Royal Mail’s new pension scheme falls 5% in first six months

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Royal Mail’s new pension scheme, the first of its kind in the UK, has fallen by almost 5 per cent in its first six months, raising questions about the level of future payments to its more than 100,000 members, including postal workers.

The Royal Mail Group Pension Scheme, a group defined contribution plan launched in October last year after six years of planning, was down 4.6 per cent by the end of March, compared with a 3.6 per cent fall in its benchmark index, according to its results seen by the Financial Times.

The findings come as the government wants to encourage wider adoption of such schemes, which provide a compromise between traditional defined-benefit pension plans that offer predictable payouts, and defined-contribution plans, where income depends on contributions and investment performance.

The Postal Group CDC was the first to be established after the schemes were allowed in 2021 and its performance will be closely monitored by other employers. The government hopes that bundled products will boost retirees’ income and channel savings into a wider range of assets.

But people familiar with Royal Mail’s CDC, which has 110,000 members, stressed it was too early to draw conclusions about payments in the long term. They added that the fund was just getting started, and inflows and timing had a significant impact on returns.

A CDC spokesperson said it was “designed to hold long-term growth investments that allow for short-term volatility” and that it had generated “positive” returns since the end of March.

The results showed that 77 per cent of the fund, which had £192 million in assets at the start of April, was invested in global stocks that follow a benchmark designed for investors who want their portfolios to align with the goal of limiting global warming to 1.5 degrees Celsius.

The fund had 9 percent in small-cap stocks and another 9 percent in emerging market stocks. BlackRock, the chief outside investment officer for the scheme, declined to comment.

CDC members participate in a pooled scheme and are offered a target return with which they can plan their retirement. But returns are not fixed and companies are not obligated to make up any shortfall in financing.

John Ralph, an independent pensions consultant, said the “real problem” was a lack of clarity on how performance – up or down – translates into a change in target pensions. He said the Royal Mail CDC should be “fully transparent” about its calculations and its impact on different age groups.

Royal Mail plans to update scheme members on their target pensions and how they are calculated in the spring.

New regulations allowing many private sector employers to join group defined contribution plans could boost retirement income by 25 to 60 per cent, Pensions Minister Torsten Bell told the Financial Times last October.

While it is “too early to say” whether CDC products will become the main choice across the UK’s £600bn workplace defined contribution market, “we should be confident that this will play an important role in our pension system going forward,” Bell said.

Royal Mail’s parent company, International Distribution Services, was taken over last year by EP Group, headed by Czech billionaire Daniil Kretinski, who has pledged to improve the postal service’s financial strength. The businessman is known for his investments in UK supermarket chain J Sainsbury’s and football club West Ham United.