Royal Mail shuts UK pension plan as deficit hits GBP 6.6bn

Royal Mail is heading for a run-in with unions today after unveiling controversial plans to shut its final salary pension scheme to new members.

The group, which operates the sixth-largest pension scheme in the UK with some 450,000 members, said the cost of servicing its retirement obligations had ballooned by GBP280 million to GBP730 million during its 2006-07 financial year. This had sent first-half interim profits tumbling to just GBP22 million, compared with GBP159 million the previous year, it said.

At the last count the deficit in Royal Mail's fund was GBP6.6 billion, ranking it high on the list of the country's most struggling schemes.

Royal Mail becomes the latest in a growing line of British businesses to exclude new staff from schemes that ensure a retirement payout based on a percentage of a member's final salary – opting instead for riskier "money purchase" schemes.

Royal Mail said the high cost of funding the scheme as it stood was unsustainable, particularly when set against its efforts to make its business operate competitively.

But the move infuriated the Communication Workers Union which, alongside pensions union Amicus, represents the interests of Royal Mail staff.

Dave Ward, deputy general secretary at the CWU, said neither the Government nor Royal Mail had consulted his union on the proposed changes. He said he would be spending the six-month consultation period marshalling opposition to the plan.

Allan Leighton, the chairman, has been in tense negotiations with the Government, in particular trade and industry secretary Alistair Darling, about a bailout financing deal aimed at guaranteeing the future of the postal operator, which has seen its markets opened up to outside competition.

Finding a solution to Royal Mail's pension problems has been at the centre of the talks. And at the same time today, Royal Mail and the Government said they had agreed the terms of the high-stakes funding deal.

Mr Leighton is said to have been frustrated by negotiations with the Government, in particular over his ambitions for share ownership among staff. He was today reported to have been approached by the private equity groups circling J Sainsbury, the supermarket group, to take charge if they are successful in their prospective takeover bid.

Adam Crozier, Royal Mail's chief executive, defended the plan. "It is important we safeguard the future of the pension fund for our people, who regard having a final salary pension scheme as a key benefit of working for Royal Mail," he said.

"But the GBP730 million annual cost of servicing the pension fund clearly damages our competitiveness as we need to increase the price of our products and services to pay for it."

Under the terms of the five-year funding agreement, the Government will lend Royal Mail GBP1.2 billion to help it modernise its business. A further GBP1 billion will be lodged in an escrow account, funded by company reserves and an extra GBP150 million from Royal Mail.

As well as agreeing to deliver a GBP1.7 billion restructuring of the Post Office, Royal Mail has agreed in principle to fund the pensions deficit over 17 years.

Furthermore, in a move that marks a partial victory for Mr Leighton, Royal Mail will operate a "phantom" share scheme for Royal Mail's employees, worth up to GBP5,300 for each one over five years and equivalent to a GBP1 billion dividend distribution. It is thought Mr Leighton had been campaigning for a more substantive share issue, where Royal Mail shares could have been tradeable.