UK pension pressure on Royal Mail to cut costs
Royal Mail is under pressure to embark on a fresh round of cost-cutting to shore up its finances, amid signs that senior ministers are reluctant to use taxpayers’ money to plug a massive pensions deficit of more than GBP4bn.
The issue of the state-owned postal operator’s pension liabilities, the full scale of which have been exposed by accounting changes, has complicated an independent review of its future ahead of full market liberalisation in January. It means a decision on a controversial share ownership plan for employees, which has been fiercely opposed by union leaders and many Labour MPs, could be delayed.
Sir George Bain, whose review was commissioned by Alan Johnson, trade and industry secretary, is understood to want clarity on the strategy for tackling the pensions deficit and on future stamp prices before he submits his final conclusions. His report is expected to comment on a proposal by Allan Leighton, Royal Mail chairman, to offer staff shares.
Mr Leighton has warned that government and regulatory action will be needed to save the Royal Mail from going “pear-shaped”. He has said either the regulator, which sets postal prices, will have to allow rises to tackle the deficit, or the government will have to foot the bill.
The size of the deficit has grown in six months from GBP2.5bn to nearly GBP4.5bn after accounting rule changes. Mr Leighton told MPs last week it was “likely to worsen significantly”. The Department of Trade and Industry is considering whether public money may need to be injected into the pension fund, but has submitted no proposals to the Treasury.
It is understood that Downing Street and the Treasury would be reluctant to sanction using taxpayers’ money in this way. Ministers, while not ruling out government involvement, have privately made clear it would resist picking up the bill.
The widespread criticism that followed last week’s deal to preserve generous public-sector pensions for civil servants retiring at 60 has added to unease in Whitehall over a bail-out.
One senior government official said: “The government can’t write blank cheques. And you cannot look at these pension issues in isolation from the company’s wider financial position.”
Ministers believe the business should focus on finding efficiency gains to improve its financial position. The postal operator is lagging behind competitors in continental Europe both on letters handled per full-time employee and on the proportion of mail handled by machines.
This view chimes with that of Postcomm, the postal regulator, which believes Royal Mail could make annual efficiency savings of 3 per cent from 2006 to 2010. Mr Leighton has proposed 1.5 per cent annual savings.
The government is also shifting its focus to postal prices as a solution to Royal Mail’s financial woes. Postcomm has indicated that it could allow the Royal Mail to charge customers more to make good any increase in the deficit.
