A description of the CWU's proposal to Royal Mail

1. Wage in Retirement Scheme
(WinRS)
Hilary Salt FIA
29 June 2017
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2. Design objectives
• A scheme for everyone
• To provide a decent income for life …
• … within a fixed employer’s budget
• Addressing some of the issues the employer
faces with DB as it exists now
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As much of a risk sharing scheme as is possible
under the current legislative framework

3. The Pensions Spectrum
Defined Benefit Conditional
Indexation
Collective
Defined
Contribution
Individual
Defined
Contribution
Provides an Income for Life Savings Scheme
Known benefit Base benefit +
target increases
Target benefit Unknown benefit
No link between
benefits and
funding
Increases
conditional on
funding
Benefits
collectively based
on funding
Benefits based
on individual
funding
Sponsor guarantee No sponsor guarantee
Sponsor bears
risk
Members and
sponsor share
risk
Members share
risks
Individual bears
risk
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4. CWU proposal for a new scheme
The Wage in Retirement Scheme (WinRS)
Standard design features
Scheme type Target Career Average
Member contributions 6%
Employer contributions Fixed at 17.1%
Pension accrual rate 1/60
Partner pension 50% of member’s pension
Normal Retirement Age
State Pension Age
(and moving with SPA)
Cash By commutation
Lump sum on death in service 4 x salary
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5. CWU proposal for a new scheme
The Wage in Retirement Scheme (WinRS)
Annual increases
Target revaluation before retirement RPI
Guaranteed revaluation before retirement Nil
Target increases in retirement RPI
Guaranteed increases in retirement Statutory minimum
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• Under current legislation, pensions in payment must increase
annually in line with CPI up to a maximum of 2.5% pa
• There is no legal requirement for deferred pensions to revalue –
so long as active benefits are also not revalued
• Scheme would be open to all staff and used for auto-enrolment

6. Managing the funding
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Annual Valuations
Base
benefits +
Increases
for whole period of
revaluation and
payment
= Assets
For a mature mix of pensioners and non-pensioners:
Funding on Target benefits 51% 65% 100% 125%
Funding on base benefits 100% 125% 195% 240%
Best estimate
annual increases
Non-retired: Nil
Retired: CPI/2.5
RPI – 1% RPI +1% RPI + 2%

7. Connecting Assets and Liabilities
• The running yield on the investments funds
the base benefits
• Growth in investment income provides for the
target increases on benefits
• Match the liability to the assets, not vice versa
• Statement of Investment Principles based on
seeking good real returns: RPI + 2.5% pa
target return
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8. Other key elements
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A new scheme with a new board of trustees
drawn from members and employer
representatives
A scheme open to all employees:
present and future, current DB, DC and opt outs:
used for auto-enrolment

9. Will it work?
• Tested how the scheme would perform if it had been set up 20 years ago
• Assumes the scheme is invested 50% in UK equities and 50% in overseas equities
• The chart compares the annual increases awarded with the target increase of RPI
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10. Estimated pension at NRA
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11. Potential Concerns
• Residual risk on the employer
• Auto-enrolment
• Employer accounts
• Intergenerational unfairness
• It’s unmanageable once closed
• TPR / PPF won’t like it
• Members won’t understand or like it
• No-one else does it
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12. Residual Risk on Employer
• True
• But funding based on target benefits so funding
has to fall very low to mean base benefits not
covered
• Possible with negotiation to reduce the accrual
rate to change the balance between base and
discretionary benefits
• In most circumstances, the scheme can be
managed within a fixed employer contribution rate
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13. Auto Enrolment
• Regulations make specific provision for average
salary schemes that don’t provide guaranteed
annual revaluation. Must allow discretionary
increases and the funding plan must include
revaluation at or above the minimum rate.
• Alternative routes to auto-enrolment qualification:
◦ The “cost of accruals” test.
◦ Passing one of the criteria for defined contribution
schemes by adding a money purchase underpin.
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14. Accounting Disclosures
• Account for it as a defined contribution scheme
because the principal terms and conditions are DC
(depends on rules)
• Account for it as a defined benefit scheme, valuing
the base benefits only
• Use DB accounting and value constructive obligation
based on increases affordable on accounting basis
• Use DB accounting and value constructive obligation
using a “past is a guide to the future” approach
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15. Intergenerational Issues
• The statutory minimum increase for pensioners creates
intergenerational risk in favour of pensioners
• There are much bigger intergenerational problems to avoid:
◦ The existing divide between DB for longer service staff and DC for
recent recruits
◦ The difference in outcomes between different generations in DC
• Less scope for inter-generational inequality than pure DB
• Target increase is more than CPI max 2.5%
• It would be better were there no statutory requirement for CPI
max 2.5 increases, like DC, cash balance and CDC.
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16. It’s Unmanageable After Closure
• On closure to new entrants, use Aggregate Funding
Method
◦ Past and Future base benefits + target increases
= Assets + future contributions
• Plan for solvency funding once all members are
retired
• Closure triggers smaller annual increases
• But an open scheme is more manageable than a
closed one. What problem could there be to which
closure is a sensible solution?
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17. TPR / PPF Won’t Like It
TPR and PPF should be delighted to see a
scheme which is very well funded,
very sustainable and is not likely to cause them
any headaches.
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18. Members Won’t Like it
• Clear communication is vital:
◦ Base and target benefits
◦ Possibility of reduced accrual
◦ Lower target on closure
• Role of representative organisations and MNTs will
be key
• Members can have a fair transfer value (but how is
a transferring member going to invest better than a
relatively unconstrained, open collective scheme?)
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19. No-one Else Does It
Discretionary pension increases are a long
standing practice in DB schemes
• Much less prevalent after statutory minimum increases
were introduced in 1997
• We’re reinvigorating an old idea: “there’s nothing new in
pensions”
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20. The WinRS positives
• Decent income for life at a fixed cost the
employer can afford
• An open scheme is best for inter-generational
equity
• A collective scheme is best for investment
efficiency
• An open scheme is easiest to manage
• Very low risk for the employer
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21. Contact us
Hilary Salt FIA, First Actuarial LLP
0161 348 7441 hilary.salt@firstactuarial.co.uk
Derek Benstead FIA, First Actuarial LLP
0161 348 7451 derek.benstead@firstactuarial.co.uk
Terry Pullinger, Deputy General Secretary Postal,
CWU 020 8971 7295 TPullinger@cwu.org
Jeremy Baugh, Senior Policy Advisor, CWU
0208 971 7507 jbaugh@cwu.org
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