UK Royal Mail seeks aid on pension gap

Royal Mail chairman Allan Leighton warned yesterday that the company could face bankruptcy without a solution to the mounting problems at its pension fund, one of the largest in the UK. The fund is already pounds 4.25bn in deficit but that could rise to about pounds 6bn under new calculations to cover the costs of people living longer, the company said yesterday. It could face an even bigger drain on its cash resources under proposals which would give companies less time to get their schemes back into the black.

This year Royal Mail expects to pay about pounds 450m into its pension fund but it calculates that on a worst-case basis it could subsequently need to pump in almost pounds 1bn a year – which it says is well above the amount of cash it could be expected to generate.

"We are dealing with a legacy from the past. If we could wipe that clear we could get on with running a profitable company. We are generating pounds 500m cash a year and may have to put twice that into the pension fund," Mr Leighton said. Asked if the problem could push Royal Mail into bankruptcy he said "Of course it could; if you run out of cash you're dead."

The government has already ruled out providing taxpayers' money to help tackle the deficit problem, arguing that the costs should be borne by customers. Its stance puts the onus on the postal industry regulator Postcomm, which is deliberating how much it will allow Royal Mail to increase its charges. Although a final determination is not expected until later this month the company and regulator have already disagreed sharply on what is required.

In addition to the money required to solve the pension fund problems, Royal Mail insists it needs to invest some pounds 2bn in modernising its sorting operation to meet the competitive challenge it will face when the market opens up to full competition at the beginning of next year. It insists, for example, that it needs the price of a first class stamp to rise to 39p by 2010. Postcomm has suggested 34p would be sufficient.

Yesterday Mr Leighton underlined the distance between the two sides. "We have sent 5,000 forests of paper to the regulator and we are still arguing about what the 5,000 forests say. We sent it in English and they read it in Chinese."

A Postcomm spokesman said the regulator had received additional information from Royal Mail and others since it made its initial assessment and this was being considered.

Yesterday Royal Mail said its operating profit had risen by a fifth in the first half of the year to pounds 159m. However the company warned that the overall volume of addressed mail fell for the first time in 25 years. First and second class post fell 4% while the volume of business mail was down 7%. Chief executive Adam Crozier said the decline was a result of what was happening to the economy. "Historically the letters business has always tracked GDP [gross domestic product]. Clearly confidence out there is going down."

Mr Crozier said Royal Mail has already carried 382m letters for competitors through its access service and by the end of the year he expected that total to have risen to 1bn. Star performer in the first half of the year was the company's General Logistics Systems, its continental European business, with operating profits almost doubling to pounds 43m. Parcelforce Worldwide came close to breaking even. Royal Mail Letters earned pounds 168m – down pounds 5m – while Post Office Ltd lost pounds 57m – little changed on the same period last year. Yesterday Royal Mail announced a series of changes to its top management. It will appoint new managing directors for both Royal Mail Letters, currently run by Mr Crozier, and for Post Office Ltd in place of David Mills, who has decided to step down at the end of the year.

guardian.co.uk/post >