UPDATE 1-Royal Mail to close defined benefit pension scheme

* Postal group to close pension scheme for 90,000 workers

* Says would need to increase contributions to 1 bln stg a year

* Union could ballot for industrial action over move (Adds union and analyst reaction, shares)

LONDON, April 13 (Reuters) - Britain’s Royal Mail will close its defined benefit pension scheme at the end of March 2018 after a review found it would need to more than double annual contributions to over 1 billion pounds ($1.3 billion) to keep the plan running.

Royal Mail, the British postal service privatised in 2013, said it was one of only a few major companies that still had employees in a defined benefit scheme, a type of pension that pays out according to final salary and length of service.

Around 90,000 Royal Mail workers are in the plan, whose closure to new members in 2008 resulted in about 40,000 workers joining a less generous defined contribution plan.

The company, which pays around 400 million pounds a year into the defined benefits scheme, said it was currently in surplus, but it expected the surplus to run out in 2018.

“We have concluded that there is no affordable solution to keeping the plan open in its current form,” the company said.

It said it was working with its unions on a “sustainable and affordable solution” for the provision of future pension benefits. Entitlements built up until the scheme closes will be unaffected.

The Communications Workers Union (CWU), however, condemned the closure, saying it would result in employees on average losing up to a third of their future pensions.

“CWU has made clear that any attempt by the company to impose change without agreement will be met with the strongest possible opposition including a ballot for strike action,” said Ray Ellis, the union’s acting deputy general secretary.


British companies are facing increasing costs to fund pensions as people live longer and investment returns on bonds have fallen and are expected to remain low.

German carmaker BMW said last month it would close its final salary pension scheme for its British workers, while Tata Steel UK has recently stopped funding its plan.

Shares in Royal Mail were trading up 1.6 percent at 426 pence by 0732 GMT.

Analysts at Liberum noted a 600 million pounds jump in contributions was unfeasible for a company forecast to make underlying pretax profit of 522 million pounds in the year before the scheme ends.

“However, the imposition of the closure of the scheme without agreement on replacement arrangements, while necessary, may be a trigger for industrial action,” they said. “How the unions react will be crucial.”

Hargreaves Lansdown analyst Nicholas Hyett said that with a highly unionised workforce, which has in the past shown itself willing to flex its muscle in defence of members’ rights, introducing an alternative plan was 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,” Hyett said.

Royal Mail started its own defined benefits pension scheme in 2012 ahead of its privatisation. Benefits built up by its workers until then are backed by the government. ($1 = 0.7956 pounds) (Editing by Kate Holton and David Holmes)