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Government to take on Royal Mail deficit

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UK - The government has agreed with recommendations from an independent panel that it should take responsibility for Royal Mail's historic pension liabilities, as its deficit is currently estimated at £5.9bn making the firm "balance sheet insolvent".

Findings from the final report - Modernise or decline: Policies to maintain the universal postal service in the United Kingdom - said the "size and volatility of the pension deficit" has "severe implications" for the future of the company.

In particular, the authors of the report - Richard Hopper, Dame Deirdre Hutton and Ian Smith - claimed the deficit is a "significant long-term drain" on Royal Mail's cash, and as it has made the firm "balance sheet insolvent" which means the directors have legal constraints when considering decisions, such as investment, and the effect on short-term cash flow at the expense of long-term factors.

The report also pointed out the deficit "makes it difficult for the company to compete effectively", primarily as it acts as a barrier to external investment by a strategic partner, an action which the report suggested is necessary for the company to survive.

Moreover, both Royal Mail and the UK government have confirmed the business has already been approached by the Dutch postal company TNT.

As a result, the independent review recommended: "The government should take responsibility for the historic pension liabilities in a way which is linked to the achievement of modernisation. It could, for example take a staged approach in which the scheme's assets and liabilities related to pensioners and members with deferred benefits were transferred to separate, government-backed arrangements."

The Royal Mail pension currently has around 452,000 members, of which just 161,000 are current employees, or active members, yet this number will only decline in the future as the scheme closed to new participants in April 2008 as part of a series of changes to make the plan more sustainable.

Figures highlighted in the report showed the scheme's deficit at the last triennial valuation was £3.4bn, though warned despite additional contributions from Royal Mail - including £284m in 2007-08 - the deficit had increased 75% since 2006 "with the most recent estimate putting it at £5.9bn", while on an accounting basis it claimed the deficit is "over six times larger than the cash generated by its business operations".

The report noted while there are some "short-term measures" to try and reduce the deficit - such as a one-off injection of taxpayer funding and/or the sale of its General Logistics Systems (GLS) European parcel service - these would "not address the underlying causes of the deficit, nor would they alleviate the adverse impact of the deficit on Royal Mail and the wider postal services market".

Instead, it claimed the "best long-term solution must be for the risk around the historic liabilities" to be managed by central government, as this would leave Royal Mail with a "much smaller scheme and liabilities that would no longer be of a size that called into question the financial viability of the business".

The details of how these liabilities should be transferred will be left to the government to decide, although the report stressed the move should only be done in "parallel with our recommendations for the modernisation of Royal Mail".

However possible options could include:

Legislation to take over the relevant assets and liabilities of the scheme with the aim of paying benefits from general taxation, The purchase of annuities, and Operation of a separate managed fund.

That said, the report noted the government "would need to obtain state aid approval from the European Commission" as part of the process.

Lord Mandelson, secretary of state for Business, Enterprise and Regulatory Reform (BERR), said: "My department will want to study the report in detail, as I will. I intend to respond with a full statement of our policy early next year. The government agrees with Hooper's analysis and the recommendations. We intend to take forward the recommendations as a coherent package of measures."

Dave Ward, deputy general secretary of the Communication Workers Union (CWU), said: "We welcome the fact that our campaign to get the government to secure Royal Mail workers' pensions has been successful. We will be studying the detail of the report closely over the coming weeks and will respond fully in the New Year."

However ,the Conservative opposition political party warned the findings of the report should not distract attention from an alleged government plan to "raid Royal Mail's pension fund in order to plug a black hole in the public finances".

"The government is trying to strike a desperate deal to see them through the next election," claimed Alan Duncan, Conservative shadow business secretary.

"They are trying to look like the saviour of Royal Mail, but are doing so in flagrant breach of their election manifesto and by raiding the pension fund to bail out government borrowing."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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