Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 60 - 79)

TUESDAY 18 OCTOBER 2005

ROYAL MAIL GROUP

  Q60  Roger Berry: So the answer—it was a yes or no answer, really—is you think there is no alternative, basically.

  Mr Leighton: I think it is very difficult just because of the size and the scale. Remember, on the deficit we have been paying in £140 million cash. This is cash generated, we have not gone and got anybody for this; we had to generate the cash to put it in there. Going forward, that number could be £400 or £500 million cash, just for the deficit. So our pension cash payments that come straight out of the business were £400 million and are going to be £800 million, of which £400 or £500 million is the deficit. There is no way that in a business like ours you can generate sufficient cash to be able to do that unless you deal with that deficit. Short of robbing a bank and probably the Bank of England (probably not the Bank of England because they have not got that much), that is where you are. It is such a big hole that it has got to be dealt with in some way, shape or form. If we could do it out of our own resources we would try and do it, because that is the way we have always done it, but the scale of the cash amount is just too big.

  Q61  Roger Berry: I agree. Let us be blunt about this: the pension deficit is, to a substantial extent, the result of decisions of government in previous years, decades. Is what you have just said that you think there is a responsibility therefore on government, or not? I think you are implying that but you are being a bit coy in saying it.

  Mr Leighton: I think we have always taken it that anything that has happened in the last three years we will take the good and the bad, and take it on the chin—that is the way we have done it—but this is such a big difference and it has such a big impact, not just on the balance sheet, as you say, which therefore looks negative and gives you problems, but it is the amount of cash you have to pay. You have to generate that cash to pay it out of the business. We have gone from, really, putting no cash into the pension deficit three years ago to paying £400 or £500 million of cash going forward, and that is just too big a thing for us to take on when we have got all this other stuff going on as well. In the end you would go pear-shaped.

  Q62  Roger Berry: Am I being unbelievably dim or have you not answered my question?

  Mr Leighton: I could not comment on whether you are dim or not, Roger, and neither would I want to be drawn on it!

  Q63  Roger Berry: Given the second part of my question, is that a yes or a no?

  Mr Leighton: I think it is an unanswerable question.

  Q64  Roger Berry: If I were you I know what I would be arguing.

  Mr Leighton: What would you be arguing?

  Q65  Roger Berry: I am asking the questions!

  Mr Leighton: You might have an argument we have not thought of.

  Q66  Roger Berry: The number of times you have referred to the "historical deficit" and the number of times you have referred to £4 billion and the number of times you have pointed out that is why you are technically insolvent—why are you not saying what I would expect someone in your position to say about that historical deficit?

  Mr Leighton: I think we have always been the same. What we have been saying, consistently—

  Q67  Roger Berry: It is not in the submission and you have not said it this morning. Third time lucky.

  Mr Leighton: There is an issue, and the issue has to be resolved. How the issue gets resolved is for debate because, first of all, it is a big sum of money and we cannot get away from that. Secondly, there are a number of ways that it could be approached, including not doing anything about it at all, but all we can do, in terms of the regulatory bit we are talking about, is say: "Look, this is the impact of that deficit on our numbers going forward and unless in some way, shape or form that gets picked up then it gives us a problem".

  Q68  Chairman: I think I am being dim now, actually. When were the pension holidays taken?

  Mr Smith: The pension fund was in surplus until 2001, and in fact it was 105 per cent funded, which means the company could not put any more money into it. So it was the 13 years prior to 2001 when the pension fund was, I believe, in surplus for the whole period.

  Q69  Roger Berry: It seems that figure came from you, Chairman, rather than from Allan, but there we go, he is being very coy on this one. It is most unusual, but there we go.

  Mr Leighton: Sometimes you have to be coy about things, Roger.

  Chairman: So that deficit has come since 2001?

  Q70  Sir Robert Smith: But not in the last three years?

  Mr Leighton: No, it has been building.

  Mr Smith: The pension fund was, I believe, under-funded in 2002.

  Q71  Roger Berry: Can I say, in all seriousness, and I was not being flippant in trying to press the issue, I would dearly like to see some figures on how we arrive at the current position of £4 billion.

  Mr Leighton: We can do that.

  Roger Berry: I think that would be incredibly helpful in terms of what it is reasonable for Royal Mail to do, and to explore the alternatives.

  Chairman: I think we will move on to a less contentious area now: the ownership of the Royal Mail group.

  Q72  Mr Hoyle: Obviously, we would not expect too many problems with this, but there is a difficulty: what is going on? We read in the press that there may be shares given to employees and we read in the press that there may be a sell-off. What is the situation?

  Mr Leighton: What does it say in Voice? You have Voice there.

  Q73  Mr Hoyle: I can read it if you want me to, but I think you will have read this already.

  Mr Leighton: The way we have always thought about the business is in chunks. After three years of renewal we are now thinking about the next three years. The thing we have always been consistent in is that from day one we have always felt that our people should have more of a share in the company. We have always said that because we think that the more our people are involved, basically, you get a better performance and that has turned out to be the case. We have put in Share in Success, everybody got their one share and the net effect of that is we paid out £200-odd million as a dividend to our people and that had a huge effect. It had a huge effect because the business performed, everybody knew what they needed to do and for once people got what they were supposed to get. It was over £1,000, and to our people that is a lot of money and they did some great things with it. That is really what it is all about. Therefore, we have been consistent from day one and we have said we want to be able to build on that. At some stage would I like to give our people some shares in this business? Yes, I would. I think it is fundamentally the right thing to do; I think our people actually believe it is the right thing to do, which is the most important thing as far as I am concerned. Our recommendation is we should find a way of doing it. There are many ways of doing it, we think it should be done and we think it is the right thing to do.

  Q74  Mr Hoyle: Let us press you a little more on that because I think it is interesting. People would say everybody has got a stake in the business because it is owned by the people of this country, so our people have already got a shareholding. In fact you can actually use profit-sharing to give people the belief in the company they are working for and they also get it direct without: "Who has got shares, who has not?" because people come and go out of a business. So would you allow the trading of shares or would it be on the stock market or would they have no value whatsoever? There is a great danger—and we have seen this with Rover, where employees were given a share that was worthless; it was a junk bond. I am not suggesting you are offering junk bonds but there is a danger; if you cannot trade it what is its value if somebody leaves? It is all a bit of mystery and smoke and mirrors, if we are not careful. I am sure you must have a better explanation.

  Mr Leighton: It is none of those things. It is very straightforward. First of all, it cannot be traded on the stock market because it is not a publicly quoted company. There are all sorts of different ways: you can create a trust, the shares can be bought by the trust, the trust can issue the shares to our people, our people can trade the shares within the trust, the trust never sells the shares and the trust pays a dividend. So this is very easy to do; it is not all complicated and our people would understand it and actually the general consensus around the business is that people want to do that. That is a very different way. We have moved our people's pay up—the basic pay was very poor and we have done a lot on that from where we started out because we always thought our people were underpaid—and we have simplified the bonus scheme, and this would be a way in which the people shared in the success of the company. So it was always going to be a matter of debate, depending on whether you think it is right or wrong, but clearly the view of the business is that this is the right thing to do and we should do it.

  Q75  Mr Hoyle: So rather than setting up a trust and deciding whether you give shares—do you take them back off them when they retire? Or once somebody leaves the company? How long do you have to be there—so long before you get shares? It seems a very, very complicated system when surely, surely, the quickest way and the cheapest way to ensure they get a fair dividend is actually to have profit sharing so you give it automatically and people understand where it is coming from. Everybody reads this in the press but what discussion has taken place with the shareholder for this agreement?

  Mr Leighton: Let us go back to where we started out. We have been very consistent from day one in saying: "This is what we want to do". I am very consistent in saying to you, as I say to everybody else: "This is what I think we should do for our company." More importantly, if I ask the people in the company they say: "That is what we should do; we would all like to be part of it." So the only discussions that have taken place with anybody, whoever I get a chance to talk to, whichever the stakeholder, from Postcomm through to the DTI are, consistently: "This is what I think we should do. This is what I would like us to do."

  Q76  Mr Hoyle: There is only one stakeholder; there is only one shareholder. I think we have got to be clear and we have got to get it on the record, Chairman. Has the stakeholder had discussions about this and has an agreement come through?

  Mr Leighton: There has been no agreement with the stakeholder.

  Chairman: There are lots of stakeholders.

  Q77  Mr Hoyle: There is only one shareholder.

  Mr Leighton: The shareholder has not agreed to do this.

  Q78  Mr Hoyle: But discussions are taking place?

  Mr Leighton: Of course discussions take place. I think the DTI have always said, and I think Alan Johnson got up in Parliament and said that this is something that he would be interested in, and he was very categoric and on the record in saying that.

  Q79  Mr Hoyle: This is critical: if the shares were offered to people within Royal Mail, would the number of shares be equal between wherever you are in the company, if it was envisaged to go ahead? Also, would these shares be used to reduce pension rights and the pension funds, and have you had discussions and talks to envisage a way of reducing that pension fund?

  Mr Leighton: The answer to your question is that the number one thing is they would be done equally, because I think that is the way to do it—that is the way we did it on Share in Success; everybody gets the same, it does not matter who you are; that is fundamental to this. Secondly, there is no linkage at all between this and anything that might happen in terms of the pension deficit, pension schemes or any other part of the business. It is a completely different thing.


 
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