APPENDIX 15
Supplementary memorandum by Royal Mail
Group
Thank you for your letter of 1 August asking
Royal Mail Group to provide some further information and points
of clarification relating to our appearance before the Trade and
Industry Committee on 18 July. We are happy to submit the following
supplementary evidence.
1. In Q18 and Q19 of the uncorrected evidence,
Mr Crozier offers to provide the Committee with a breakdown of
how funding for investment for modernisation and the pension fund
deficit will be split between the increased price of postage stamps,
income generated by the pension fund, from the shareholder and
from efficiency savings at Royal Mail Group. We would be grateful
if you could provide us with this evidence?
A total investment of £2 billlion will
be required to complete Royal Mail's modernisation programme.
This will be funded by:
(a) the Group's own cashflows. These will
depend, in part, on the agreement reached with Postcomm for the
current price control. This gave us scope to increase stamp prices
although the benefit of this is offset by constraints on our ability
to fully rebalance our prices in line with real costs. At 32p,
the first class stamp price is approximately 6p below fully allocated
costs. (This is particularly relevant given that, after the initial
increase of 4% in 2006-07, prices will fall in real terms as they
will increase, on average, below inflation.)
In business mail, where increases could have
a more significant impact, it is not possible to put up prices
without loss of market share because of competitive forces. The
price control is predicated on Royal Mail achieving efficiency
savings of 3% per annum (a challenging aim when considered with
the need to absorb inflationary costs, including pay rises).
(b) a £900 million loan facility from
Government. The Government loan will be provided on commercial
terms and be equivalent to what would be available in the open
market.
In respect of the pension fund deficit, Royal
Mail has reached agreement in principle with the Trustee to pay
down the deficit over the next 17 years, with an initial payment
this year of £735 million (covering the 2006-07 ongoing contribution
and deficit correction payments). The pension deficit will be
funded in part from the price control agreed with Postcomm (for
the period 2006-10) in so far as payments relate to the regulated
business. The balance will be funded from Company resources.
This contribution profile should allow the deficit
to be paid down over 17 years and has been agreed, in principle,
with the Trustee on the basis of its assessment of future returns
from pension fund assets and the likely cost of meeting future
liabilities. For the avoidance of doubt, any returns generated
on pension fund assets are for the benefit of the pension fund
beneficiaries (ie current and future pensioners). Moreover, the
pension is managed by the Pension Fund Trustee who is independent
of the Company. It is the case that any fluctuations in the returns
that accrue in the fund are not available to finance the Royal
Mail going forward (although returns from the assets in the pension
fund will be taken into account in determining the Company's future
contribution levels—up or down).
In addition, we will, as part of the financial
framework agreed in principle with Government, be transferring
£1 billion into an escrow account for the benefit of the
Pension Fund, which may be drawn by the Trustee in the unlikely
event the company should fail; this should give the Trustee the
necessary comfort to accept the 17-year payment profile. Any income
generated on the funds while in this escrow will also be for the
benefit of the Trustee, on the same basis.
We should stress that the £900 million
loan facility, the 17-year deficit correction payment schedule
agreed with the Trustee and the £1 billion payment into the
escrow account are all dependent on final agreement of the funding
deal with Government. In turn, the funding deal is dependent on
Government agreement to an employee share scheme, which will provide
the right incentives to implement a challenging strategic plan.
2. We would also request that the Royal
Mail Group provides the Committee with an updated version of the
table you provided us with, during our previous inquiry into the
Royal Mail Group, on the pension plans funding position. The original
table can be found in the printed evidence to the inquiry: TISC,
Royal Mail after Liberalisation, Second Report 2005-06, HC 570
II, Appendix 20, Section 3, Ev 116.
We have added an additional line to the table
to update it:
| Date of Actuarial Valuation
| | Funding level (%)
| Surplus (£m) | Recommended period for suspension of Company contributions
|
| 31 March 2004 | RMPP (Royal Mail Pension Plan—POSSS and POPS)
| 85.1% | (2,670) Deficit |
Nil |
| 31 March 2005 | RMPP | 88.7%
| (2,200) Deficit | Nil |
3. The Committee would also like to know if there were
any legal impediments to the Royal Mail Group creating a pension
escrow account into which monies could have been placed when the
pension fund was in surplus and was 105% funded?
It would have been legally possible to create a pension escrow
account at a time when the pension fund was in surplus, providing
the sums put in it were solely for the benefit of the pension
scheme. However, putting funds into a pension escrow account would
have inevitably meant that such funds were not available elsewhere
in the company to invest, as we did, in improving customer service,
keeping prices down or building up reserves.
It is worth noting that the escrow account now being established
is largely composed of funds from the mails reserves—ie,
funds which were paid into the reserve from past profits.
4. In Q27 of the uncorrected evidence, Mr Crozier offers
to advise us of the date the Royal Mail Group put the proposed
finance package formally to the Government. We would be grateful
if you could provide us with this evidence?
The proposed finance package was formally put to Government
on 14 February 2006.
5. In Q39, Mr Leighton offered to provide the Committee
with any relevant part of a Memorandum or Article of Association
relating to the spending of Post Office resources on surveying
your employees opinions: "If there is one, we will send it
to you with pleasure; if there is not one, there is not one".
And later in Q42, that he would send the Committee a copy of the
letter, which was sent to employees with regards to the proposed
share scheme. We would be grateful if you could provide us with
these two pieces of evidence? The Committee would also be interested
in being provided with the results of this survey in as much detail
as is possible.
You will see that Clause (T) of the Memorandum of Association
of Royal Mail Holdings—which I have enclosed as Annex 1—allows
the Company: "To do any other thing which in the opinion
of the board of directors of the Company is or may be incidental
or conducive to the attainment of the above objects or any of
them".
In addition to this general power a couple of other areas
are relevant to this particular activity. Firstly, the Company
has a policy to encourage effective communication and consultation
between our people, particularly on matters relating to strategy,
financial and economic factors that may influence the Company's
performance; and secondly, statutory provisions such as the Information
and Consultation of Employees Regulations 2004 (SI 2004/3246)
require a company to inform and consult with employees about a
wide range of business decisions.
A copy of the letter dated 2 May 2006 concerning the proposed
employee shares scheme sent by Royal Mail Group Chairman Allan
Leighton to employees and subpostmasters is also submitted to
the Committee and attached at Annex 2. The letter was sent to
208,000 people and 91,703 returns were received; all but a handful
were in favour of an employee share scheme.
While the company's Articles of Association do not bear directly
on the point you raised, please let me know if you would like
me to send you a copy, by email or hard copy.
6. In Q46, Mr Leighton offered to provide the Committee
with "empirical evidence that shares for employees works".
We would be grateful if you could provide us with the empirical
evidence that the particular model of share scheme Royal Mail
Group proposes would "work"?
The support comes from all sides: as well as academics, it
comes from the private sector, from institutional investors and
from governments of different persuasions all of whom put their
money where their mouth is when it comes to employee share ownership:
1. The overwhelming majority of the FTSE 100 runs employee
share ownership plans and have done so for many years. The Boards
of nearly every major company in the UK strongly believe that
letting their employees have shares makes sound business sense.
Their annual reports describe the benefits they get from these
plans.
2. The major institutional shareholders know the advantages
of aligning the interests of employees to their own: they have
long allowed UK companies to print new shares to the value of
one percent of the issued share capital each year for employee
share plans. This is a real cost to investors which proves their
belief in the motivational value of employee share plans. Investors
just would not do this if it didn't get them better results.
3. Successive governments wanting to strengthen the economy
have long invested in employee share ownership. Governments have
backed their belief in the effectiveness of these plans through
tax advantages. There has been ShareSave, Profit Sharing Shares
and the current government's Share Incentive Plan—which
is really four different types of employee share plan covered
in one piece of legislation. The appendix to this letter quotes
a number of government ministers strongly supporting employee
share plans—including Gordon Brown citing academic research
with approval. The European Union also officially encourages Members
States to provide incentives through share ownership schemes.
We firmly believe that when Boards, investors and governments
are all in agreement and back their judgements financially that
there really is an advantage in employee share ownership.
Comprehensive evidence to back our belief is included in
Annex 3 to this letter, while Annex 4 shows support for the principle
of employee share schemes from Government Ministers. Study after
study shows that there is real economic sense in employee share
ownership. It is not an untried idea. It is recognised by everyone
as beneficial to all parties. If there are fewer academic studies
in the UK that's because UK companies haven't needed to reflect
on the matter—they've just got on with it and put the plans
in—and our leading companies have almost all got employee
share ownership plans.
It has always proved very hard to produce radical reform
in the public sector—there is a strong mindset that makes
it difficult. But we have to make changes, for the sake or our
employees, our customers and our shareholder. Employee share ownership
is essential to changing the psychology—people behave differently
if it is their business and they have something to gain if all
goes well and something to lose if it doesn't.
The academic studies show companies with shares doing better
financially than those without them. For Royal Mail it is more
fundamental than that. We are convinced that we need shares if
we are to stand a chance of building and maintaining a worthwhile
business.
I hope this letter has clarified the points you had raised
but please do not hesitate to get in touch if the committee requires
further information.
11 August 2006
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