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State aid for UK's Royal Mail pension deficit 'essential'

UK - The chief executive of the UK postal service has said it is imperative that the European Commission approves proposals to shift Royal Mail’s pension deficit onto the government’s books.

Speaking as Royal Mail released its half-yearly results showing an increase in its pension deficit to £4.6bn (€5.3bn), Moya Greene highlighted an improvement in financial performance compared with the same period last year.

However, the company stressed nonetheless that the European Union’s approval of plans for the UK government to assume its historic pension deficit - considered state aid and therefore requiring permission on competition grounds - was “vital” for its return to financial health.

Greene said: “It will be essential for Royal Mail that the European Commission approves the government’s state aid application to relieve the company of its historic pension liability and allow restructuring of the Royal Mail balance sheet.”

In July, the Commission launched an investigation into the UK government’s plans, following royal assent for the Postal Services Bill, to assume its pension liabilities.

The proposal comes amid plans to privatise the company, with legislation now allowing private investors to hold as much as 90% of shares.

Royal Mail’s half-yearly report noted that the final salary scheme’s deficit had only seen a “relatively small” increase in the six months to September, rising by £146m to £4.6bn - despite the volatile market environment. 

It said pension contributions currently amounted to more than £200m per year and that, if the proposal to transfer the deficit to the UK government’s balance sheet were rejected, it would be forced to contribute further deficit payments.

“Were the government not able to provide the deficit relief, the group would need to make a pension deficit payment of £307m by 31 March 2012,” the report said.

It added that, under the current 38-year recovery plan, these deficit payments were set to increase to £410m a year from 2016 and that there was currently uncertainty whether the UK government would provide alternative sources of funding were the state aid proposal to be rejected.

A spokeswoman at the European Commission’s directorate general for competition said she was unable to comment on an ongoing investigation.

In September, the Royal Mail Pension Plan’s assets had increased from £26.7bn 12 months ago to £28bn, with more than 80% of assets held in bonds, a further 13% in equities, 5% in real estate and the remainder in other assets and derivative contracts.

Over the same period, liabilities fell significantly from £35.1bn to £32.7bn.

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