Page last updated at 11:27 GMT, Thursday, 2 July 2009 12:27 UK

Pensions 'threat' to Royal Mail

Royal Mail lorries
The pension scheme's increasing deficit is still unresolved

Failure to resolve the huge pension deficit at the Royal Mail threatens the future of the UK's universal postal service, it has been claimed.

Richard Hooper, the businessman whose review suggested partial privatisation of the service, made the warning in an interview with BBC radio.

"If you have a £9bn or £10bn pension deficit, you are in financial trouble," he said.

His comments came after the government halted its part-privatisation plan.

Lord Mandelson, the business secretary, said yesterday that no bidder had come forward who was prepared to offer enough money to buy a minority stake in the Royal Mail.

But the plan had also involved the government taking on, in some form, full responsibility for running the Royal Mail's pension scheme, which covers 450,000 past and present staff.

That plan would have relieved the cash-strapped company of having to pay in huge sums in the future to reduce its deficit.

Speaking on the Radio 4 Today programme, Mr Hooper emphasised that in his view the deficit in the scheme threatened to overwhelm the company.

"The universal postal service, the delivery of letters six day a week to 28 million households across the UK, is threatened by the finances of the Royal Mail," he said.


But a spokesman for the Prime Minister made it clear that unless the privatisation plan was revived, there would be no alternative government move to sort out the pension scheme deficit on its own.

It's an extremely bleak situation
CWU spokesman

"The government will not cherry pick the bill and... we have to take account of taxpayers. We have to look at the problems of Royal Mail as a whole. That includes restructuring and modernisation," the spokesman said.

"The pensions deficit remains a matter for the company," he added.

The trustees of the scheme said they were very disappointed and were seeking urgent talks.

"[Our] key concern is to strengthen the financial position of the pension scheme and [we] will be focused on how this can now best be achieved in its discussions with the company and government," the trustees said in a statement.

The quandary now facing the Royal Mail was highlighted by comments from the Communications Workers Union (CWU).

An official with close knowledge of the Royal Mail's pension scheme said "it's an impossible situation - I don't see how they can sort it out."

"It's an extremely bleak situation," he added.

Ballooning deficit

Three years ago a formal valuation of the scheme calculated that the pension fund had a deficit of £3.4bn.

When the latest valuation is published in September, it is widely expected to reveal that the deficit, as of March this year, had ballooned to between £9bn and £10bn.

The Royal Mail agreed in 2006 to make extra payments of £270m a year for the following 17 years to fill in the financial hole.

But these top-up payments are now certain to be set at an even higher level as a result of the forthcoming valuation.

That could force the company to pay in more than £1bn a year in total, once the routine contributions are taken into account - money that the management and the government would rather was spent on new equipment to modernise the Royal Mail's sorting offices.

Last month the group's chairman Donald Brydon threatened to close the final salary pension scheme to its current members if the government's part-privatisation plan did not go through.

"Whatever the government decides to do with its shareholding, the well-understood problems of regulation and pension fund deficit will not go away," he said today.

"The management, for its part, is continuing to forge ahead with its modernisation plan which is unaffected by this announcement," he said today.

Reduced contributions

That still leaves open the issue of how the deficit will be dealt with after its size is finalised by the scheme's actuary in September.

It is not obvious that closing the scheme to current members would save much money in the short term.

A lot of the deficit relates to ensuring there is enough money to pay for pension entitlements built up in the past.

In fact the Royal Mail pension scheme has already been made much cheaper to run, but only in the long run.

Last year it was closed to new joiners, who are now offered a "money purchase" fund, rather than a final salary scheme.

And all existing members are now paying into a so-called career average scheme, which is much less generous that the old final-salary version.

Along with raising the standard retirement age to 65, the Royal Mail hopes all these changes will, in due course, cut its total contribution rate from about 30% of staff salaries now to about 11%.

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