Privatised postal delivery service Royal Mail PLC (LON:RMG) has finally bitten the bullet and decided to close its current pension scheme from March 31 2018, saying there is “no affordable solution” to keeping the plan open in its current form.
The move follows a consultation on the future of the Royal Mail Pension Plan, which ended on 10 March 2017, which received feedback from members and its unions, the Communication Workers Union (CWU) and Unite/CMA.
This included a proposal put forward by the CWU for a hybrid pension plan to replace the existing defined benefit scheme.
READ: Royal Mail faces higher costs if it accepts union’s pension proposals …
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In a statement, Royal Mail said while the plan is currently in surplus, it expects the surplus will run out in 2018.
The company added that its annual pension contributions are currently around £400mln, but if no changes are made, the contributions could more than double to over £1bn in 2018.
The FTSE 100-listed firm said: “We have concluded that there is no affordable solution to keeping the Plan open in its current form.
“Therefore, the Company has come to the decision that the Plan will close to future accrual on 31 March 2018, subject to Trustee approval.”
Royal Mail added: “We continue to work closely with our unions on a sustainable and affordable solution for the provision of future pension benefits. We will write to Plan members once further decisions have been made.”
The move could please the City, if not the unions.
In a note on Royal Mail published on March 23, heavyweight broker JPMorgan Cazenove argued that resolution of the pension issue should see sentiment towards the former nationalised company change.
READ: Royal Mail to get some love once pension issue resolved..
The shares have been out of favour since a poor third quarter mail volume update, with investors worried about the post-Brexit environment and the prospect of strike action.
In early trading, Royal Mail shares were up 1.9%, or 7.9p to 427.1p.
In a note to clients, Cantor Fitzgerald analyst Robin Bryde said: “We view this as a small positive but this is just a first step in a wider restructuring of pension benefits.”
He added; “RMG is trading at a c.19% PE discount to the European postal sector. Pending earnings in May we maintain our HOLD rating, TP 500p.”
Union reaction crucial ...
Meanwhile, Liberum Capital analyst Gerald Khoo reiterated a ‘sell’ rating and 400p price target on Royal Mail.
In a note, he said; “How the unions react to this will be crucial. They may view it as a technical move that does not prejudice future talks – funding the current scheme when the surplus runs out is so unaffordable the company would not be a going concern.
“Closure to future accrual is required, either by agreement or imposition. Alternatively, the unions may view this as a reluctance to compromise, which might result in moves towards industrial action.”
-- Adds share price, broker comment --