EU backs €33bn state takeover of Royal Mail legacy pension costs

The European Commission has given the green light to the UK government to take over Royal Mail’s legacy pension costs, paving the way for privatisation. The move would mean allowing Royal Mail to transfer around GBP 28bn (EUR 33.5bn) in liabilities to the state, and relieve the postal operator of a pension deficit of about GBP 8.4bn (EUR 10bn).

Today’s Commission approval was another hurdle overcome on the way to privatising Royal Mail.

The European Union’s executive branch also confirmed today that it will allow the UK government to provide EUR 1.311bn in state aid separately to assist in the restructuring of Royal Mail.

It said the restructuring would support both the continuing provision of universal postal services and also access to its delivery network for other postal companies in the UK.

After an eight-month investigation, the Commission said “appropriate measures” were in place to minimise the distortion of competition in the market resulting from the state support.

Joaquin Almunia, the Commission vice president for competition policy, said today: “In order to achieve a level playing field in postal markets, it is crucial that incumbent operators neither enjoy undue advantages, nor suffer from structural disadvantages in comparison with competitors.

“The relief of excessive pension costs and the restructuring aid approved today will help ensure this balance for Royal Mail and its competitors.”

State aid

Under EU competition law, governments cannot choose to support one company over others in a particular market with a taxpayer-funded hand out, even if the company is state-owned. However, certain exemptions are available, with EU Commission approval, for example to support universal access to postal services.

The Commission said its investigation into UK government plans for Royal Mail suggested that the Group had heavier pension liabilities than its competitors because it was supporting retirees employed before the UK postal market was opened up to competition in 2006.

The approved state aid will only cover the level of pension payments Royal Mail faces above those made by “comparable” companies in the UK, it said, adding that the decision is similar to the arrangements agreed for Deutsche Post in Germany, La Poste in France and bpost in Belgium.

Royal Mail will continue to run a pension scheme for staff employed after the end of 2005, but its plan will start without the historic deficit.

Meanwhile, the approved restructuring aid, amounting to just over GBP 1bn, will go towards reducing Royal Mail’s debt over the period to 2015.

Royal Mail is financing 50% of its restructuring costs through various measures such as selling off property, but the state aid will allow completion of the Group’s modernisation plan and a structural reduction of the mail processing network to match reduced mail volumes.

“Safeguards service”

The announcement from the Commission came today as the UK government unveiled its latest Budget.

UK postal minister Norman Lamb said today: “We warmly welcome the European Commission’s approval of state aid in favour of Royal Mail. It safeguards the universal postal service by allowing the government to relieve, in full, the historic pension deficit of the Royal Mail Pension Plan and restructure the debt on the company’s balance sheet as required at the time of sale.”

Lamb said the government would now put in place secondary legislation – which does not need full debate in Parliament, just notification – to implement the planned takeover of the Royal Mail pension.

The minister added that the approval from the Commission was a “fundamental step” towards privatising Royal Mail.

However, he said: “Today’s decision does not mean that a sale of Royal Mail will happen overnight. We have always been clear that further modernisation by the company and a period of stability under a new regulatory framework, along with state aid approval, are needed before we can move forward with a sale.”

“Moral obligation”

The Communication Workers Union said today that it had been urging the UK government to take over Royal Mail’s historic pension debt for years, that the government had a “moral obligation” to take on the pension deficit as owner of the company and for allowing the company to take a 13-year breather from paying in pension contributions.

It said the approval from the Commission would help stabilise the company’s finances and protect jobs. The union also said the state aid would help safeguard the pension plans for Royal Mail workers and retirees.

But, the union said it remained “strongly” opposed to privatisation.

“Nationalising the debt and privatising the profit doesn’t make sense,” said Billy Hayes, the CWU general secretary. “It’s not in the interests of customers, workers or the taxpayer. Royal Mail is now GBP 8.4bn better off and the case for privatisation weaker still.”

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