Royal Mail: A hedge fund that delivers letters
Royal Mail is a hedge fund that delivers letters.
Or at least that's what the pension-fund expert John Ralfe argues. He has spotted that Royal Mail's vast pension fund took a massive punt on shares via the derivatives market last year.
The accounts of the Royal Mail Pension Fund show that it had £5.13bn of "economic exposure" to UK and overseas shares via futures contracts as of 31 March this year.
That's up from £2.1bn a year earlier.
Now the pension fund will argue that it has used futures as an efficient way of investing in equities.
And if the equities futures are ignored, the fund has a conservative investment strategy, with 71.5% of assets in bonds or cash.
But the futures bets shouldn't be ignored.
The fund's annual report (as opposed to Royal Mail's) describes this investment in equity futures as a "return-seeking overlay".
And it says that this return-seeking overlay rose from being equivalent to 10.5% of assets to 20.1%.
Some would say that was a big wager on shares. And, of course, it's fabulous that it seems to have paid off.
The return on all the fund's assets (not just derivatives) in 2009-10 was 29%, which more than made up for the previous year's losses and was superior to the performance of many pension funds.
The precise contribution of the futures bets on shares to this return is unclear. But it's reasonable to assume it was positive.
But what if it hadn't paid off?
Here's what will trouble some: there's no mention of the futures investment in Royal Mail's own annual report and accounts.
John Ralfe says that is a worrying omission: the pension fund is a formal liability of Royal Mail, which means that when the fund takes increased risks, so too does Royal Mail.
"These huge off-balance-sheet side-bets should certainly be disclosed in Royal Mail's own accounts," Ralfe asserts.
I understand that Royal Mail's directors were aware of the pension fund's future speculation. And they discussed it with their auditors.
They believe that the potential liability to the group of the derivatives investment going wrong is captured in a general disclaimer in the accounts about uncertainties.
But does the Business Secretary, Vince Cable, know that - in effect - he's the shareholder in a giant hedge fund that happens to be attached to postal service?
Here's the question for him: as Royal Mail prepares for privatisation and for simultaneously putting the bulk of its pension-fund liabilities on to the public sector's balance sheet, should its pension fund be speculating to the tune of £5bn on equity futures?