UK - The UK government will not be able to find a "strategic partner" to help modernise Royal Mail unless something is done about the pension deficit which is now estimated to stand at around £8bn, Richard Hooper has warned.

Hooper, the author of an independent review of the UK postal services sector, told a meeting of MPs on the House of Commons Business and Enterprise (BERR) Select Committee his three packages of recommendations outlined in his report in December - including government taking responsibility for the pension deficit and findings investment from a strategic partner - are all connected.

He said: "We would ask them [the government] not to pick and mix, it is not 'a la Carte' it is a three course meal, and it should be taken as a three course meal."

In answer to questions from MPs about plans for the pension deficit, officially valued at around £3.4bn in 2006, Hooper said: "Clearly that should happen in a staged approach as modernisation is delivered by Royal Mail and unions."

Pressed on whether this would be used as part of a "carrot and stick" approach to modernisation, Hooper pointed out it would be "sensible for it to be seen as something important to happen", as Royal Mail currently pays "something like £270m a year" to tackle the deficit, as well as a further £500m in continuing commitments to members.

An actuarial valuation of the scheme is ongoing at the moment, but Lord Peter Mandelson, secretary of state for BERR, stated in a select committee hearing last week the Royal Mail pension deficit had "grown from £3.5bn to £5bn and some predict will reach somewhere in the region of £8bn this year".

Hooper admitted because the pension deficit may be aprroximately £7-8bn, the £270m annual payments may need to be doubled, and warned the government or Royal Mail "could not get a strategic partner if they don't do something about the pension deficit".

However, some MPs on the select committee disagreed with Hooper's package of recommendations to allow a strategic partner to invest in Royal Mail as it passed "all the liabilities" of Royal Mail, in terms of the pension deficit, to the taxpayer.

Lindsay Hoyle, a Labour Party MP, claimed Royal Mail still has £600m of a £1.2bn public grant for modernisation which it has not been spent, so he argued putting the deficit on the taxpayer but allowing private investment would essentially be "giving taxpayers' money away to competitors", and told Hooper "I don't accept your report".

Meanwhile, Dave Ward, deputy general secretary of the Communication Workers Union (CWU), told MPs at the second evidence session the union recognises the pensions deficit needs to be tackled, but said "our view is that government should accept responsibility for that".

Billy Hayes, general secretary of the CWU, added if the pension issue is solved there would be enough resources to allow Royal Mail to become successful without the need for a strategic partner.

He said: "Why should we nationalise the debt [in the form of the pension deficit] and privatise the profit? There is no doubt in my mind that Royal Mail can be successful provided it gets the proper investment to modernise."

The comments follow evidence given to the select committee by Lord Mandelson last week when he confirmed the government had  "in principle" accepted Hooper's recommendation for the government to take a "measure of responsibility" for the pension fund and its deficit and  "will consult on how that might best be done". (See earlier IPE article: Government to take on Royal Mail deficit)

That said, he admitted "hundreds of millions of pounds of additional investment" is needed to modernise Royal Mail, and added the "taxpayer alone cannot be expected to foot the bill for that modernisation", stressing the need for resources and management expertise to come from a minority stakeholder, such as Dutch postal firm TNT which has already expressed an interest.

"We have got huge demands and calls on the Treasury, on the taxpayer. We are doing so much to pull Britain through the economic downturn, to get the banks back on their feet, to do what we can to enable struggling firms to get through this downturn, that to ask us to take on both a potential £8bn deficit in the pension fund plus provide all the resources needed to bring about much needed modernisation is too much to ask from the Treasury and from the taxpayer alone," said Mandelson.

He pointed out: "We are talking about a liability, a deficit in the Royal Mail's pension fund which has grown from £3.5bn to £5bn and some predict will reach somewhere in the region of £8bn this year. You are asking the taxpayer to take on a great deal now in underwriting that pension fund deficit.

"I do not think the public would stomach our cherry-picking the Hooper Review recommendations and saying, 'We will take on the pension deficit, we will fix the regulator, but broadly speaking leave the Royal Mail operation as it is'. I do not think that is an acceptable deal or an acceptable bargain for the taxpayer," added Mandelson at that time.

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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