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Last Updated: Thursday, 18 May 2006, 08:11 GMT 09:11 UK
Royal Mail gets 1.75bn package
Postman sorting mail
The Royal Mail has been improving its efficiency and service
The Royal Mail has confirmed it is to receive a 1.75bn package from the government to help plug its pension fund deficit and pay for modernisation.

About 900m will be in the form of a loan with commercial rates of interest, which must be repaid by 2013.

The other 850m comes from existing Royal Mail reserves, which it will be allowed to use to shore up a pensions deficit now totalling 5.6bn.

Over the past year the Royal Mail said it saw profits rise 17% to 355m.

The profits will trigger staff bonuses of more than 400 per person.

Huge pension scheme deficit

BBC business editor Robert Peston said the fact that the 900m was being given as a loan "makes it difficult for competitors to call it a subsidy and claim that it breaches European Union rules".

Of course they should get the money. They are there to offer a service to the public
Roy Hills, Eastbourne

Speaking on BBC Breakfast, Royal Mail chairman Allan Leighton, insisted the government wasn't bailing out the company.

"We're just like any company, we're a commercial entity that provides a public service," he said.

"Like any company, we can go to the market - and in this case, that happens to be our shareholder, who happens to be the government - and say, 'look, we think we can give you a cracking return - five times what you put in - so why don't you try and invest in us and we'll deliver that sort of return for you'."

"So, as I say, to keep going on about all this news about rescues and bale-outs and stuff like that is wide of the mark."

The 850m from reserves is essentially money that the Royal Mail owns, but cannot use freely due to existing arrangements with the government.

As part of the investment package, the Royal Mail will be able to put the money into a special account for the exclusive use of the pension fund - to help reassure pensioners that their savings are safe.

In addition to the 5.6bn pension deficit, the Royal Mail badly needs money to modernise its sorting offices now that the UK postal market has been opened up to greater competition.

Last year, the company's bosses said that they would need to invest as much as 2bn to upgrade equipment if they were to survive.

Since then the Royal Mail has been improving efficiency and profits.

Chairman Allan Leighton defends government deal

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