UK Government plans pounds 2bn Royal Mail bail-out

The Government is considering a cash injection of more than pounds 2bn into Royal Mail to shore up its ailing pension fund, which has a pounds 4bn deficit.

In a possible double victory for Allan Leighton, the chairman of Royal Mail, ministers are also siding with him in a vitally important dispute between the postal service and its regulator, Postcomm, over the future price of stamps.

“I know it sounds extraordinary given how tight public money is, but we may inject hard cash into the pension fund,” said an official. Ministers have been told by their own advisers that Royal Mail will only have a sound commercial future if the pension deficit is cut to between pounds 1bn and pounds 1.5bn.

Meanwhile, the Department of Trade and Industry and the Treasury are becoming increasingly concerned at Postcomm’s proposal that tariff increases should be kept to the bare minimum.

“The fact is that Postcomm has done its sums wrong,” said a member of the Government. “However, we don’t want to have too visible a fight with Postcomm for fear of damaging the principle of independent regulation.”

Although Royal Mail made an operating profit of pounds 537m during 2004, Leighton last week told a House of Commons select committee that the Government-owned postal services group is technically insolvent because of its pounds 4bn pensions shortfall.

Leighton also said that in order to meet the challenge of full competition in the letters market, which will be liberalised in January next year, Royal Mail needs to invest around pounds 2bn in modernising its mail sorting and delivery infrastructure.

There are two pension options under consideration. One would be simply to ring-fence a portion of the fund and transfer it to another part of the public sector’s balance sheet. But that might be seen as dodgy creative accounting, which is why a cash injection has become a real possibility.

Meanwhile, Leighton is at odds with Nigel Stapleton, the chairman of Postcomm. Leighton has requested permission to increase the price of first class letters from 30p to 48p by 2010. Postcomm has made a preliminary recommendation that the increase should be limited to 4p.

In a bid to resolve the dispute without being seen to interfere in the regulatory process, Alan Johnson, the secretary of state for trade and industry, appointed Sir George Bain, an academic, earlier this summer to carry out a review of the impact that competition will have on Royal Mail.

It is believed that Bain has more or less finished his review, although his conclusions will not be announced for a few weeks.

Johnson, who is himself a former postman, is expected to allow Royal Mail to transfer 20 per cent of its shares into a trust for the benefit of its 160,000 employees.