Royal Mail faces Pounds 800m annual bill for hole in pension fund

Royal Mail faces the prospect of having to pay Pounds 800m a year to fill the hole in its pension fund that was revealed last year, the group announced yesterday.

The state-owned company’s financial recovery continued in the first half of the year following job cuts and the abolition of the second postal delivery. Its operating profit in the six months to the end of September was Pounds 217m, putting it on course to meet its full-year target of Pounds 400m.

If that target were hit, each employee would receive an Pounds 800 bonus, at a total cost of Pounds 160m. But Royal Mail’s future profits could be undermined by the need to service a Pounds 2.5bn fund deficit in its pension fund. Under FRS17, the new accounting standard, the deficit is even bigger, at Pounds 4.6bn.

The letters business, which contributed three-quarters of the group’s turnover, benefited from a 2.4 per cent rise in mail volumes in the first half of the financial year.

The Post Office, which operates the retail network, and Parcelforce continued to lose money – Pounds 68m in total. Their financial health was improving, Royal Mail said.

Revenues at the Post Office rose slightly, following the introduction of a range of new financial products, from motor insurance to a savings account.

David Mills, the chief executive of the Post Office, again rejected reports that half the network of 555 directly-owned Crown post offices would be closed. He said the actual number would be fewer than five this year, although many more could be franchised to private retailers.

Since the beginning of Royal Mail’s three-year plan in 2002, it has cut its workforce by 35,000 to 195,000.

Allan Leighton, the group’s chairman, said: “I always knew the third year of our turnaround plan would be the hardest, and it has been.”

Postal deliveries were disrupted earlier this year by a move to a five-day week, the lengthening of postal rounds and the abolition of the second daily delivery.

There was a contributions holiday at Royal Mail’s pension fund, the fifth biggest in the UK, from 1990 until 2003, when an actuarial report uncovered a Pounds 2.5bn deficit.

The group said yesterday that current contributions of Pounds 310m a year would soon increase to Pounds 450m a year.

The trustees of the fund argue that even more than this should be contributed to clear the deficit within 12 years rather than a planned 40 years, and to reduce the reliance on equities.

The fund’s 80 per cent holdings in shares is too risky, it has said, and more cash should be invested in debt. These changes would push up the cost of covering the deficit, said Royal Mail, to about Pounds 800m a year for the next 12 years.

At the start of the three-year recovery plan, the group was losing more than Pounds 1m a day. The company ditched its ill-fated rebranding as Consignia, cut loss-making international operations and set about slashing costs at its core UK businesses. Mr Leighton said that a profit margin of 8 per cent on Royal Mail’s letters business was an improvement but would not be enough when private sector competition increased.