We have recently sent letters to all our members who had built up benefits in the period to 31 March 2025, informing them what the first adjustments to their income for life and lump sum will be.
I know these communications are new to everyone and contain a lot of information, so I wanted to write this blog to help explain what a valuation is, the valuation process and what it means for you, the members of the Collective Plan.
How do the valuations impact you?
The valuations determine how much your income for life and lump sum will be adjusted by. They are based on the benefits built up as at 31 March 2025 and on the assets in the Collective Plan at that date.
What are the valuation results and why?
There are two separate sections of the Collective Plan - a section for your income for life and a section for your lump sum. Each has its own valuation which calculates the expected level of affordable increases or adjustments over the long term based on the assets in that section, the expected returns on those assets, and the expected cost of paying the benefits built up so far in that section. The “assets” are the total amount of contributions that were paid into each section from the launch of the Collective Plan to 31 March 2025, plus or minus the investment performance on those assets and then deducting any benefits paid and costs incurred over the same period.
The valuations resulted in an assessment that, this year there will be a 6.4% increase to your income for life, and 7.6% increase to your lump sum. These will be added from 31 March 2026 to the benefits you had built up in the Collective Plan up to 31 March 2025.
This means that if you had built up an income for life of £100 a year up to 31 March 2025, this would increase to £106.40. Remember, that this is not guaranteed and so could go up again or down in future years.
If you had built up a lump sum of £100 up to 31 March 2025, this would increase to £107.60. This is guaranteed by Royal Mail and cannot go down, but it’s not guaranteed to always go up in future years.
These are both higher than recent price inflation of 3.8%, because the valuation for each section identified that, at the moment, the assets are expected to be enough to give increases on average at this level. However, this will be assessed again each year and the adjustments are likely to change from one year to the next.
What might the results be in future years?
The valuation results depend on the amount of assets in each section, and estimates (“assumptions”) the Trustee makes about how those assets will perform in the future, as well as how much it will cost to pay the benefits in future. The benefit adjustment also depends on the latest rate of price inflation.
Many of these things will change every year, and so the valuation results are likely to change from one year to the next. In some years the benefit adjustments could be lower than price inflation, and it’s possible that in some years the income for life could go down. Lump sums cannot go down because Royal Mail has guaranteed this and would pay more into the lump sum section to top up the assets if needed.
How do we do a valuation?
The process for carrying out valuations is set out in the Collective Plan's Trust Deed & Rules, which is the legal document which governs the Collective Plan.
As noted above, in line with the Trust Deed & Rules, there are two separate valuations - one for the income for life section and another for the lump sum section. They must follow similar approaches but do have some important differences. Broadly speaking for each of your income for life and lump sum, every year, we compare how much money we’ve got for the payment of the income for life and lump sum, known as the “assets”, with how much we think it’s going to cost to pay everyone’s income for life and lump sum from the Collective Plan, known as the “liabilities”.
We have to make lots of assumptions about the future, like how long people are going to live, and how much we think the assets in the Collective Plan will grow over time.
For each valuation, we start off by looking at the cost of paying the income for life and lump sum if they had no increases in the future, which we call the “parity cost”.
The difference between the parity cost and assets in each section determines how we adjust your income for life and lump sum.
If the assets in each section are higher than the respective parity costs, then your income for life and lump sum would go up.
If the assets in each section are lower than the respective parity costs, then your income for life would go down. However, your lump sum would stay the same as it’s guaranteed by Royal Mail and can’t go down.
Remember, the income for life and lump sum sections are separate and have separate assets and liabilities, so they will usually be adjusted by different percentages. It’s possible that your income for life could go down and your lump sum could go up in the same year, or your income for life could go up and your lump sum could stay the same.
What are the assumptions and how do we set them?
As noted above, to work out how much we think it’s going to cost to pay everyone’s income for life and lump sum, we estimate what will happen in the future, known as making assumptions.
These include assumptions about our membership, such as how long people will live on average.
To work out how much money we think we’re going to need to meet the future cost of paying everyone’s income for life and lump sum, we estimate how much we think the money we have for the payment of the income for life and lump sum, our assets, will grow by based on assumptions about future inflation and asset returns. Before those assumptions are agreed, we get advice from our Scheme Actuary (an independent pensions finance specialist who provides advice and calculations when required) and consider the views of other independent professionals, although, as explained below, the way the assumptions are set is slightly different in relation to the income for life and the lump sum sections.
Making assumptions is common in the pensions industry. We know it might sound strange, but nobody knows what will happen in the future so assumptions have to be made. There is no such thing as a “correct” assumption, this is why the Trustee spends time considering the assumptions and takes independent professional advice to help ensure that where they are set by the Trustee, the Trustee is setting them taking all relevant factors into account.
Why are the future asset investment return assumptions important and how did we estimate them?
The estimate of future asset investment returns has the biggest impact on the level of the adjustments which are made to your income for life and lump sum.
There are different legal requirements for the income for life section and lump sum sections that we must consider when doing this:
Income for life section
For the income for life section, the legal requirement is for the asset returns to be determined using a “central estimate of the estimated future returns on assets held by the scheme or expected to be held in the future”. This mechanism works towards ensuring fairness in how the Collective Plan, as a whole, provides income for life to different generations of members by not setting assumptions that are expected to be too optimistic or too pessimistic. In each year, incomes will be adjusted based on the latest estimates of what the assets will fund over time, so that they aren’t adjusted by too much or too little. Nothing from the assets which are used to provide the income for life is held in reserve, everyone’s income for life will be adjusted every year based on the difference between the assets and the parity costs as determined at each valuation, as outlined above.
The Collective Plan's Trust Deed & Rules set out a few rules for the income for life section around how we must go about estimating future asset returns, including:
The rate of future asset returns “is determined by the Trustee having obtained advice from the Scheme Actuary which uses a Central Estimate of the estimated future returns”
The Trustee must take into account the views of the investment adviser appointed by the Trustee
The Trustee must take into account the views of certain other actuaries and experts including an actuary nominated by each of Royal Mail and Royal Mail’s recognised unions if they choose to participate.
Once we have obtained and considered all the required advice, we, the Trustee, make our own judgement on the central estimate. We may make different return assumptions for the different types of investments in the Collective Plan and the prevailing market environment. Our central estimate for the income for life section was within the range of estimates provided by the various professionals described above.
Lump sum section
For the lump sum section, legislation requires that the future asset returns “must be chosen prudently”.
As well as the requirements of legislation, we must also take account of the Collective Plan’s Trust Deed & Rules. They contain the rules which govern the Collective Plan and we must always act in line with these rules.
Even though the rules are different to the income for life section, we follow a similar process where we seek advice to estimate future asset returns.
Where can I find more information?
You can find technical information about the assumptions for the income for life section in The Income for Life Section’s Valuation Summary 2025. You can find more information about the lump sum section’s valuation in The Lump Sum Section’s Summary Funding Statement 2025.
For more information about the Collective Plan you can also look at the member Handbook and the Trust Deed & Rules which are available under the documents and forms section of our website: www.rmcollectiveplan.com/documents-forms