Regulator tells UK Royal Mail to cut costs
Royal Mail should cut more costs rather than rely on a government bail-out to address its Pounds 4bn pensions deficit, the industry regulator has signalled.
The tough stance adopted by Postcomm, less than a month before finalising crucial four-year price controls, suggests the state-owned postal operator is heading for a showdown with the regulator.
In an interview with the Financial Times, Nigel Stapleton, the chairman of Postcomm, said the sheer scale of Royal Mail’s pensions deficit, which has made the company technically insolvent, presented a “unique problem” for the regulator.
“It’s such a big problem – they have Pounds 21bn of liabilities and Pounds 2.2bn of net tangible assets . . . It’s a pension fund with a mail business attached rather than the other way round,” Mr Stapleton said.
He suggested Royal Mail should agree to greater efficiency savings to help fund the deficit, as a quid pro quo for the regulator’s agreement to modify its initial price control proposals to allow an element of future increases in the size of the deficit to be passed on to customers through higher prices.
“We acknowledge that our final proposals need to address further the issue of pensions volatility,” said Mr Stapleton. “But in changing our thinking in that direction, we’re also urging Royal Mail to look at how much it can be contributing to the solution itself through pushing still harder for efficiency gains.”
Royal Mail has insisted the 3 per cent annual efficiency gains assumed by Postcomm in its initial proposal for price controls to 2010 is not achievable. The company’s business plan assumes annual savings of only 1.5 per cent. Being forced to cut costs to the level required by Postcomm could cripple the business, sending Royal Mail into a spiral of decline, the company has claimed.
But Mr Stapleton is unbowed by this vociferous lobbying, saying there was “an awful lot of scaremongering going on at the moment”.
He warned that “the one thing we need to be very clear on is that we’re not going to make our decision based on game-playing”.
He insisted “unequivocally” that the consultation on Postcomm’s proposed controls had not unearthed anything to suggest the regulator had “got our sums wrong and that the initial proposals were unsound.
“Having unpicked the rhetoric, and considered all the new information, we find no fatal flaws in our initial proposals.”
The government suggested yesterday it would not intervene in the fight between Postcomm and Royal Mail until the price controls had been finalised.
The company is lobbying for ministers to agree to fund at least some of pensions black hole.
But Barry Gardiner, competitiveness minister, told the FT that if the regulator got the price settlement right, Royal Mail should be “able to trade its way to meeting all its obligations”.
“We need to see exactly what Postcomm come up with. At that stage, it’s for the government and Royal Mail to look at what needs to be done,” he added.
