5 Royal Mail Pension Plan
108. The Review and the Government agree that
Royal Mail Group's pension deficit needs to be tackled urgently.
However, this problem is not new; it may be helpful to repeat
the history set out in the Trade and Industry Committee's 2005
report.
109. The Post Office Staff Superannuation Scheme
(POSSS), a final salary scheme, was established on 1 October 1969
under the terms of the Post Office Act 1969. A full valuation
was carried out by an actuary as at 30 December 1972, which showed
a deficit of £1,100 million. By the 31 March 1976 actuarial
valuation, the deficit had increased to £1,900 million. By
1988, changes in the equity markets had wiped out this deficit,
and Royal Mail took a contributions holiday. When our predecessors
on the Trade and Industry Committee looked at this in the autumn
of 2005, Royal Mail said it:
made little economic sense to continue contributions,
bearing in mind there was reasonable conservatism built into assumptions
used by the plan actuary. Under the Prescribed Basis (set out
in Schedule 22 to the Income and Corporations Taxes Act 1988),
employers have to take action to utilise any surplus assets above
the 105% funding level on this basis either to improve benefits
or to take a contributions holiday. The intention was to control
the funding of the plan to below the Prescribed Basis.[96]
110. The Post Office Staff Superannuation Scheme
was closed to new entrants in 1987 and the actuary advised Royal
Mail that "as the scheme was closed to new members, it was
important not to over-fund the prospective benefits". The
scheme was replaced by the Post Office Pension Scheme (POPS),
again a final salary scheme, established from 1 April 1987 for
all new employees. The POSSS and POPS plans were then merged to
become the Royal Mail Pension Plan (RMPP) on 1 April 2000. The
POPS part of the RMPP scheme moved into deficit in March 2000
and annual deficit payments of around £50 million started
in March 2001. By March 2003 the RMPP was 82.5% funded and £2.5
billion in deficit. However, the evidence Royal Mail presented
to our predecessor Committee suggested that the pension fund deficit
was then at £4.0 billion and not £2.5 billion, due to
changes in the accounting methodology used to calculate its pension
liabilities on its balance sheet:
there is a specified methodology to calculate the
FRS17 liability which requires a set of assumptions. […]
For the first time in 2005-06 the FRS 17 liability will need to
be recognised on our balance sheet—which will therefore
show that Royal Mail has liabilities in excess of its assets.[97]
111. Our predecessors concluded that:
We agree with Mr Leighton, Chairman of Royal Mail,
when he told us that the pension fund deficit was "such a
big hole that it has got to be dealt with in some way, shape or
form" but there has been insufficient time during this inquiry
to investigate the pension fund deficit in sufficient detail to
come to firm conclusions about the responsibility for the deficit.
For example, we were unable to ascertain with any degree of certainty
the reliability and robustness of Royal Mail's estimate of its
future pension cost liabilities.[98]
REFORMS TO THE PLAN
112. A series of changes to the Pension Plan
began to take effect on 1 April 2008 after informal consultations
with unions and other employee representatives, and a formal consultation
with all pension scheme members. The changes to the fund were
agreed by the Pension Trustee in March 2008 and include:
- The Plan closed to new members
from 31 March 2008;
- All pensions and benefits
earned before 1 April 2008 are still linked to final salary at
the time of retirement;
- From 1 April 2008, defined benefits building
up for employee members of the Plan were earned on a Career Salary
basis;
- A new defined contribution plan, to be launched
in April 2009;
- New recruits joining the Company from 31 March
2008 were able to begin paying contributions to the new plan after
they had worked for the Company for a year;
- Employees continue to take their pension on reaching
60, but the normal retirement age will increase to 65 for benefits
earned from 1 April 2010; and
- from 1 April 2010, it will be possible to draw
pension earned before the change to normal retirement age at 60,
and continue working while still contributing into the Pension
Plan until the maximum level of benefits is reached.[99]
CURRENT POSITION
113. At its last triennial valuation in 2006,
the deficit of the pension plan was calculated at £3.4 billion.
When the Independent Review was published last December, it noted
that the most recent estimate of the deficit was £5.9 billion.
When he gave evidence to us in January, Lord Mandelson suggested
that this could now be as high as £8 billion.[100]
We will not know with certainty until the next valuation is made.[101]
114. Even at current levels, the payment Royal
Mail Group has to make to reduce the deficit is £280 million
a year. Royal Mail Group's pensions payments as a whole were
far higher than this: the 2007-08 accounts show the following
figures:
| Pension cash funding: Group contributions
|
| 2008
£m
| 2007
£m
|
| Regular pension contributions
| 550
| 543
|
| Funding of pension deficit
| 284
| 243
|
| Payments relating to redundancy
| 36
| 74
|
| Prepayment of 2008-09 regular pension contributions
| 50
| -
|
| Net cash payments
| 920
| 860
|
If, as is expected, the deficit increases, then the payments from
Royal Mail Group will of course increase still further.
115. Over many years the Trade
and Industry Committee warned about Royal Mail Group's pension
deficit. Competitors coming later to the United Kingdom market
have not been burdened by such historic deficits. We note that
in other countries the pension deficits of the universal service
operators have been dealt with as part of the preparation for
postal market opening. We agree that Royal Mail Group's pension
deficit needs to be tackled as a matter of urgency.
116. The Future of the Universal Postal Service
in the UK says:
Our proposed approach is to take responsibility for
all the historic pension liabilities within the Royal Mail Pension
Plan incurred prior to 16 December 2008 - the date of our announcement
to Parliament. All future service liabilities after this date
will remain with Royal Mail.[102]
This approach means
all members of the scheme with accrued rights earned
before December 2008 will have complete security that their entitlements
will be honoured in full. …. In addition, taxpayers will
have the certainty that it is Royal Mail that will bear the full
cost of future pensions provision for its current employees and
costs relating to future salary increases.[103]
117. We consider that the approach
set out in The Future of the Universal Postal Service in
the UK to allocating responsibility for Royal Mail
Group pensions between the taxpayer and Royal Mail Group itself
is basically sound. Royal Mail Group will retain responsibility
for future liabilities; the taxpayer will deal with historic liabilities.
The Future of the Universal Postal Service in the UK makes
it clear that in the Government's view this change should depend
upon concluding a partnership agreement; we examine that in more
detail later in this report.
118. As the Government notes, any transfer of
responsibility for Royal Mail Group pensions will require European
state aid clearance. This is, of course, true but the need for
approval remains whether or not Royal Mail Group is a public or
partially private entity. It is important that the market should
not be distorted. We are puzzled by the discussion of state aid
in Modernise or Decline, which notes in an early chapter
that as part of state aid approval the Commission can demand radical
restructuring of a company, but does not discuss
the implications of the state aid rules in the part of the report
which proposes the transfer of responsibility for pensions.
119. The implementation of market opening under
the postal service directives has been gradual precisely because
universal service providers may require time to adjust. As Mr
Crozier told us:
The truth is that our competitors on price do not
have this problem. La Poste had this taken care of two or three
years ago; TNT, Deutsche Post and others had it taken care of
as part of wider changes in structural and privatisation processes
in the nineties. Therefore, we are competing on an apples and
pears basis where we carry a cost that our competitors do not.[104]
120. The universal service is a service of general
economic interest and indeed one of the most appreciated of such
services.[105] The
United Kingdom will be taking action to ensure continued provision
of that service, and it is taking this action only after it is
clear that it is necessary. The majority of the liabilities it
assumes will date from before market opening. Royal Mail Group
will be left with significant pension liabilities, and will lose
the assets underpinning the historic pension scheme. The universal
service provider will remain subject to regulation to prevent
market abuse. In
our view, a strong case can be made for state aid clearance for
removal of part of RMG's pension liabilities without radical restructuring
or compensating competitors.
The provisions of the Postal
Services Bill [Lords]
121. The Bill gives the Secretary of State power
to establish a new public pension scheme, which could provide
the pensions or other benefits for persons who are or have been
qualifying members of the Royal Mail Pension Plan (RMPP). Assets
and liabilities would be divided between the continuing RMPP and
the new scheme. The transfer must ensure that the ratio of assets
to liabilities of the RMPP after transfer is at least equal to
the ratio before that time. In effect, Royal Mail Group will keep
a pensions deficit, but it will be a far smaller one.
SCHEME AMENDMENTS
122. The new scheme cannot be
amended at a later date in any way that would adversely affect
the position of scheme members.[106]
However, this restriction does not apply where either a) scheme
members consent to the amendment is secured or b) where "the
scheme is amended in the prescribed manner" (which means
amended in accordance with the new scheme as created by the Secretary
of State).We believe the House should explore what rules the Secretary
of State intends to introduce in relation to amendments.
TRANSFER OF LIABILITIES
123. The key points from a political point of
view are that the Secretary of State can make a transfer with
a retrospective effect and that transfers are subject to negative
resolution procedure. The timetable set out by the Government
indicates the pensions transfer order will be made after a private
sector partnership has been agreed and state aid clearance granted:
We aim to sign legally binding agreements by summer
2009. Shares can only be sold after new primary legislation is
brought into force and any necessary European Commission clearances,
including state aid, have been completed. The payment for the
shares in Royal Mail will not be made until then.[107]
This can be achieved by ensuring that any agreement
that creates a partnership is conditional upon Parliament granting
any consents that are necessary.
124. Presumably the
private sector partner will enter an agreement with the Government,
conditional on the pensions liabilities being transferred. Parliament
will then be faced with an artificial choice between allowing
the pensions transfer, and with it the private sector partnership,
to progress, or blocking the private sector partnership by refusing
to transfer pension liabilities to the new scheme.
96 HC (2005-06) 570-i, para 93 Back
97
HC (2005-06) 570-II Ev 117 Back
98
HC (2005-06) 570-i, Para 107 Back
99
Information from the House of Commons Library Back
100
HC 143-I Q19 Back
101
HC 143-I Q19 Back
102
Cm 7560, para 3.2 Back
103
Ibid, para 3.4 Back
104
Q 266 Back
105
Directive 2008/6/EC, para 4 Back
106
Clause 19(6), Protection against adverse treatment Back
107
Cm 7560, para 4.17 Back
| 
