Royal Mail (ROYMF) shares topped the FTSE 100 in London Thursday after the company said it will close a legacy pension scheme that has been threatening its bottom line.
The postal service operator currently contributes around £400 million ($502.2 million) per year to its defined benefit pension scheme, which is currently in surplus. But ongoing pressures on investment income and rising costs have meant that, without action, contributions into the scheme will more than double to £1 billion from 2018.
"We have concluded that there is no affordable solution to keeping the Plan open in its current form," Royal Mail said in a statement.
Royal Mail stock rose by more than 2% after the opening bell, to change hands at 428.7 pence, far outpacing the 0.50% fall for the U.K.'s FTSE 100 index of blue chip stocks. The shares pared gains to around 1% by 08:50 BST.
Earnings before interest, taxes, depreciation and amortisation at Royal Mail were £327 million in 2016, according to Factset (FDS - Get Report) , while the company itself reported operating profit of just £218 million for the year ending June 03 2016. This means that closing the pension scheme is a necessity if Royal Mail is to avoid potentially catastrophic losses from 2018 onward.
The company said it is working on an alternative plan for employees, that will be more affordable, while its decision to close the defined benefit plan will be subject to trustee approval.
Defined benefit schemes calculate payments to retirees based on how long the plan holder worked for the company in question as well as their final salary upon retirement.
Payouts from defined benefit schemes are often much higher than what most workers would receive from a defined contribution plan and, with interest rates having been at record lows for nearly a decade, such plans have been becoming more difficult for companies to fund.