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These notes refer to the Postal Services Bill [HL] as introduced in the House of Lords on 25th February 2009 [HL Bill 24]
POSTAL SERVICES BILL [HL]
EXPLANATORY NOTES
INTRODUCTION
1. These Explanatory Notes relate to the Postal Services Bill [HL] as introduced into the House of Lords on 25th February 2009. They have been prepared by the Department for Business, Enterprise and Regulatory Reform in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.
2. The Notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.
BACKGROUND
3. At present, legislation governing the postal services sector is contained in the Postal Services Act 2000. This Act, amongst other things, gave the postal services regulator, the Postal Services Commission (Postcomm), its duties and powers, including the duty to ensure the provision of a universal postal service. The 2000 Act also introduced a new system of licensing and regulation for postal service operators.
4. The universal postal service set out in the Act is the minimum service that must be made available to all addresses in the United Kingdom, which number some 28 million at present. In the United Kingdom, the universal service provides for deliveries of letters six-days-per-week across the national network at uniform affordable prices.
5. In recent times the communications sector has undergone significant changes. The digital media revolution is offering consumers unprecedented choice in how they communicate, with email, text messages and web-based social networking all increasing in popularity.
In addition, the liberalisation of postal services across Europe and the introduction of competition has led to new opportunities and challenges for service providers. 6.
It was against this background that the government commissioned an independent review of the postal services sector. Led by Richard Hooper CBE, the review (the Hooper Review) was announced in December 2007.
The Hooper Review
7. In December 2008 the Hooper review published its final report, entitled Modernise or Decline: policies to maintain the universal postal service in the United Kingdom (Cm 7529).
8. The review process included consultation with consumers and their representatives, postal companies, trade unions, political parties, government departments, the devolved administrations and regulators.
9. The Hooper Review identified a number of key challenges facing the postal services sector and Royal Mail Group Ltd (Royal Mail). Particular emphasis was placed on Royal Mail as it is the only company currently capable of providing the universal service throughout the United Kingdom.
10. The Hooper Review identified five major factors that are hampering Royal Mail’s ability to respond to the changing market:
a) Inefficiency. Royal Mail is much less efficient and profitable than its main European peers.
b) Pension deficit. Royal Mail’s historic pension deficit is one of the largest in the United Kingdom and is a major drain on the company’s cash.
c) Pricing. Increasing postal prices is no longer guaranteed to generate sufficient revenues to offset falling volumes.
d) Labour relations. The relationship between management and the Communications Workers Union is extremely difficult.
e) Relationship with the regulator. The relationship between the company and its regulator, Postcomm, is difficult.
11. To address these difficulties, the Hooper Review proposed a package of measures:
a) Strategic partnership: Royal Mail should enter into a strategic partnership with a private sector firm that has demonstrable expertise in transforming a major network business.
b) Pensions: the government should tackle the historic pension deficit, to enable Royal Mail to benefit from modernisation.
c) New regulatory regime: postal regulation should be placed within the broader context of the communications market, with the primary duty of the regulator in relation to postal services being to maintain the universal service.
PURPOSE OF THE BILL
12. This Bill has three main purposes. First, it makes provision to ensure Royal Mail Group Ltd and Post Office Limited remain in public ownership, while allowing for a sale of a minority stake in Royal Mail. Secondly, it makes provision for the transfer of Royal Mail’s historic pension deficit to the government. Thirdly, it makes provision for a new regulatory regime for the postal services sector, including transferring regulatory responsibility from Postcomm to the Office of Communications (OFCOM), with the primary duty of OFCOM in relation to postal services being to maintain the universal service.
STRUCTURE OF THE BILL
13. The Bill is divided into four Parts:
14. Part 1 of the Bill deals with the restructuring of the Royal Mail group. In particular, provision is made to ensure Royal Mail Group Limited and Post Office Limited remain in public ownership, while allowing for a sale of a minority stake in Royal Mail.
15. Part 2 of the Bill deals with the Royal Mail pensions scheme. This Part provides for the transfer of the historic pension deficit to government and sets out how this will be done.
16. Part 3 of the Bill deals with the regulation of the postal services sector. This Part includes provisions giving OFCOM the functions of the regulator for the postal services sector and abolishing Postcomm, making maintenance of the universal service the primary duty for the regulator in relation to postal services, replacing the current licensing regime for the provision of postal services with a general authorisation scheme, and providing for the regulator to impose conditions aimed at ensuring accounting separation and cost transparency.
17. Part 4 of the Bill contains general provisions relating to orders or regulations made by the Secretary of State, commencement and other general matters.
TERRITORIAL EXTENT
18. The Bill extends to the United Kingdom.
COMMENTARY ON CLAUSES
Part 1: Restructuring of Royal Mail group
Summary and Background
19. Part 1 of the Bill is concerned with the restructuring of the Royal Mail group of companies. This includes Post Office Limited which is currently a subsidiary of Royal Mail Group Limited. In particular, the provisions will ensure that any Royal Mail company providing the universal postal service is publicly owned (which will permit a minority sale of shares in such a company to a third party) and will also ensure that any Post Office company engaged in the provision of a post office network remains entirely owned by the Crown.
20. To facilitate the internal group restructuring that will be necessary before a minority stake is sold in Royal Mail Group Limited, this Part of the Bill contains tax provisions to ensure that the internal group restructuring is, so far as possible, tax neutral.
21. This part also contains transfer scheme provisions which will enable the transfer of property, rights or liabilities between companies in the Royal Mail group.
Ownership of the Post Office
Clause 1: Post Office companies to be owned in their entirety by the Crown
22. Subsection (1) requires that each Post Office company must be owned in its entirety by the Crown (i.e. the Secretary of State and/or the Treasury). To ensure that this is the case, Subsection (2)(a) and (b) provide that any issue or transfer of shares in a company or of share rights (i.e. rights to subscribe for (or acquire shares) and any other rights in connection with shares) is ineffective if it would cause a Post Office company to cease to be owned in its entirety by the Crown. The meaning of Post Office company is set out in clause 2. Clauses 10 to 12 contain further details as to what is meant by “owned in its entirety by the Crown”.
Clause 2: Meaning of “Post Office Company”
23. Subsection (1) defines a Post Office company as one which meets the criteria set out. The criteria are that the company:
a) is engaged in the provision of post offices;
b) is or has at any time been -
i) a subsidiary of the original holding company (i.e. Royal Mail Holdings plc), or
ii) in the same group as a company that is or was, designated under this clause; and
c) is designated as a Post Office company by the Secretary of State.
24. Subsection (2) provides that a company can only be designated if immediately before its designation, it is owned in its entirety by the Crown.
25. Subsection (3) provides that an order made under subsection (1) may not be amended or revoked.
26. Under subsection (4), before section 65 or 66 of the Postal Services Act 2000 can be repealed, the Secretary of State must have designated Post Office Limited (POL) as a Post Office company. Section 65 of the Postal Services Act 2000 precludes the issue of shares in certain companies in the Royal Mail group, including POL, outside the Crown, except where the issue has been approved under section 67 of that Act. Section 66 of the Postal Services Act 2000 precludes the transfer of shares in certain companies in the Royal Mail group, including POL, outside the Crown, except where the transfer has been approved under section 67 of the Postal Services Act 2000. By requiring the Secretary of State to have designated POL as a Post Office company before the share issue and transfer restrictions in the existing legislation are lifted, it ensures that POL will always be caught by either the existing restrictions or the new ones.
Ownership of the Royal Mail
Clause 3: Royal Mail Companies to be publicly owned
27. Subsection (1) requires that each Royal Mail company must be publicly owned. To ensure that this is the case, subsection (2)(a) and (b) provide that any issue or transfer of shares or of share rights in a company is ineffective if it would cause a Royal Mail company to cease to be publicly owned. The meaning of Royal Mail company is set out in clause 4. Clauses 10 to 12 contain further details as to what is meant by “publicly owned”.
Clause 4: Meaning of “Royal Mail company”
28. Subsection (1) defines a Royal Mail company as one which meets the criteria set out. The criteria are that the company:
a) provides a universal postal service;
b) is or has at any time been -
i) a subsidiary of the original holding company, (i.e. Royal Mail Holdings plc), or
ii) in the same group as a company that is or was, designated under this clause; and
c) is designated as a Royal Mail company by the Secretary of State.
29. Subsection (2) provides that any company can only be designated if immediately before its designation, it is publicly owned.
30. Subsection (3) provides that an order made under subsection (1) may not be amended or revoked.
31. Under subsection (4), before section 65 or 66 of the Postal Services Act 2000 can be repealed, the Secretary of State must have designated Royal Mail Group Limited (RMG) as a Royal Mail company. Section 65 of the Postal Services Act 2000 precludes the issue of shares in certain companies in the Royal Mail group, including RMG, outside the Crown, except where the issue is approved under section 67 of that Act. Section 66 of the Postal Services Act 2000 precludes the transfer of shares in certain companies in the Royal Mail group, including RMG, outside the Crown, except where the transfer has been approved under section 67. By requiring the Secretary of State to have designated RMG as a Royal Mail company before the share issue and transfer restrictions in the existing legislation are lifted, it ensures that RMG will always be caught by either the existing restrictions or the new ones.
Securities
Clause 5: Power to direct issue of certain securities
32. This clause is similar in effect to section 63 of the Postal Services Act 2000. It enables the Secretary of State to direct a Post Office company, a Royal Mail company, or a company in the same group as such a company that is owned in its entirety by the Crown to issue securities to the Secretary of State, the Treasury, or to a nominee of either of them. The Secretary of State can also direct a Post Office company or a Royal Mail company to issue securities to its parent company if that parent company is owned in its entirety by the Crown
33. Any direction under this clause must specify the kind and amount of the securities to be issued, the terms of the issue and the date at or by which the securities should be issued.
34. Subsection (5) provides that any shares issued under this section are to be issued as fully paid up and treated for the purposes of the Companies Act as if they had been paid up by virtue of payment of their nominal value in cash.
35. Before a direction can be made the Treasury must give consent and the Secretary of State must consult with the company to whom the direction is being given, and any ultimate parent company of that company.
Clause 6: Government investment in certain securities
36. This clause enables the Treasury, or, with the consent of Treasury, the Secretary of State to acquire securities in a Post Office company, a Royal Mail company or a company in the same group as them.
Transfer of property etc
Clause 7: Transfer schemes
37. This clause enables the original holding company (Royal Mail Holdings plc) to make one or more transfer schemes to transfer property, rights and liabilities between the original holding company and a subsidiary of that company or between subsidiaries of that company, provided that the companies involved are owned in their entirety by the Crown (subsection (3)). The transfer schemes will ensure that in any restructuring the appropriate property, rights and liabilities are located in the appropriate company in the group. Transfer schemes have to be approved by the Secretary of State and can be modified by the Secretary of State, (subsection (4)), though the Secretary of State must consult the original holding company before modifying a scheme (subsection (5)). Subsection (6) gives the Secretary of State a power to direct the original holding company to make a transfer scheme, provided it is owned in its entirety by the Crown, as set out in the direction.
38. Further provisions about transfer schemes are contained in Schedule 1.
Clause 8: Transfer of employees other than under transfer scheme
42. This clause relates to any agreements between companies in the Royal Mail group of companies which are owned in their entirety by the Crown which provide:
i) for employees’ rights and liabilities under contracts of employment with one company to be transferred to another company in the group, or
ii) for activities carried out by employees of one company for another (e.g. under a secondment agreement) to cease when the company for which those activities were being carried out decides to carry out those activities itself.
39. The Secretary of State may designate any contract of employment which is to be so transferred or any employee involved in the carrying out of such activities for another company in the group. On the coming into force of the agreement, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) will apply in relation to the transfer of the designated contracts of employment, or the cessation by the designated employees of the relevant activities, whether or not the provision made by the agreement constitutes a relevant transfer under the TUPE regulations.
Clause 9: Taxation provisions relating to re-structuring
40. This clause introduces Schedule 2 which contains tax provisions relating to the restructuring of the Royal Mail group of companies.
Interpretation
Clause 10: Meaning of “owned in its entirety by the Crown” and “publicly owned”
41. This clause sets out the meaning of “owned in its entirety by the Crown” and “publicly owned” for the purposes of this Part of the Bill. The former is the case when the Crown owns all of a company (either directly or indirectly) and the latter if the Crown owns more that half of it (either directly or indirectly).
Clause 11: Indirect ownership of companies
42. This clause defines the meaning of indirect ownership of companies and is intended to ensure that the requirements for public ownership are not diluted by sales of shares along a chain of companies. To ensure RMG (and any other Royal Mail company) is publicly owned at all times, account must be taken of the Crown’s shareholding in any holding companies and how this flows through the subsidiary companies below it. For example, if the Crown owned 51% of shares of a holding company and that holding company owned 51% of a Royal Mail company, then the Crown would only indirectly own 26% of the Royal Mail company. Clauses 1 and 3 together with this provision ensure that the Crown will at all times in substance own 100% of a Post Office company, and more than 50% of a Royal Mail company, taking into account ownership through any intervening holding companies.
Clause 12: Ownership of a company
43. This clause sets out what is meant by ownership of a company. Subsection (1) provides that the proportion of a company owned by the Crown, or any other person, is whichever of the following is the smallest:
a) proportion of the company’s issued share capital owned by the person;
b) the proportion of the voting rights in the company owned by the person;
c) the proportion of the company’s distributable assets to which the person is entitled; and
d) the proportion of the company’s distributable profits to which the person is entitled.
44. Subsection (2) makes it clear that the property and rights of the Secretary of State, the Treasury or a nominee of the either of them shall be regarded as those of the Crown. Subsections (3) to (5) define “voting rights in the company”, “distributable assets” and “distributable profits” for the purposes of this clause. Subsection (6) provides for the application of the clause in relation to a company that does not have a share capital.
Clause 13: Directions
45. This clause provides that directions given under this Part of the Bill must be in writing and may be varied or revoked by further directions. A person in receipt of a direction has a duty to comply with it, enforceable as specified in subsection (5). The clause applies to the powers of direction contained in clauses 5 and 7(6).
Clause 14: Interpretation of Part 1
46. This is an interpretation clause which sets out the definitions of terms used in this Part of the Bill.
Part 2: Royal Mail Pension Plan
Summary and Background
47. Part 2 of the Bill gives power to the Secretary of State to remove historic pension liabilities from the Royal Mail and to take the liabilities into government. In particular, the Secretary of State is given power to:
- establish a new statutory scheme which may be used to provide benefits to certain members of the Royal Mail Pension Plan (“RMPP”);
- transfer rights and remove liabilities from the RMPP;
- transfer assets from the RMPP to the government;
- divide the RMPP into sections and to allocate assets and liabilities between those sections.
48. When exercising the powers conferred by this Part, the Secretary of State must ensure that the pension provision in respect of anyone in the RMPP (or who has benefits transferred to the new statutory scheme) is in all material respects at least as good immediately after the power has been used as it was before that use of the power (clause 19). In addition, where the Secretary of State transfers assets to the government the ratio of assets to liabilities in the scheme after the transfer must be at least as good as the ratio before any assets transfer and attendant transfer of benefits (clause 21).
Introduction
Clause 15: Introduction
49. Subsection (1) defines the three main concepts in this Part of the Bill.
50. The first concept is “qualifying member of the RMPP”. This means a group of members of the RMPP specified by the Secretary of State by an order under this Part.
51. The second concept is “qualifying time”. This is the cut off date by reference to which it is determined what rights or entitlements under the RMPP scheme are “qualifying accrued rights”.
52. The third concept is “qualifying accrued rights”. These are the entitlements under the RMPP scheme that may be transferred to the new scheme under clause 16. Qualifying accrued rights will cover:
- rights of qualifying members or their beneficiaries to future benefits under the RMPP;
- rights of qualifying members or their beneficiaries to the current payment of a pension, or other benefit.
53. Subsection (2) provides that “qualifying accrued rights” includes pension credit rights, which are pension rights provided to the ex-spouse of a member if that member’s pension benefit is divided between them pursuant to a pension sharing order on divorce, and any additional voluntary contributions which a member has made up to the qualifying time to enhance their benefits in the Royal Mail Pension Plan.
54. Subsection (3) provides that if “qualifying members” includes members who are in service after the qualifying time, their “qualifying accrued rights” will be calculated as if they had left the scheme at the qualifying time. So, in the case of current or active (rather than retired) members, the right that is transferred is to be calculated by reference to service up to the qualifying time and by reference to the member’s salary at or near the qualifying time, in accordance with the RMPP rules. If further rights accrue in respect of service before the qualifying time (e.g. where the pension is linked to the member’s final salary), amendments to the RMPP scheme will make it clear that these further rights will remain in the RMPP scheme. The Secretary of State has power to amend the RMPP scheme under clause 18 to achieve this.
Powers exercisable
Clause 16: Transfer of qualifying accrued rights to new public scheme
55. Subsection (1) confers power on the Secretary of State to establish a new scheme for pensionable service in the RMPP up to the qualifying time in respect of members designated as qualifying members. Subsection (2) allows the Secretary of State to transfer “qualifying accrued rights” of such members to this new scheme. The consequence of this transfer is that the corresponding liabilities of the RMPP scheme will be extinguished.
56. Subsection (3) provides that the benefits payable by a new scheme may be increased on such basis as the Secretary of State may determine and gives the Secretary of State power to pay a transfer value in respect of a member’s qualifying accrued rights. It also enables the Secretary of State to include provision in the scheme for further payments to active members of greater value than a deferred pension.
57. A new scheme established under this clause will not otherwise come within the definition of an occupational pension scheme or public service pension scheme in section 1(1) of the Pension Schemes Act 1993. Subsection (4) therefore provides that a new scheme may be deemed to be an occupational pension scheme for the purposes of applying any legislation to the scheme as may be prescribed by the Secretary of State.
58. Subsection (5) provides that an order by the Secretary of State may provide for a new scheme to be treated as a contracted-out scheme and as capable of providing contracted-out benefits for the purposes of Part 3 of the Pension Schemes Act 1993. This will allow benefits which are contracted out under the RMPP scheme to transfer to the new scheme.
59. Subsection (6) permits an order to have retrospective effect. This power may be used to enable the new scheme to be established with effect from a date before an order is made under this clause. This may be necessary if an effective date for the purpose of the transfer of liabilities has been agreed as part of a wider arrangement with a third party which precedes the date of an order. In addition this power would enable the Secretary of State to amend the new scheme rules to have retrospective effect, for example, to ensure that the rules complied with changes in legislation.
60. Under subsection (7) the Secretary of State may provide for a new scheme to be administered by any person and may delegate to any person any functions exercisable by the Secretary of State under a new scheme.
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