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Last Updated: Wednesday, 31 October 2007, 16:00 GMT
Royal Mail hit by pension costs
Rural post office
Royal Mail's letters business continued to lose custom
Royal Mail profits fell by a third in its 2006-07 financial year, hurt by a sharp rise in pension fund costs.

The group posted earnings of 233m, but said that but for a 75m government loan, this figure would have fallen to 158m - half the 355m made last year.

Pressures from rising pension costs, falling mail volumes and increased competition were blamed.

The figures do not cover the period over the summer when Royal Mail was hit by a series of strikes.

Declining volumes of post, competition in the mail market and the rising use of electronic communication, such as e-mail, continued to eat into Royal Mail's letters business, with revenues down 78m during the first five trading months of 2007-08 on the previous year.

The revenue fall came despite a rise in postage prices in April.

We anticipate that the company's current level of contributions to the pension plan will reduce to 22% in five years' time from the existing level of 30%
Royal Mail

These factors, in addition to the "huge investment" that the group is about to make to update its business practices, mean that Royal Mail will make no profit this year or in its 2008-09 period.

And it said that without the contribution from its unregulated European parcel delivery service, General Logistics Systems, one of the few areas of growth for the Royal Mail last year, the group would become loss-making.

There was no indication of the cost to its business from the strikes organised by the main postal union, the Communication Workers Union, between June and October.

Industry observers estimated that about 260m was knocked off profits during this period as a bitter dispute over the firm's modernisation plans, including unpopular reforms to its pension scheme and radical changes to working practices, led to a series of walkouts.

Pension reform

CWU leaders last week endorsed a deal with the Royal Mail management, committing to support the firm's plans to close its final salary pension scheme to new members in February and to existing members in April.

CWU members are yet to approve the terms of the deal, which would also see the normal retirement age for workers extended from 60 to 65 from April 2010, though existing staff will still be able to claim pensions benefits built up before that date at 60.

The Royal Mail hopes that these changes will take away some of the pressure of supporting its pension fund pot, which currently represents a drain on its finances to the tune of 800m a year for the next 17 years.

This is before the funding of its deficit, which stood at 5bn at the year end.

"We anticipate that the company's current level of contributions to the pension plan - equivalent to 30% of the pensionable pay bill - will reduce to 22% in five years' time, well ahead of the UK's average contribution," said Royal Mail.

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