Union says staff face losing up to a third of their future pensions, but company insists defined-benefit plan is unaffordable

Unions have threatened to disrupt Royal Mail deliveries with possible strike action, after the company said it would close its defined-benefit pension plan next year.

The plan, which has 90,000 members – two-thirds of Royal Mail’s workforce – and assets of £7.4bn, is in surplus, but Royal Mail said this would run out next year and the scheme would become unaffordable. The company, which was privatised in October 2013, currently pays £400m a year into the fund but it says this could rise to more than £1bn in 2018.

The scheme, which was closed to new members in 2008, guarantees a pension based on a postal worker’s average salary, and Royal Mail is thought to have plans to replace it with a less generous defined-contribution scheme.

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Royal Mail said it had consulted members and unions and defended its plans. “We have concluded that there is no affordable solution to keeping the plan open in its current form,” it said. “Therefore, the company has come to the decision that the plan will close to future accrual on 31 March 2018, subject to trustee approval.”

The Communication Workers Union slammed the decision, and vowed “the strongest possible opposition including a ballot for industrial action”. Unite, the UK’s largest union, also threatened potential strike action if a better pension deal with the company is not reached.

Ray Ellis of CWU said the unions had put together an alternative proposal a few weeks ago, called the “wage in retirement” scheme, which would preserve the defined-benefit plan but share the risk between the employer and employees, and would not increase Royal Mail’s costs.

He said: “The company has been at pains to assure us that they are committed to seeking an agreed solution, but at the moment it doesn’t seem to be prepared to accept any element of risk falling on the company.”

He added: “We will not stand by and watch the company abandon the pension promises it made at the time of privatisation which threatens our members with massive cuts to their future pension benefits and insecurity and poverty in retirement.”

CWU said employees face losing up to a third of their future pensions. For a 50-year-old member earning £25,000 a year and retiring at 65, this would equate to a loss of £4,392 a year (£109,800 over 25 years).

A Royal Mail spokesperson said under its proposal, only a “very small percentage” would see this level of reduction in their pension. For those leaving Royal Mail before that age and members close to retirement the changes are expected to have a smaller effect.

“The impact of the proposed changes will depend on age, length of service and which part of the scheme a member is in ... We are not proposing to change the benefits members build up before April 2018.”

The spokesperson warned that any industrial action, or threat of it, undermined the trust between Royal Mail and its customers and it could lose business as a result. The 500-year-old organisation is battling a decline in its letter business and faces a fiercely competitive parcel market.

The company added that is was still in talks with the unions over a “sustainable and affordable solution for the provision of future pension benefits”.

Brian Scott of Unite said: “The Royal Mail Pension Plan is not closing in its entirety as the replacement pension scheme will embrace part of that. It is very likely that it will still be a different form of the current defined-benefit scheme. We will study the implications of today’s announcement very carefully and consider all the options going forward. If we don’t achieve a satisfactory outcome, we can’t rule out an industrial action ballot on this issue.”

Laith Khalaf, a senior analyst at Hargreaves Lansdown, warned that this could turn into a costly battle for Royal Mail. “With a highly unionised workforce, which has in the past shown itself willing to flex its muscle in defence members’ rights, introducing an alternative plan is likely to prove costly. Whether those costs will be in the form of chunky employer contributions to a new defined contribution scheme or lost revenue from industrial action remains to be seen.”

Other companies including Marks & Spencer and Tata Steel UK also have plans to end defined-benefit pension plans.