The latest news about the Royal Mail’s pension scheme may be a news the trustees do not want to hear.
Royal Mail’s annual accounts have revealed a black hole of 6 billion pounds in its pension funding. Despite some significant action taken by Royal Mail bosses to plug the gap in the scheme in the past including cash injections and funding commitments, the firm’s accountants have still arrived at this spectacular figure.
In fact, when the official actuaries’ (three yearly) valuation of the scheme is published in the next couple of months, the deficit is expected to be even bigger. Some commentators report that the deficit may even be as large as £10 billion.
Like most final salary pension schemes, this one has been closed to new members for a while. It has also been partially replaced with a “career average” scheme which typically entitles members to a lower pension than they would have received under the final salary arrangement. In a further step to curb the deficit, the Royal Mail also raised its retirement age to 65 a couple of years ago.
The accounts show that Royal Mail paid in £867 million into the scheme during its last financial year. Whilst a large sum, this amount seems like a drop in the ocean compared to the huge deficit.
Yesterday the coalition government announced plans for the partial privatisation of Royal Mail, but the business is not an attractive proposition for outside investors given this enormous deficit. Some commentators have said that the pension deficit even threatens the viability of the business itself.
Given that Royal Mail has a legal obligation to close its pension funding gap, no doubt the government will be looking at alternative ways to fund the scheme. Will taxpayer’s money be poured into the scheme?
If the deficit continues to grow in this manner, there may be no alternative, no matter how unpalatable that may seem to a cash strapped Treasury.
