UK - Trustees of the Royal Mail Pension Scheme have voiced their support for the pension recommendations outlined in the earlier Hooper Report, and warned the scheme deficit could be "significantly higher" than the current estimate of £5.9bn (€6.7bn) if reforms are not implemented.

In a letter to Lord Mandelson, secretary of state for business and enterprise (BERR), at the end of last week Jane Newell, chairman of the scheme trustees, pointed out the trustees' prime concerns are the  "security of members' benefits and the strength of the covenant of the plan sponsor".

She argued Royal Mail has a weak covenant as an employer, and said the significant pension fund deficit - estimated at £5.9bn in Hooper's report in December 2008 but reported as closer to £8bn by the end of January - is a "long-term drain" on the firm's cash flow even though it is "already balance sheet insolvent".

In December, a report outlining the findings of a review chaired by Richard Hooper recommended three packages of measures, including the government taking responsibility for the pension fund deficit and finding additional investment through a 'strategic partner'. (See earlier IPE article: Government to take on Royal Mail deficit)

Newell warned Mandelson in her letter "if the recommendations of the Hooper Report were not implemented, the consequences could be very severe indeed for the Royal Mail Pension Plan and for Royal Mail itself".

She pointed out because of the weak employer covenant the trustees would "consider it necessary to seek to significantly strengthen the funding basis for the 2009 actuarial valuation", which would increase the value of the liabilities and result in the deficit being "significantly larger than the £5.9bn quoted in the Hooper Review".

However, both Hooper and Mandelson have warned the pension deficit may already be nearing £8bn, and hinted it is unlikely Royal Mail could receive investment from a 'strategic partner' unless the deficit is tackled. (See earlier IPE article: Royal Mail's £8bn deficit deterring investors)

But Newell added: "Whatever its precise amount, the deficit resulting from a strengthened funding basis for the 2009 valuation is highly unlikely to be affordable by Royal Mail, with potentially devastating consequences."

She suggested benefits would be "very significantly reduced" as, for example, if the pension scheme was to wind-up now it "would not even be able to provide as much as 50% of members' benefits".

In addition, the trustees claimed although the Pension Protection Fund (PPF) is meant to be a 'safety net' for members, Newell admitted: "I would not like to speculate on its ability in practice to absorb the Plan without putting an intolerable levy strain on remaining UK pension schemes."

The letter to Mandelson has been released ahead of legislation expected to be presented to Parliament on Thursday (26 February) implementing Hooper's recommendations, but around 145 MPs, including Labour MPs such as Peter Hain, Frank Field and Jon Cruddas, have signed an early day motion accepting the need for the government to take responsibility for the deficit but opposing the idea of a 'strategic partnership".

In evidence to the BERR committee in January, Hooper warned the recommendations are all linked and the government should not "cherry pick" the measures, but the Communication Workers Union (CWU) has also staged a protest in central London opposing what it calls the "privatisation of Royal Mail".

Billy Hayes, general secretary of the CWU, said: "The pension trustees letter leaked last night is a distraction designed to scare MPs. Privatisation is not linked in any way to sorting out the pension fund. It's not even about protecting pension benefits, it's about making the company viable for takeover."

But in the letter Newell concluded: "The Trustee of the Royal Mail Pension Plan, subject to obtaining satisfactory guarantees from government, is in favour of the Hooper Report's recommendations. We very much look forward to these being implemented, as soon as possible, for the benefit of all concerned."

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

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