UK - A report published today by the UK's postal regulator Postcomm warns the UK government could come under pressure to take on responsibility for Royal Mail's £3.4bn (€4.3bn) pension deficit.

Details of the report suggests private investment may have to be made to the publicly-owned service to stop a "managed decline" of the firm but private firms are unlikely to be willing to take on the pensions debt, according to the Postal Services Commission (Postcomm).

In its second submission to the government's independent review of the postal market Postcomm warned Royal Mail needs to improve efficiencies in costs - including automation and contracting-out - and it should also exploit opportunities in growth areas by increase prices 'appropriately', and fund the loss-making universal postal service from other more profitable business lines.

That said, Nigel Stapleton, chairman of Postcomm, claimed in a covering letter if mail volumes decline further a "more extensive restructuring of the network will be necessary, for which more funding would be required than is available under Royal Mail's existing shareholder credit lines".

As a result, Postcomm said it "strongly" believes "better access" to funding for Royal Mail through "private capital" could make a "very big difference", citing examples from Belgium, Denmark and Sweden of a "half-way house to full privatisation".

However, Stapleton pointed out "no new equity investor can be expected to assume a share of Royal Mail's significant pensions deficit. A solution would have to be found - if feasible - by government assuming the historic pension liabilities".

He added these initiatives would "strengthen significantly the covenant available to pensioners" as there would also be a "step reduction in Royal Mail's costs and an increase in its competitiveness, if it no longer had to provide for funding the historic pension fund deficit".

In addition, the Postcomm report claimed a change in ownership structure that introduces private capital, and any consequent restructuring, "might enable the government to consider more radical options for addressing Royal Mail's pension deficit problem".

The independent regulator noted Royal Mail as a whole is "technically insolvent" on a balance sheet basis partly because of the deficit, and warned this "has to be addressed before decisions on governance and the regulatory framework can be concluded".

Postcomm stated in Germany, France and the Netherlands the state has retained responsibility for the pension deficit for members no longer working at the postal operator.

So it warned under the current ownership model in the UK, "the government as shareholder is likely to come under pressure to take on responsibility for funding Royal Mail's pension deficit".

That said, the report suggested the introduction of private capital would allow government the opportunity to "restructure the pension liability and to use any proceeds to support the pension deficit".

This latest submission from Postcomm follows Royal Mail's confirmation in its preliminary results suggesting the £3.4bn deficit had "increased significantly" because of market changes, despite the firm contributing more than £800m to the fund during 2007/08. (See earlier IPE story: Royal Mail admits "significant" deficit increases)

Royal Mail announced a final pension reform plan in March, which saw the £23bn defined benefit scheme close to new members from April 1 2008, with a new defined contribution (DC) plan to be set up in 2009.

However, unions have reacted angrily to the changes and following ballots by Unite the Union and the Communication Workers Union (CWU) both managers and staff voted to reject the proposals, threating industrial action if further discussions do not take place. (See earlier IPE articles: Royal Mail faces fresh 'pensions' strike threat and Royal Mail managers reject pension deal)

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