Royal Mail pension deficit hits £8bn

The deficit in the Royal Mail pension fund has hit £8bn, according to calculations in the company's latest annual accounts.

The figures, by the company's own accountants, are a snapshot of the fund's position.

However a full three-yearly valuation of the scheme, due to be published in the next two months, is expected to reveal an even bigger deficit.

Sources at Royal Mail suggest it could be as much as £10bn.

This could lead to even more money being drained from the business to support the scheme as the company has a legal obligation to make up any deficit, typically over a period of 10 to 20 years.

The size of the deficit - the difference between the value of its assets and the assets actually needed to pay pensions now and in the future - is also a huge and unresolved financial headache for the government.

"At the moment, the trustees with their actuaries are negotiating the financial repayment schedule the company will have to sign up to," said a source close to the discussions.

"But the government will not be able to sell the company with such a deficit."

The warning came as the coalition government announced its intention to part-privatise the Royal Mail.

The Conservative-Lib Dem government said it would seek "an injection of private capital", without saying how much of the mail group would be up for sale.

Financial problem

Two years ago a report for the government on the future of the company highlighted the growing size of the pension deficit as the postal service's number one financial problem.

The report's author, businessman Richard Hooper, suggested the solution would be for the government to find a way of taking over responsibility for the fund and plug its financial black hole with taxpayer's money.

That would relieve the Royal Mail of the burden of financing the scheme, a problem highlighted by the group's latest accounts.

They reveal that in the last financial year the Royal Mail had to pay a further £867m into the scheme, by way of both regular and existing deficit payments.

This dwarfed both the cash outflow of the company of £517m, and the group's pre-tax loss of £262m.

An increase in the existing level of deficit payments, which in 2006 the company agreed it would pay for 17 years, could push the company's total funding bill for the scheme to more than £1bn a year.

Unsuccessful

The surge in the Royal Mail's pension costs comes despite that fact that the group took action in 2008 to restrain the ballooning costs of the final-salary scheme.

The scheme was closed to existing staff, who were offered a much cheaper career average scheme instead, and their retirement age was raised to 65.

The past year saw an unsuccessful attempt by the previous Labour government to privatise the company led by Lord Mandelson, which was scuppered by the unwillingness of rival postal services to lodge a bid.

Royal Mail also had to deal with the financially damaging impact of strikes by postal workers over management's plans to bring in new sorting office technology and work routines for postmen and women.

Nothing has happened though to resolve the pension problem.

That is despite warnings last year by the company that it might have to close the scheme to all its existing staff, and a further assertion from Mr Hooper that the scale of the deficit was so high it threatened the viability of the entire business.