Post price rise to plug pension gap

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The Independent Online

Royal Mail has warned that it may shortly be forced to raise the price of postage to help plug the £4.6bn hole in its pension fund.

The revelation comes just seven weeks after the state-owned mail company increased the price of first- and second-class stamps by a penny. It is understood that Royal Mail is considering a further 1p rise - which would generate £170m a year - to shore up its pension fund, which has 400,000 members.

Royal Mail chief executive Adam Crozier believes the bitterly contested regulatory review with Postcomm, completed in March, leaves the door open for an emergency price hike. It would follow a similar move in the energy sector. On Tuesday, the regulator, Ofgem, said gas and electricity companies could raise domestic fuel bills to cover pensions costs.

Any attempt to increase prices would deepen tensions between the regulator and Royal Mail executives. Earlier this year the loss-making Royal Mail accused Postcomm of threatening its survival. The Department of Trade and Industry stepped in to diffuse the situation.

Royal Mail has vowed to apply for the postage increase if it loses a separate battle with Postcomm. The regulator wants to force the company to slash the amount of money it charges courier firms to use its sorting and delivery network. Royal Mail has estimated that this could cost it £500m to £1.2bn and derail its plan to return to profitability. Last month it announced a £611m pre-tax loss.

A Royal Mail spokesman said: "Postcomm is proposing unrealistic prices for access services which threaten to unravel the price control and destabilise our turnaround. We're going to fund our pension schemes come what may. Irresponsible prices for access might have to be balanced by price increases for everyone else. The challenge for Postcomm is to avoid setting up that sort of anti-consumer scenario."

It is understood that Postcomm will make a final ruling on access charges in September. If the regulator sticks to its guns then Royal Mail is expected to apply for the price increases in late September.

The company believes it has a strong case for a price hike, based on two paragraphs in its last regulatory review. Postcomm stated that if Royal Mail were to make an application as a result of increased pension funding liabilities, then "Postcomm will consider it very carefully". The document adds that it views additional pension contributions of £50m a year as a "fundamental change of circumstance" which would trigger a fresh review.

Last month Royal Mail announced that it would pump an extra £100m into its pension fund - on top of the £265m a year it was already paying. The £4.6bn deficit was calculated under the controversial FRS17 accounting standard, which provides a snapshot of the difference between assets and liabilities.

Considering an application for postage price increases would be Postcomm chairman Graham Corbett's last task before stepping down this year. Sir George Bain and Sir Bill Morris are tipped as replacements.