Royal Mail faces £330M pension shortfall

The Royal Mail faces a pensions black hole of pounds 330m following the collapse in the stock market. To make good the substantial deficit, it has asked the regulator, Postcomm, for the flexibility to make further increases in the price of a stamp on top of a planned 1p rise from next April. The loss-making postal group is warning that it also faces an extra pounds 120m bill to cover National Insurance Contributions following NIC increases announced in the budget. Royal Mail may require a further pounds 280m to cover potential increases in interest payments on Government loans. Royal Mail last valued its pounds 15bn pension fund three years ago, before the bear market in equities set in with a vengeance. It is planning a new actuarial valuation in the spring, but has already estimated this will show a deficit of pounds 330m. The group believes the pensions shortfall shows that Postcomm needs to be more flexible in its approach to price controls. Under the regulator’s plans, Royal Mail’s average prices will be frozen after April’s 1p rise in the cost of a first and second class stamp. “What we can say is that we will keep pensions adequately funded and meet all our obligations. “We are not asking for another penny on postage but we are saying that we need to agree with Postcomm that the control can be revisited. The current proposals are a straitjacket,” a Royal Mail executive said. Royal Mail has been on a pension holiday for some years. Its fund has 443,000 members. Buried deep in a submission to the regulator, Royal Mail says: “The outlook for Royal Mail’s profitability is poor”, and the 1p stamp rise “does not provide funding to meet additional National Insurance and other risks such as additional pension contributions almost certain to arise during the price control period”. Allan Leighton, the Royal Mail chairman, has warned that proposed price control rules, due to take effect in April, will cost the company pounds 460m. This would wipe out the benefit of a 1p increase in the price of 1st and 2nd class postage stamps. He believes his ability to regenerate the business is being hampered by what he perceives as over-zealous regulation. However, Postcomm insists it is simply endeavouring to create a level playing field for competitors. The plunging stock market has left many companies facing pension funding gaps. “What you should remember is that it is a very long-term thing and this is a very large fund,” the Royal Mail executive said. The battle over the price control will be a baptism of fire for Adam Crozier, the former head of the Football Association who has recently been appointed as the chief executive of Royal Mail. Postcomm is expected to come out with its final proposals on the price increase and associated controls on Royal Mail late in January. Leighton, who has embarked on a pounds 3bn renewal plan for the ailing company, has also been at loggerheads with the postal regulator over how much Royal Mail should be able to charge rivals to use parts of its delivery network. The Royal Mail, which is losing about pounds 1m a day, will face competition in its core letter market from the beginning of the year. The company fears it will be left carrying the cost of the universal service (delivering to every address in the country for the same price) while rivals cherry-pick more lucrative customers.

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