by Royal Mail or until you take your benefits. Unless you instruct otherwise, your Addplan contributions would continue, but as additional contributions to your DC retirement account instead.

21 I am paying additional contributions to Flexiplan – what impact does the Company’s proposal have on me?Unless you instruct otherwise, your Flexiplan contributions would continue, but as additional contributions to your DC retirement account instead.

22 I am paying additional contributions to Bonusplan – what impact does the Company’s proposal have on me?Bonusplan contributions, both yours and the Company’s, would cease on 31 March 2018. However, as DC pensionable pay does not have a Lower Earnings Deduction, both you and the Company would pay contributions on your full basic pay to your DC retirement account.

23 What happens if I am made redundant – what impact does the Company’s proposal have on me?The Company’s proposal is that only cash compensation would be payable from 1 April 2018. However, we would have separate discussions with our unions about the impact of the proposed changes where redundancy arrangements are governed by collective agreements before making any final decision.

24 What happens if I am a Section A member?The Company’s proposal would not impact you unless you opt for Section B benefits. There are very few active Section A members left in the Plan.

Section 02 Retirement benefit examples

16

Section 2 Retirement benefit examples under our proposalThese illustrative examples show the possible effect on your retirement benefits of the changes set out under the Company’s pension proposal, to help you understand the potential effect. The figures are provided to give you a broad illustration of the possible impact of the proposed changes on Plan benefits. They are estimates based on assumptions (pages 35-36). They have not been provided for any other purpose and should not under any circumstance be relied on to make financial decisions about your benefits or otherwise.

Please ensure that you read the assumptions used for these examples. These are given at the end of this section. All of the figures provided are based on these assumptions. The assumptions are not guaranteed to be correct. If they turn out to be incorrect, the amount of benefits could be higher or lower (and the impact of the proposed changes lesser or greater).

We are also preparing individual personal illustrations showing the possible impact of the proposed changes on you, if they were to be implemented, based on your individual details and the assumptions set out in the personal illustration. You will receive your personal illustration shortly.

In all of the examples, we show the total pension benefits in relation to your pensionable service with the Company (including the benefits now payable from the Royal Mail Statutory Pension Scheme) if you:

nretire from pensionable service if the changes under our proposal are not made (“before”); and

nretire from pensionable service if the changes under our proposal are made (“after”).

We have also shown how the total pension for each of the example members, used in the illustrations, might be affected by the amount of the State Pension that they could receive from State Pension age (see note 5 on page 35 for more information).

Retirement benefit examples The difference the changes under our proposal would make will depend on, among other things, your age, and therefore how long you would be building up Defined Contribution (DC) benefits rather than current Plan Defined Benefit (DB) benefits. The effect of the proposed changes is expected to be greater if you are younger and continue to be employed by the Company until retirement age. Some of your Defined Benefits are normally payable from age 60, whereas others are normally payable from age 65.

The effect of the changes will also depend on a number of other factors such as the level of contributions you decide to pay into your DC retirement account, the investment returns you receive on your DC retirement account, any charges levied and the cost of the options you choose on retirement. The effect will also be different depending on whether you are a member of Section A/B or Section C of the Plan. Please note too that, for the sake of simplicity, we have assumed that DB pensionable pay growth in all scenarios is in line with RPI.

For the sake of simplicity, the illustrations ignore for all members the potential impact of above RPI increases to Final Salary pensionable pay.

Section 02Retirement benefit examples

17

Section 2 Retirement benefit examples under our proposal continued

The amount of the benefits will also depend on your pensionable pay in the past and in the future (which could go up or down).To help illustrate the possible effect on you, we have included four example members for each of Section A/B and Section C. These cover:

1 a member who earns £25,000 a year and retires at age 60;

2 a member who earns £40,000 a year and retires at age 60;

3 a member who earns £25,000 a year and retires at age 65; and

4 a member who earns £40,000 a year and retires at age 65.

The ages and lengths of service in each of the tables for these examples refer to members as at 31 March 2018.

All amounts are expressed in today’s money terms, where prices are assumed to increase in line with CPI inflation.


18

How to use our example tables

Step 1: Select which section of the Plan you are inThere are three possible Sections: A/B or C (if you are not sure which section of the Plan you are in, look at your payslip or at your last Benefit Illustration from the Plan Trustee). Then find the relevant example for your Section.

Pages 19-26 – Examples for Section A/B

Pages 27-34 – Examples for Section C

Section A members are members who joined the Plan before 1 December 1971. For Section A members, the tables illustrate the possible effect of the proposed changes (on the basis of the assumptions on pages 35-36) if you choose at retirement to receive Section B benefits.

Section B members are members who joined the Plan between 1 December 1971 (without reserved rights to Section A benefits) and 31 March 1987.

Section C members are members who joined the Plan between 1 April 1987 and 31 March 2008 (when the Plan closed to all new members and re-joiners).

Step 2: Select your ageUsing the left hand column, find the nearest figure to what your age will be at 31 March 2018. For example, if you will be 52 then you should select “50” as that is nearer to your age than “55”.

Step 3: Select your length of pensionable service Using the line across the top of the example table, find the nearest figure equal to the number of years you will have been a member of the Plan by 31 March 2018 (including service before 2012, which has been transferred to the RMSPS). For example, if you joined the Plan in 1995 and will have 23 years’ pensionable service at 31 March 2018, then you should select “25” as that is nearer to your length of service than “20”.


19

Section B benefits – example 1Pay £25,000 and retirement at age 60

In this example we consider a member with basic pay (and pensionable pay) of £25,000. We have also assumed the member will continue to be an employee of the Company until retirement at age 60 and therefore build up DC benefits from 1 April 2018, paying contributions of 6% of basic pay with the Company paying contributions of 10% of basic pay until this age.

If the changes under our proposal are made, the possible effect of these changes (on the basis of the assumptions on pages 35-36) would be (both including and excluding the State Pension):

For example, a member aged 55 with 35 years’ pensionable service in 2018:• Before the changes - an annual pension of £20,876 (including State Pension from age 67), equivalent

to 84% of basic pay. • After the changes - an annual pension of £20,040 (including State Pension from age 67), equivalent

to 80% of basic pay.• The member’s State Pension would come into payment at age 67. As shown above, members who are aged 60 at 31 March 2018 are expected to have no change to their pension benefits if they retire at this age.Note that in addition to the pension shown above, Section B members are entitled to a retirement lump sum as shown in the table on the next page. We have assumed in the lump sum and pension figures that part of the DC fund is used to buy enough lump sum so that the lump sum after the changes is the same as before.

Before changes - total pension (including State Pension) £ pa

Age at 2018

Service

30 35 40

50 21,561

55 19,234 20,876

60 17,082 18,644 20,207

Before changes - total pension (excluding State Pension) £ pa

Age at 2018

Service

30 35 40

50 12,441

55 10,556 12,198

60 8,825 10,388 11,950

After changes - total pension (including State Pension) £ pa

Age at 2018

Service

30 35 40

50 19,796

55 18,398 20,040

60 17,082 18,644 20,207

After changes - total pension (excluding State Pension) £ pa

Age at 2018

Service

30 35 40

50 10,675

55 9,720 11,362

60 8,825 10,388 11,950


20

Section B benefits – example 1 Pay £25,000 and retirement at age 60 continued

IMPORTANT INFORMATION

A member’s DC pension within the ‘after changes’ pension will depend on the contributions paid, investment returns received (net of charges), and type of pension purchased at retirement. The following table shows how some of these might vary for the member aged 55 with 35 years’ pensionable service in 2018.

Illustration After changes - total pension £ pa

‘After changes’ pension shown above (including State Pension) 20,040

Member contribution rate 4% instead of 6% 19,866

DC investment returns 2% pa lower 20,013

2% pa higher 20,069

DC annuity terms 25% more costly 19,951

25% cheaper 20,151

Before changes – lump sum £

Age at 2018

Service

30 35 40

50 38,627

55 32,565 37,491

60 27,000 31,688 36,375

After changes – lump sum £

Age at 2018

Service

30 35 40

50 38,627

55 32,565 37,491

60 27,000 31,688 36,375


21





to 67% of basic pay.• The member’s State Pension would come into payment at age 67.

As shown above, members who are aged 60 at 31 March 2018 are expected to have no change to their pension benefits if they retire at this age.Note that in addition to the pension shown above, Section B members are entitled to a retirement lump sum as shown in the table on the next page. We have assumed in the lump sum and pension figures that part of the DC fund is used to buy enough lump sum so that the lump sum after the changes is the same as before.

Section B benefits – example 2Pay £40,000 and retirement at age 60


Age at 2018

Service

30 35 40

50 29,026

55 25,568 28,195

60 22,377 24,877 27,377


Age at 2018

Service

30 35 40

50 26,201

55 24,230 26,858

60 22,377 24,877 27,377


Age at 2018

Service

30 35 40

50 19,905

55 16,890 19,517

60 14,120 16,620 19,120


Age at 2018

Service

30 35 40

50 17,080

55 15,552 18,180

60 14,120 16,620 19,120


22

Section B benefits – example 2Pay £40,000 and retirement at age 60 continued


A member’s DC pension within the ‘after changes’ pension will depend on the contributions paid, investment returns received (net of charges), and type of pension purchased at retirement. The following table shows how some of these might vary for the member aged 55 with 35 years’ pensionable service in 2018.





2% pa higher 26,903


25% cheaper 27,036


Age at 2018

Service

30 35 40

50 61,804

55 52,104 59,986

60 43,200 50,700 58,200


Age at 2018

Service

30 35 40

50 61,804

55 52,104 59,986

60 43,200 50,700 58,200


23






Section B benefits – example 3pay £25,000 and retirement at age 65

Before changes – total pension (including State Pension) £ pa

Age at 2018

Service

30 35 40

50 25,912

55 22,928 24,654

60 20,173 21,815 23,458

65 17,632 19,194 20,757

Before changes – total pension (excluding State Pension) £ pa

Age at 2018

Service

30 35 40

50 16,326

55 13,808 15,534

60 11,495 13,138 14,780

65 9,375 10,938 12,500

After changes – total pension (including State Pension) £ pa

Age at 2018

Service

30 35 40

50 22,142

55 20,529 22,255

60 19,038 20,680 22,322

65 17,632 19,194 20,757

After changes – total pension (excluding State Pension) £ pa

Age at 2018

Service

30 35 40

50 12,557

55 11,409 13,135

60 10,360 12,002 13,644

65 9,375 10,938 12,500


24

Section B benefits – example 3pay £25,000 and retirement at age 65 continued


A member’s DC pension within the ‘after changes’ pension will depend on the contributions paid, investment returns received (net of charges), and the type of pension purchased at retirement. The following table shows how some of these might vary for the member aged 60 with 35 years’ pensionable service in 2018.





2% pa higher 20,714


25% cheaper 20,807


Age at 2018

Service

30 35 40

50 48,978

55 41,423 46,601

60 34,486 39,413 44,339

65 28,125 32,813 37,500


Age at 2018

Service

30 35 40

50 48,978

55 41,423 46,601

60 34,486 39,413 44,339

60 28,125 32,813 37,500


25




to 74% of basic pay. • After the changes – an annual pension of £27,881 (including State Pension from age 66), equivalent


Section B benefits – example 4pay £40,000 and retirement at age 65

Before changes – total pension (including State Pension) £ pa

Age at 2018

Service

30 35 40

50 35,708

55 31,213 33,975

60 27,071 29,698 32,326

65 23,257 25,757 28,257

After changes – total pension (including State Pension) £ pa

Age at 2018

Service

30 35 40

50 29,677

55 27,375 30,136

60 25,254 27,881 30,509

65 23,257 25,757 28,257

Before changes – total pension (excluding State Pension) £ pa

Age at 2018

Service

30 35 40

50 26,122

55 22,092 24,854

60 18,393 21,020 23,648

65 15,000 17,500 20,000

After changes – total pension (excluding State Pension) £ pa

Age at 2018

Service

30 35 40

50 20,091

55 18,254 21,016

60 16,576 19,203 21,831

65 15,000 17,500 20,000


26

Section B benefits – example 4pay £40,000 and retirement at age 65 continued







2% pa higher 27,936


25% cheaper 28,084


Age at 2018

Service

30 35 40

50 78,365

55 66,277 74,562

60 55,178 63,061 70,943

65 45,000 52,500 60,000


Age at 2018

Service

30 35 40

50 78,365

55 66,277 74,562

60 55,178 63,061 70,943

60 45,000 52,500 60,000


27

In this example we consider a member with basic pay (and DB pensionable pay before the deduction of the Lower Earnings Deduction) of £25,000. We have also assumed the member will continue to be an employee of the Company until retirement at age 60 and therefore accrue DC benefits from 1 April 2018, paying contributions of 6% of basic pay with the Company paying contributions of 10% of basic pay until this age.





As shown above, members who are aged 60 at 31 March 2018 are expected to have no change to their pension benefits if they retire at this age.

Section C benefits – example 1pay £25,000 and retirement at age 60


Age at 2018

Service

10 15 20 25 30

30 18,665

40 15,758 17,939 20,121

50 13,298 15,273 17,249 19,224 21,199

60 11,175 12,963 14,751 16,539 18,328


Age at 2018

Service

10 15 20 25 30

30 7,536

40 5,683 7,865 10,047

50 4,178 6,153 8,128 10,103 12,079

60 2,918 4,706 6,495 8,283 10,071


Age at 2018

Service

10 15 20 25 30

30 26,197

40 20,356 22,538 24,720

50 15,386 17,361 19,337 21,312 23,287

60 11,175 12,963 14,751 16,539 18,328


Age at 2018

Service

10 15 20 25 30

30 15,068

40 10,281 12,463 14,645

50 6,265 8,241 10,216 12,191 14,166

60 2,918 4,706 6,495 8,283 10,071


28

Section C benefits – example 1pay £25,000 and retirement at age 60 continued







2% pa higher 17,351


25% cheaper 17,487


29

In this example we consider a member with basic pay (and DB pensionable pay before the deduction of the Lower Earnings Deduction) of £40,000. We have also assumed the member will continue to be an employee of the Company until retirement at age 60 and therefore build up DC benefits from 1 April 2018, paying contributions of 6% of basic pay with the Company paying contributions of 10% of basic pay until this age.








Age at 2018

Service

10 15 20 25 30

30 36,731

40 27,543 31,250 34,957

50 19,766 23,122 26,478 29,834 33,190

60 13,215 16,253 19,291 22,329 25,368


Age at 2018

Service

10 15 20 25 30

30 25,602

40 17,468 21,175 24,882

50 10,645 14,001 17,357 20,713 24,069

60 4,958 7,996 11,035 14,073 17,111


Age at 2018

Service

10 15 20 25 30

30 23,577

40 19,520 23,227 26,934

50 16,124 19,480 22,836 26,192 29,548

60 13,215 16,253 19,291 22,329 25,368


Age at 2018

Service

10 15 20 25 30

30 12,448

40 9,445 13,152 16,859

50 7,003 10,359 13,715 17,071 20,427

60 4,958 7,996 11,035 14,073 17,111


30








2% pa higher 23,000


25% cheaper 23,217


31









Age at 2018

Service

10 15 20 25 30

30 34,495

40 26,641 28,934 31,227

50 19,966 22,042 24,118 26,194 28,270

60 14,316 16,195 18,075 19,954 21,834

65 11,833 13,621 15,409 17,198 18,986


Age at 2018

Service

10 15 20 25 30

30 22,798

40 16,052 18,346 20,639

50 10,380 12,456 14,532 16,608 18,684

60 5,638 7,518 9,397 11,276 13,156

65 3,576 5,365 7,153 8,941 10,729


Age at2018

Service

10 15 20 25 30

30 22,207

40 18,603 20,896 23,189

50 15,574 17,650 19,726 21,802 23,878

60 13,000 14,879 16,758 18,638 20,517

65 11,833 13,621 15,409 17,198 18,986


Age at2018

Service

10 15 20 25 30

30 10,510

40 8,014 10,308 12,601

50 5,988 8,064 10,140 12,216 14,292

60 4,322 6,201 8,081 9,960 11,839

65 3,576 5,365 7,153 8,941 10,729

32

Retirement benefit examplesSection 02








2% pa higher 20,041


25% cheaper 20,185


33








Before changes - total pension (including State Pension) £pa

Age at 2018

Service

10 15 20 25 30

30 50,431

40 37,862 41,759 45,655

50 27,222 30,749 34,276 37,803 41,331

60 18,257 21,450 24,644 27,837 31,030

65 14,333 17,371 20,409 23,448 26,486

Before changes - total pension (excluding State Pension) £pa

Age at 2018

Service

10 15 20 25 30

30 38,735

40 27,274 31,170 35,066

50 17,636 21,163 24,691 28,218 31,745

60 9,579 12,773 15,966 19,159 22,352

65 6,076 9,115 12,153 15,191 18,229

After changes - total pension (including State Pension) £pa

Age at 2018

Service

10 15 20 25 30

30 29,015

40 23,866 27,762 31,659

50 19,578 23,105 26,633 30,160 33,687

60 15,966 19,159 22,352 25,546 28,739

65 14,333 17,371 20,409 23,448 26,486

After changes - total pension (excluding State Pension) £pa

Age at 2018

Service

10 15 20 25 30

30 17,319

40 13,277 17,174 21,070

50 9,992 13,520 17,047 20,574 24,101

60 7,288 10,481 13,675 16,868 20,061

65 6,076 9,115 12,153 15,191 18,229


34








2% higher 27,136


25% cheaper 27,367


35

Assumptions used in the retirement benefit examples

1 Benefits shown are those on retirement at the member’s 60th or 65th birthday assuming that you continue in Royal Mail employment until then. If you leave Royal Mail employment before that age, the impact on your benefits is expected to be smaller.

2 The ‘before’ figures assume the Plan remains open and you continue to build up CSDB benefits on the current basis until the ages shown. The ‘after’ figures assume benefits cease building up on the current CSDB basis on 31 March 2018, are then provided on a DC basis from 1 April 2018, and DC contributions continue as proposed until the ages shown.

3 All amounts are expressed in today’s money terms, where prices are assumed to increase in line with Consumer Prices Index (CPI) inflation. Your basic pay is assumed to increase in line with CPI inflation, and DB pensionable pay is assumed to increase with Retail Prices Index (RPI) inflation.

4 RPI is assumed to be 2.5% a year, and CPI is assumed to be 1.5% a year.

5 Where stated, the pension amounts include

the full rate of the new State Pension, which is £8,093.80 today. The State Pension is assumed to increase at 2.5% a year. The State Pension will come into payment at a member’s State Pension age. Members’ State Pensions may be less, if for example they have not paid sufficient National Insurance contributions, or there is a deduction in respect of periods of

employment when you were contracted-out of the State Earnings Related Pension Scheme or the State Second Pension. You can obtain an estimate of your actual State Pension by going to www.gov.uk/check-state-pension.

DB assumptions:

6 For simplicity, the illustrations show the position for a member who does not receive any pensionable allowances. For Section C members, the member’s DB pensionable pay as at today has been calculated by subtracting the Lower Earnings Deduction.

7 The figures showing the amounts payable at ages 60 and 65 each assume that you retire from Royal Mail employment at the relevant age and are an active pension member until then. If you leave Royal Mail employment before that age then the impact on your benefits is expected to be smaller.

8 Early retirement reductions applying to benefits normally payable at 65 on retirement at age 60 are assumed to be the same as currently applied. For Section B members, these reduce the lump sum by less than the pension, resulting in a lump sum of slightly over three times the pension at age 60.

9 For Section C members, no allowance is made for the pension supplement that would be payable between Normal Retirement age and State Pension age, or for the option to exchange pension for cash at retirement. For Section B members, no allowance is made for the option at retirement to convert lump sum to pension or vice versa.

36

10 No allowance has been made for any possible impact of the Annual Allowance or the Lifetime Allowance, or for Pension Sharing Orders or earmarking orders made as part of a divorce settlement.

11 For members of Section A, the amounts shown assume the member opts for Section B benefits at retirement.

DC assumptions:

12 The ‘after’ figures assume you remain in Royal Mail employment until the relevant age, you remain at the current default contribution tier, where you pay 6% of basic pay, and that the Company continues to pay contributions of 10% of basic pay.

13 Investment returns on the DC fund are assumed to be in line with the Company’s existing DC Plan’s Default Lifecycle option, as described at www.zurich.co.uk/internet/worksavings/SiteCollectionDocuments/royalmaildcplan/714073.pdf

14 Returns in excess of RPI (and net of expenses) are assumed to be in line with Statutory Money Purchase Illustrations (SMPI) for 2016-17, i.e. 4.0% a year for global equity, 2.3% a year for diversified assets, 1.1% a year for bonds and 0.2% a year for cash. Actual DC pension amounts will depend on the investment returns actually achieved on contributions held in your personal fund before retirement. The investment returns are not guaranteed and may differ significantly from those assumed.

15 DC funds are assumed to be converted to pension on terms consistent with SMPI for 2016-17. The actual terms at retirement are likely to differ from those assumed in the figures. The pension purchased with the DC fund has been assumed to have the same broad features as the benefits in the DB Plan, for example: pension increases in line with CPI for Section B and RPI for Section C members, a 50% spouse’s pension payable on your death after retirement, and a lump sum of around three times pension for Section B members.

16 We have assumed in the lump sum and pension figures that part of the DC fund is used to buy enough lump sum so that the lump sum after the changes is the same as before.

AVC assumptions:

17 Benefits shown ignore the impact of any Additional Voluntary Contributions (AVCs) that you may be making to the Plan.

Retirement benefit examplesSection 02

37

Section 03Member contributions examples under our proposal

These illustrative examples show the possible effect on your pension contributions of the changes set out under the Company’s proposal, to help you understand the potential effect on your take-home pay.

In all of the examples, we show the weekly or monthly member contributions that you would pay if you choose to stay at the proposed default DC contribution rate of 6% of basic pay, rather than a lower tier.

Under the proposal, the change to member contributions is as follows:

nCurrent Plan member contributions are 6% of pensionable pay, where pensionable pay for this purpose is, in summary: nbasic pay at 31 March 2014, and for Section

C members reduced by the Lower Earnings Deduction of £3,328 a year at 31 March 2014;

nincreased with RPI (up to 5% a year) since then;

nincreased with pensionable promotions in excess of RPI (up to 5% a year) since then;

nplus your current pensionable allowances or pensionable bonuses.

nUnder the proposal, the default member DC contribution rate would be 6% of basic pay.

nAlthough the 6% rate is not changing, the pay it is applied to is changing.

Section 3 Member contribution examples under our proposal

The effect on your member contributions will depend on:

nhow much you are paid by the Company;

nwhether you are a Section A/B or Section C member, because Section C members have the Lower Earnings Deduction as set out previously; and

nwhether you are currently paid pensionable allowances or bonuses, because those would no longer be included within contributory pay under our proposal.

We have shown below four examples which illustrate these points. These cover:

1 a Section B member who earns basic pay of £25,000 a year with no pensionable allowances;

2 a Section B member who earns basic pay of £30,000 a year with pensionable allowances of £2,000 a year;

3 a Section C member who earns basic pay of £40,000 a year with no pensionable allowances; and

4 a Section C member who earns basic pay of £20,000 a year with pensionable allowances of £2,000 a year.

For Section C members, we have taken account of the Lower Earnings Deduction.

Section 03 Member contributions examples under our proposal

38

How to use our examples

Step 1: Select which section of the Plan you are in

There are three possible Sections: A, B or C (if you are not sure which section of the Plan you are in, look at your payslip or at your last Benefit Illustration from the Plan Trustee). Find the relevant example for your Section.

Section A members are members who joined the Plan before 1 December 1971. Section A members are assumed to have opted for Section B benefits.

Section B members are members who joined the Plan between 1 December 1971 (without reserved rights to Section A benefits) and 31 March 1987.

Section C members are members who joined the Plan between 1 April 1987 and 31 March 2008, (when the Plan closed to all new members and re-joiners).

Step 2: Consider whether you are paid pensionable allowances or pensionable bonuses.

Under our proposal, neither allowances nor bonuses would be included in DC pensionable pay – so this would reduce the contributions that you pay.

Example 1 - Section B member Pay £25,000 and no pensionable allowances

In this example we consider a Section B member with basic pay of £25,000 a year and no pensionable allowances, and pensionable pay also of £25,000 a year.

Member contributions would change as follows:

ncurrent weekly member contributions would be 6% of weekly pensionable pay of £481, i.e. £28.85 a week.

nnew DC weekly member contributions would be 6% of weekly basic pay of £481, i.e. £28.85 a week.

So there would be no change in member contributions, if you choose to stay at the proposed default DC contribution of 6% of basic pay, rather than a lower tier. This is because in this example pensionable pay is not changing.

Example 2 - Section B member Pay £30,000 and pensionable allowances of £2,000

In this example we consider a Section B member with basic pay of £30,000 a year and pensionable allowances of £2,000 a year and so current pensionable pay of £32,000 a year.


ncurrent monthly member contributions would be 6% of monthly pensionable pay of £2,667, i.e. £160 a month.

nnew DC monthly member contributions would be 6% of monthly basic pay of £2,500, i.e. £150 a month.

So there would be a £10 a month reduction in member contributions if you choose to stay at the proposed default DC contribution rate of 6% of basic pay. This is because in this example

39

pensionable pay is reducing as pensionable allowances are not included. If you wanted to pay the same monthly contribution as currently, you could choose to pay additional voluntary contributions of £10 a month.

Example 3 - Section C member Pay £40,000 and no pensionable allowances

In this example we consider a Section C member with basic pay of £40,000 a year and no pensionable allowances. Their DB pensionable pay net of the indexed Lower Earnings Deduction would be £36,458 a year.




So there would be a £18 a month increase in member contributions, if you choose to stay at the proposed default DC contribution rate of 6% of basic pay, rather than a lower tier. This is because in this example pensionable pay is increased due to the DC pensionable pay not having a Lower Earnings Deduction. Note that the increase in pensionable pay also means that the Company would contribute more to your retirement account.

Example 4 - Section C member Pay £20,000 and pensionable allowances of £2,000

In this example we consider a Section C member with basic pay of £20,000 a year and pensionable allowances of £2,000 a year. Their DB pensionable pay net of the indexed Lower Earnings Deduction would be £18,458 a year.




So there would be a £8 a month increase in member contributions, if you choose to stay at the proposed default DC contribution rate of 6% of basic pay, rather than a lower tier. This is because in this example pensionable pay is reducing due to the removal of pensionable allowances, although this is partly offset by DC pensionable pay not having a Lower Earnings Deduction. Note that the increase in pensionable pay also means that the Company would contribute more to your retirement account.

How to use our examples continued

Section 03Member contributions examples under our proposal

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GlossarySection 04

Term Definition

Accrual(s) Means the rate at which you earn pension each year. Plan members accrue pension at the rate of 1/60th (Section C), or 1/80th and a lump sum of 3/80ths (Section A/B).

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

Career Salary Defined These are also sometimes referred to as career average benefits. You Benefit or CSDB 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.

Company Means Royal Mail Group Ltd.

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

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, where a member’s pension is based on their salary near to retirement and years of service. Another type of Defined Benefit scheme is a CSDB or career average as described above.

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.

Glossary

Section 04Glossary

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Glossary continued

Defined Contribution (DC) Would mean 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: nyour basic salary or wage for your contractual hours, plus nthe 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 will not be counted for the purpose of DC pensionable pay. Allowances, bonuses and other items would not be counted for the purpose of DC pensionable pay.

Financial markets or Financial markets are where the Plan holds, buys and sells the investments financial market conditions that it uses to pay member benefits. These include investments such as Company shares and Government or corporate bonds. The yields on bonds and expected future returns on other investments are used to calculate the money that should be set aside now to pay benefits in the future. In recent years, pension costs have increased due to the historically low yields on bonds and lower long-term expected returns on other assets.

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. Under our proposal, for Section B members, benefits accrued before April 2018 would continue to have a link to Final Salary pensionable pay beyond 31 March 2018. This would not be the case for Section C members whose Final Salary benefits under our proposal would be linked to RPI (up to 5% a year) from 1 April 2018 for so long as the member remains in Royal Mail employment or until he or she takes his or her benefits.

pensionable pay

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Lower Earnings Deduction LED is the annual rate of the Lower Earnings Limit (the least amount (LED) you must earn before you have to pay National Insurance). For Section

C members, it is subject to a maximum of £3,328 per year, but is reduced proportionately for part-time workers. The LED is indexed in line with RPI inflation following the 2014 Pensions Reform.

Pensionable service Means 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.

Royal Mail Statutory Means the Government backed pension scheme to which most of the Pension Scheme (RMSPS) Plan’s liabilities to pay benefits were transferred on 31 March 2012.

Retail Prices Index Means the annual rate of increase in the Government index of retail (RPI) or RPI inflation prices as measured at the previous September each year.

State Pension The pension payable by the Government. For examples in Section 2, as stated in assumption 5 on page 35, this has been assumed to be the full rate of the State Pension introduced in April 2016.

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. After this, the State Pension age for both men and women will rise to age 66. From 2026 to 2028, the State Pension age will start rising to 67. Further increases after April 2028 (if any) will be subject to review by Government every five years based on life expectancy.

Important legal note: this booklet is for consultation purposes only and does not guarantee or change your benefits. Benefits under the Royal Mail Pension Plan are subject always to the rules of the Plan in force from time to time. Once we have considered the responses to the consultation, and had an opportunity to discuss matters further with our unions as part of our pension review process, we will write to you with our decision and the full terms of any changes. We have the right to withdraw, suspend or amend all or any part of any Royal Mail pension arrangement, including Pension Salary Exchange (PSE), at any time.

Glossary continued

Section 04 Glossary

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