Business

Royal Mail pension plan challenged by regulator

  • 30 July 2010
  • From the section Business
Filton sorting office
Image caption A 38-year deficit repayment plan would the longest yet suggested at any pension scheme

The Pensions Regulator is challenging a crucial plan to pay off the £10.3bn deficit in the Royal Mail pension scheme over 38 years.

The pension scheme's trustees have struck the deal with the company.

Royal Mail says it will continue to make "substantial" extra payments to clear the deficit.

But the regulator says it has "substantial concerns about both the deficit figure and other aspects of the agreement".

Details of the deal between the company and the trustees are being kept private for the time being.

But the BBC has learnt that the plan involves repaying the deficit over 38 years, more than twice as long as the current deficit repayment plan.

Deficit payments would be tiered, starting a bit above their current level but rising sharply in four or five years' time.

"The regulator is passionately opposed to the idea," said a source close to the scheme.

"They would see it as a green light to every other scheme in the country."

The £10.3bn deficit was calculated as of 31 March 2009, but the trustees say that a valuation a year on suggests the deficit has fallen to £8.4bn.

Formal review

The regulator's concerns and its formal investigation have been revealed in a letter to all Royal Mail pension scheme members from Jane Newell, chairman of the trustees.

"The trustee is pleased to report that agreement has been reached with Royal Mail regarding the ongoing funding of the Royal Mail pension plan," she said.

"Royal Mail will continue to pay substantial contributions in excess of the current level to repair this deficit [£10.3bn].

"The agreement is now subject to a formal review by the regulator," she added.

The deficit in the scheme has long been identified as the biggest financial problem facing the postal service.

In the Queen's Speech, the newly-elected coalition government said it would revive the previous Labour government's plan to part or wholly privatise the Royal Mail.

It said this would include plans to "resolve the problems" with the pension deficit.

Last month, the Business Secretary, Vince Cable, asked the businessman Richard Hooper to update a report on the Royal Mail he had written for the Labour government in December 2008.

That had recommended that the state should take over the pension scheme, to relieve the Royal Mail of the burden of eradicating the deficit and clearing the way for its part privatisation.

Previous agreement

Under a previous deal struck between the company and the pension trustees in 2006, Royal Mail committed itself to paying an extra £270m a year over 17 years, to clear a deficit of just £3.4bn.

In 2008, the scheme was closed to new joiners, who now join a "money purchase" fund, rather than a final-salary scheme.

Existing members were moved into a career-average scheme, which is much less generous than the old final-salary version.

Along with raising the standard retirement age to 65, the Royal Mail hoped all these changes would eventually cut its total contribution rate from about 30% of staff salaries to about 11%.

Related Internet links

The BBC is not responsible for the content of external Internet sites