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Royal Mail deficit payments could near £1bn

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UK - Trade unions have called on the government to take action on the Royal Mail Pension Plan's (RMPP) estimated £10bn (€11.6bn) deficit, as it argued future deficit repayments by the company could triple to almost a £1bn following the latest triennial valuation.

Presenting its report entitled Time to deliver: Royal Mail Pension Fund Deficit to MPs in Westminster this week, the Communication Workers Union (CWU) argued that as the sole shareholder the government has a specific responsibility to address the crisis, despite the failure of last year's Postal Services Bill. (See earlier IPE article: BIS rejects 'Royal Mail sale is dead' claim)

The union highlighted that since 2006 Royal Mail has been paying around £280m a year to reduce the then pension deficit of £3.4bn. This repayment plan was set under the Pensions Regulator's recovery plan rules for a period of 17 years, against the previous agreement to clear the 2003 deficit of £2.5bn with payments of around £150m for 40 years.

The CWU said this deficit was mostly attributable to a pension contribution holiday by the company for 13 years between 1990 and 2003, which it claimed was driven by legislation forcing companies to use surplus assets above a 105% funding level to either improve benefits or take a contribution holiday.

However, latest estimates from Royal Mail half-year figures indicated the actuarial deficit at the latest valuation on 31 March 2009 could be "at least £10bn". (See earlier IPE article: UK roundup - Royal Mail, Wandsworth, Oxford and Powys)

The CWU warned that if this higher deficit is correct and needs to be repaid on a similar schedule of 17 years, then "a tripling of the pension fund deficit payments to nearly £1bn might be expected. Clearly, Royal Mail is not in a position to make these repayments and government intervention is essential."

It noted the firm is currently paying regular pension payments into the scheme of £550m a year on top of the deficit repayments - although this is expected to reduce once the full impact of the 2008 scheme reforms are felt. (See earlier IPE article: Royal Mail given 'last chance' to avoid strike threat)

Possible government solutions put forward by the trade union, to address the deficit without introducing new legislation, include:

Agreeing a much extended repayment period that is long enough to allow the industry to function, such as 40 years; Providing a Crown guarantee on the deficit if Royal Mail becomes insolvent; Direct government repayments to the fund while Royal Mail is a going concern, although this raises state aid issues, and The government could enter into a PPF-style contingent asset agreement.

The union acknowledged that the issue of state aid would need to be addressed, as the government had previously warned it would be unlikely to receive approval to take on the pension deficit without transformation' of the postal industry.

But the report noted: "The CWU believes that the decisive issue on this is not ‘modernisation', ‘transformation' or ‘EU Competition Law'. The key is whether the government has the political will to honour its obligation to the industry and the workforce."

Billy Hayes, general secretary of the union, told MPs on Tuesday: "This document can be summed up in one word - 'will'. If government has got the will to resolve this issue, then it can be done in the twinkling of an eye."

Two UK pensions consultancies were unwiling to comment on the CWU proposals as one has worked with Royal Mail in the past and another has signed a confidentiality agreement about the status of the pension fund.

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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