UK - Royal Mail has admitted the current £3.4bn (€4.3bn) deficit in its defined benefit (DB) pension scheme has "increased significantly" following changes in the market.

Figures from the firm's preliminary statement for the year ending March 30 2008 revealed the deficit for the £23bn (€29bn) DB scheme had fallen on an accounting basis from £5bn to £2.9bn.

However, on an actuarial basis the deficit was last valued at £3.4bn in 2006, and Adam Crozier, chief executive of the Royal Mail Group, admitted over the last year the firm had already contributed more than £800m towards reducing the deficit in 2007-08.

In addition, he admitted the firm now estimates the "actuarial deficit has since increased significantly due to market changes", although the company declined to comment on what the estimate might be ahead of the triennial actuarial valuation later this year.

Royal Mail said the increase in liabilities "further underlines how pensions remain a significant and volatile risk to the group", and admitted the "continuing heavy cash calls on the company to service the plan and to pay the deficit" demonstrates the need for the company to modernise its business".

As a result, the preliminary statement highlighted Royal Mail is seeking an "achievable funding programme" - based on the actuarial deficit of £3.4bn - which includes the reform of the pension scheme, in particular the closure of the scheme to new entrants from April 1 2008, and the establishment of a £1bn escrow account for the sole benefit of the scheme - announced in February as part of a five-year government-agreed investment package to provide "security to pension fund trustees".

However, unions have reacted angrily to the Royal Mail's pension reforms, as it described the lengthy consultation as a "sham", leading members of both Unite the Union and the Communication Workers Union (CWU) to reject the proposed reforms. (See earlier IPE story: Royal Mail faces fresh 'pensions' strike threat)

Its admission - acknowledging the revaluation of the pension liabilities in the autumn will increase the value of the deficit - follows a 30.4% fall in group operating profits for Royal Mail to just £162m, primarily driven by a 3.2% decline in the letters business, as the firm handled three million fewer letters than in 2007.

Crozier said: "The £162million operating profit is a robust financial performance - ahead of expectations - in a year when we faced many difficult challenges. But we secured a landmark agreement on modernisation and pensions."

However, Allan Leighton, chairman of Royal Mail Group, admitted although the company had not "shirked difficult challenges and decisions" to put the company in a stronger position to tackle tough market conditions, the firm " continues to face significant risks, which unless tackled will impact on its performance".

He added there is a "need to continue to take and execute the often difficult decisions that will turn Royal Mail into a world class postal services company competing successfully in the wider communications market".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com