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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