Tag: UK

UK postal provider Royal Mail has reported an 86% drop in first half profits following a massive increase in its pension deficit. The troubled group has said it is now hoping to close its final salary pension scheme to new employees in a bid to stem any further growth of the current GBP6.6 billion deficit.
Profits during the period between April and September 2006 dropped to GBP22 million, compared to GBP159 million during the same period a year earlier.

The pension deficit increased by GBP1 billion, as servicing costs grew from GBP280 million to GBP730 million during the last year. The postal operator currently employs around 190,000 workers, 167,000 of which pay into the pension scheme.

Chief executive Adam Crozier said the costs incurred by servicing the pension fund has led to a drop in competitiveness of the company, which means it will now be forced to raise the cost of its products and services to fund the scheme.

To ensure the problem does not worsen, Royal Mail has chosen to start a six month consultation period to decide whether to replace the current scheme for new staff.

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.

Royal Mail is today unveiling an ambitious investment plan to strengthen the group’s finances, improve competitiveness and reward its workforce.

The five-year programme, agreed by the Government, will re-position Royal Mail to compete more effectively with commercial rivals and address major funding challenges for the company.

Highlights of the programme include:

• Government agreement for a GBP1.2bn debt facility, on commercial terms, to modernise Royal Mail operations
• Restructuring of the Post Office network, already approved by Government
• GBP1bn investment in an escrow account to give security to the pension fund trustees, including GBP850m from company reserves and a further payment of GBP150m by Royal Mail
• Royal Mail agreement in principle with the pension fund trustees to fund the pension deficit, currently standing at GBP6.6bn, over 17 years
• Consultation on how best to safeguard an affordable final salary pension scheme for existing employees
• Consultation on replacing the final salary scheme for newly recruited employees with a defined contributions scheme
• Inaugural “phantom” share scheme to reward Royal Mail’s 190,000 employees, worth up to GBP5,300 per employee over five years – equivalent to a GBP1bn dividend distribution.