Examination of Witnesses (Questions 340
- 357)
TUESDAY 15 NOVEMBER 2005
COMMUNICATION WORKERS
UNION
Q340 Mr Wright: Your members have
borne the brunt of some of the cost cutting exercise, with over
30,000 jobs gone already, and we have already touched on the fact
that there could be automation and obviously that could possibly
lead to more job losses. Keeping on the question of the pension
liabilities, do you think that these historical pension liabilities
are due to the reduction in the number of employees; do you think
there is a correlation there somewhere that the liability has
changed from the wage role to the pension deficit?
Mr Baugh: I think the high liabilities
primarily affect lower mortality rates. I think a number of factors
explain the current deficit: the lower stock market returns, lower
mortality rate, and our view is that during the contributions
holiday, customers and government benefited and it is right that
both have to pay in to deal with it. I take the point you are
making but I think the high liability is primarily about the fact
that people are living longer.
Q341 Mr Wright: Surely if 30,000
less employees are contributing into the pension, which was already
in deficit, surely that is going to increase the problems and
the liabilities that you have within the pension fund? It has
to have an impact, 30,000 employees putting less in, obviously
the employers putting less into the pension fund as well, that
puts more emphasis on the remaining employees to actually bridge
that gap, therefore the deficit is going to get larger all the
time. We talked about the automation and what automation also
brings is the possibility of fewer jobs as well, and that in itself
is going to have an impact. Is that not the case?
Mr Ward: I think it is bound to
be a factor as the pension debate moves forward. It is difficult
to judge at this stage where it sits within the balance of issues
and the combination of issues which brought about the deficit.
One interesting thing that the Committee should be aware of is
that it is not the first time that the scheme has been in deficit
to proportionally the same sort of levels. I think it was in the
early 1970s that the scheme was, in those days, in deficit to
the tune of about two or three billion through its accounting
procedures that were there then, and within a number of years
we went from the scheme being in deficit—which proportionally
would be a bigger deficit now, in real terms—in about 10
years, when the stock market went up, to the scheme being in surplus.
So we are not underplaying the importance of the pension deficit,
we obviously want to make sure that our members' pension schemes
are protected at all costs. I think the point that you are making
will be a factor but I think it is hard to judge exactly to what
degree that is going to place at risk future pensions.
Q342 Mr Wright: You have already
touched on this and the next point I want to make is in regard
to who should be responsible in bridging that deficit, whether
it is through the Chancellor saying, "There was a particular
mess here so therefore we should take the money forward to that,"
or a price increase of the actual product itself. It is going
to be Joe Public who is going to fund that; is that a fair way
to look at it?
Mr Hayes: Not quite because it
is a combination certainly of price—we all pay something
to somebody's contribution to a pension scheme when we buy any
product, however that is funded. For 13 years the government benefited
directly from a pensions holiday in terms of the money; the government
got back somewhere in the region of £2.5 billion in terms
of what used to be called external financing. You also have to
consider that if it takes a dividend holiday, which it is currently
on, and continues that dividend holiday then that releases money
anyway and it is a commercial approach that any corporation, if
it were having difficulties, would obviously not seek to take
a dividend. So it is a combination of things. Simply saying that
it is passed on to Joe Public, it is not quite like that; it is
a combination of things. There is also the issue of the expansion
of the economy, which is often overlooked in the wider pensions
debate, because if people's wealth grows then that also contributes
to pensions. If workers' wages grow there is a greater input into
the company per se, and that is also true for pensions
generally. One of the things that gets overlooked, I think, in
the pensions debate is the overall wealth of the economy per
se, and that is as true in Royal Mail as it is in a wider
economy.
Q343 Judy Mallaber: Keeping on the
pensions issue, I hear what you are saying about there being different
ways in which some of that gap might be bridged, but your evidence
did say—at least as part of that—that the next price
control should include a clear allowance to address the deficit.
Although they do not actually spell it out in detail in their
evidence Postwatch have suggested that price increases that there
previously were—and they say in April 2000—were predicated
on the basis of the need to top up the pension fund in fact never
actually found their way into the fund. As I say, they have not
spelt that out, but if that is the case how would you suggest
the regulator could stop that happening in the future if Royal
Mail did charge more? How could you make sure that some of that
did go in towards dealing with the pension fund issue?
Mr Hayes: You mean hypothecated,
as it were; is that what you suggest?
Q344 Judy Mallaber: Yes.
Mr Hayes: I think that there is
an issue there obviously in terms of it not being salted off,
as it were, in terms of just passing it on to the customer. I
am not sure that Postwatch is absolutely right on that, by the
way. I am used to Postwatch making a proposition and then having
to look at the premise and not finding it. So I am not sure that
they are absolutely right on that.
Q345 Judy Mallaber: Are you saying
you think that some of that increase did find its way into the
pension fund?
Mr Hayes: Yes.
Q346 Chairman: We share doubts about
that evidence as well, so thank you for saying that.
Mr Hayes: It is the first time
I have heard it said but I am not sure they are right on that.
I am not a lawyer but I am not even sure that that is the case
anyway, whether they would be allowed to do that anyway because
they have to meet their liabilities.
Mr Baugh: And the fact is that
they have met their liabilities and poured hundreds of millions
of pounds into the scheme to meet those liabilities. So the key
is that the Royal Mail has the financial room for manoeuvre from
the next price control to deal with the pension problem.
Q347 Judy Mallaber: Have you made
any estimates at all as to what amount extra on top of the current
postage charge you would need to make a necessary dent into that
deficit?
Mr Hayes: We have not really got
into that in terms of any great depth but certainly tracking RPI
for starters. So it is a simple formula, if you like. Tracking
RPI in terms of the tariff in dealing with the issue then of under-investment.
And we are not the company but we share the frustration sometimes
of not being able to get all of the stats. Levels of investment
around that figure you can work out on the information available
to us, so it is something around RPI and then what is the historic
level of under-investment? Bearing in mind that we were the ones
four or five years ago saying that it was an historic problem
of under-investment, everyone is saying that now. So as Jeremy
says, it is a question of giving the financial room for the company
to invest.
Mr Ward: Could I add to that that
the key to the pension debate is not just how much Postcomm allow
headroom in their pricing control, it is also the length of time
that Royal Mail has the ability to pay this deficit back, and
obviously pension trustees will have to be satisfied that that
period of time is sustainable.
Mr Baugh: Ultimately it is a judgment
about the employees, about the scheme, about the number of members;
it is an actuarial evaluation and very difficult for us, outside
of all that information, to make detailed recommendations.
Q348 Judy Mallaber: What you are
saying is that this is one element of this Y that you add on to
RPI for historical under-investment?
Mr Baugh: Yes, and to also help
plug the pension deficit.
Mr Hayes: We sent this book[2]
to all MPs, and we have done international comparisons of domestic
first class at 60 grams, and if you look at where we are we are
at the bottom of the scale. There is nobody in the OECD who is
cheaper than us, and that is even the USA, even Japan and even
Canada. So in the world we are the cheapest. We can celebrate
that, that is fantastic, but then as the industry started to creak
under-investment we have paid a price for that. So it has to be
something that is comparable with European figures, somewhere
in that figure, and we say round about RPI plus Y.
Judy Mallaber: We may need some clarification
later on.
Q349 Mr Bone: I am a bit surprised
because it sounds to me it is more like the employers sitting
there rather than the union. I am a bit baffled because you are
arguing, it seems to me, for a price increase to fund the pension
deficit. If I had been sitting there in your shoes I would say,
"Look, the shareholder, which is the British government,
has taken all this money out in earlier years, built up this huge,
massive deficit, it should be the government coughing up for this,"
and that is one argument I would like you to comment on in a minute.
The other is, as you say, it can be clawed back from the customers
but that seems, when you are in a monopoly position, a bit of
a dodgy route. Then there is another suggestion, that the Post
Office could sell off an asset like its European subsidiary, which
is worth a lot of money, and that would help your members' pensions
and the deficit. Another idea that has come up—and I express
no view whether this is right or wrong—is that instead of
having the pension entitlement that the members have at the moment,
you get equity in the Post Office instead. I wonder if you would
like to comment if any of those appeal?
Mr Hayes: First of all, the equity
issue; it sounds like privatisation of some sort so I think we
would discount that. Maybe I did not make myself explicit enough.
We are saying that the government, by way of a nil dividend, make
a contribution; we are not saying the government should not make
a contribution. In the region of that we produce, at current levels
of the company's performance, about £2 billion. So we are
saying that the government should make a contribution. But we
are saying that we make a contribution, our members make a contribution
in terms of efficiency, and they do. So we are saying price, tariff,
as it were; we are saying tariff, government contribution by way
of nil dividends, there is an issue of investment there. In terms
of whether it should sell its German company, my view is that
what the UK customers want is a UK mail that is top notch. Obviously
it is a matter for the company when it sells its assets and things
like that, but I would think that the British want a British Post
Office that works, and being told that we have a German company,
I am not so sure what value that is to the British public. But
obviously at the end of the day that is a commercial decision
for the company. So we are saying that the government should make
a contribution but we are saying that everybody should make a
contribution. The government did benefit. In our booklet we show
how much contribution the Post Office made to the Exchequer: £2.5
billion. Also, that was delivered literally—and I am not
just being poetic here—on the backs of our members. In 1979
there were 21.9 million addresses in the UK and there are now
27 million, and if Thames Gateway goes ahead and John Prescott
goes ahead there will be another million homes that are going
to be delivered to by our members.
Mr Ward: Just to reinforce the
point, I think Judy's question was specifically in relation to
what our view was on Postcomm and their pricing control. Billy
is absolutely right, our written submission is making it absolutely
clear that we believe that the government has a responsibility
in exactly the way that you said, because they are the shareholders
and they have benefited, there can be no doubt about that, and
this is not an issue that the government can put to one side and
just dismiss it. It will require, ultimately, a sensible debate
with a combination of factors assisting to finally deal with the
pension deficit. But the government definitely has a role to play
within that.
Mr Baugh: Can I answer directly
the point you made about the equity swap? I do not think we are
in the business of trading off members' future pension entitlements
for an equity stake in the business; I just do not think that
that is a runner. They are entitled to the benefits that they
are entitled to as current scheme members and we would not want
to interfere with that. I think the idea is actually a short-term
idea, when on the question of pensions it is a long-term view
and we should be encouraging people to save more, we should not
be encouraging them to short-term quick fixes, to trade off their
pensions for some short-term gain.
Q350 Chairman: I think we have done
the pensions issue to death probably, but can I just be clear
about one issue? What is your view on the staff being given an
equity share in the business—leaving it aside as a trade-off
for pensions? Are you also opposed to that?
Mr Hayes: You are saying employee
share ownership?
Q351 Chairman: Employee share ownership.
Mr Hayes: Privatisation.
Q352 Chairman: So you dismiss it?
Mr Hayes: You cannot say that
a cat is a dog and not think that it is a dog. We are very, very
clear that any share sale would be privatisation and a breach
of the manifesto commitment given by the British governments to
British people, and we take manifesto commitments very seriously.
Q353 Chairman: And therefore you
oppose it?
Mr Hayes: Therefore we oppose
it.
Mr Ward: Can we also reinforce
there that we are questioning the motives for what really is behind
this proposition. It is really interesting to see the way that
this debate has developed because every single observer that we
speak to has taken an interest in this, and they all agree on
two things: the two key issues are investment and pensions, how
you deal with those two issues, and regulation sits within that
as well. Nobody seems to be saying that the most important issue
is whether or not you give a share to employees, and, as we understand
it, even Allan Leighton's proposition, which is often talked about
in the Press rather than face to face, which is unfortunate, seems
to us to be premised on the basis that it is not going to raise
any capital for investment. So what is this really about? When
we have had an opportunity—a rare opportunity—to speak
to Allan about this he says it is about pulling everybody in the
same direction. Then he says, "What I want to do is create
an internal market for buying and selling shares." It is
a flawed logic. Explain to us, with all the challenges that the
business has, how creating an internal market to buy and sell
shares is actually going to motivate everybody to pull in the
same direction? What is going to happen is it is going to create
those who have shares, those who do not have shares, and ultimately
our view is that all the evidence suggests that in two years the
management team of the company will own that 20% share, not the
employees. It is not about giving the employees more say and we
really do seriously question the real motives of the proposition
that is being put forward.
Q354 Chairman: It is always good
to have a motivated staff working for an organisation, though.
One way the Royal Mail tried that recently was by giving you all
a bonus for the magnificent performance of your staff, around
about £1,000 for an employee. Was that a good idea or should
that have gone to the pension fund?
Mr Ward: I think that the issue
is really one that should be negotiated about. If you are talking
about trying to get the workforce, if you like, to try to understand
the challenges of competition, to understand the need for greater
efficiency, that is a much more rounded debate than somebody plucking
out of the air, "Look, I have this fantastic idea, let us
hand over some shares." Our observation about that is that
the workforce is never going to turn down money; nobody in this
room is going to turn down somebody dangling a carrot saying,
"Do you want £1,000?" I think the more honest debate
is what you are expected to do for that money, and that is where
Allan's position seems to us to be quite weak because he never
tells people what they are expected to do for that money. What
he does is to channel the bad news, if you like, through the trade
union; he expects the trade union, in a completely separate debate,
to talk about efficiency. We have a vision for the future of Royal
Mail as far as the staff are concerned and it is very clear: we
believe that you need higher basic pay. The fact of the matter
is that the latest government figures that have been produced
have shown an even greater gap now between average earnings in
the country and average postal workers' pay, and that gap has
widened. We believe that the priority should be about training
people, investing money in training. Can we not get back to the
days that basically when you joined the Post Office you had a
feeling of a postal service ethos, public service ethos? That
for us is top of the agenda and I think is a debate that we should
be having with the employer around the whole question of efficiency.
Q355 Miss Kirkbride: The Chairman
really asked my question; I was going to ask about the bonuses.
I was quite surprised by your response. Are you saying then that
you would rather the money was spent on training than those bonuses?
Mr Ward: I would rather the money
was spent on basic pay where our members can have a permanent
share in success. In return for that we would expect to have a
clear understanding of what people are expected to do in the job
and the flexibility debate will be raised in the overall question
of moving the industry forward.
Q356 Mr Weir: You mentioned earlier
about the Universal Service Obligation in your evidence, that
liberalisation could undermine the ability of Royal Mail to meet
its USO. What evidence do you have for that? We are getting conflicting
evidence on this, even from the Royal Mail, who suggested that
USO could be of benefit to them rather than a drain.
Mr Hayes: Let us start with Parcelforce.
That is the USO, the only parcel company that has a Universal
Service Obligation, but look at some of the problems that Parcelforce
have. The other thing is, the competition want it both ways. When
they say competition I am not so sure they really mean competition,
I think they mean access to markets. I am not trying to make a
tautology, as it were, but the thing is that in terms of the competition
not one of the competition is saying that they are going to replicate
Royal Mail's structure, it is all but impossible. So the final
mile—and that is why the premise that the USO is of benefit—the
delivering to 27 million addresses at a universal price, one price
goes everywhere, what would happen is that bit by bit the company
would have to do all the bits that the competition does not want
to do, and that is one of the problems with full liberalisation.
Q357 Mr Weir: Do you see the structure
of the Royal Mail, as it is at the moment, by having postal services
throughout the country, being a drag in a liberalised market,
because it has to finance that whole structure if the business
is being eaten away by competitors?
Mr Hayes: That is a problem because
the Royal Mail, no matter what, has to deliver to every single
address in the UK. The competition can pick what part of the market,
and does—and we heard them this morning—without any
strictures around them in terms of quality. So they decide to
pick one of the most profitable aspects of the market, with the
Royal Mail having to deliver to every single address. So Royal
Mail faces a number of problems. A fundamental one is one of investment
in the industry, and you see that. Any one of you who has been
to a delivery office will see a simple illustration of that. If
you go into a delivery office it feels cramped and the reason
why it feels cramped is that mail volumes have grown at a phenomenal
rate but there has not been the requisite investment in the industry,
and that is affecting things just on the ground, quite literally,
in terms of the size of sorting offices, the level of mechanisation
that we currently have. So investment is a key. One of the things
about the competition accessing the market, obviously they are
taking out a revenue stream and as they take out revenue streams
they are pulling against the company in terms of revenue streams.
And the problem with Postcomm's proposal is that it does not allow
the company to raise its prices to a decent extent, to enable
investment. So it faces a problem on two fronts: one in terms
of its revenue base, its cost base is shrinking, or certainly
the big costs. Some of the market it loses, for example, can seem
miniscule but if it is a high value market that is losing straightforward
revenue it is a big issue, yet at the same time it has to deliver
to your door in the Isle of Skye or whatever, and that is how
it affects the company. A point that Peter made earlier on, that
we are sounding like the company, the reason why in some of the
stuff we sound like the company—although we disagree on
one or two fundamentals—is because all of us having worked
in the industry we know it quite literally and we see it on the
ground, and you only have to look at the company for any length
of time to know what the issues are. It is not hard; it is not
a very difficult operation. Somebody puts a letter in the pillar-box,
somebody takes it out and puts it through a letterbox and that
is it. So the issues are quite stark, and so on a lot of this
stuff the reason why we sound very similar is because it is looking
at a problem and the investment and the revenue base of the company
sticks out, and it is very, very obvious to all of us who have
examined it, unless someone is coming at it from an ideological
approach.
Chairman: Mr Hayes and Mike Weir, I owe
you both an apology because we are going to have to call things
to a halt, I am afraid. You have given us very good oral evidence,
very good written evidence, and if you feel that there is stuff
you would like to have said, but have not had a chance to say,
please feel free to submit something additional in writing. I
apologise that we are out of time. Thank you very much indeed
for your evidence today.
2 Communication Workers Union, Delivering Quality:
The Post Office in the Public Sector, Members' Handbook, February
2005 Back
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