Regulator takes tough line on Post Office pension gap

Royal Mail must not expect taxpayers or customers to help bail out its £4.5bn pension deficit, the industry's regulator Postcomm told MPs last night.

Giving evidence before the Commons Trade and Industry Select Committee, the Postcomm chairman Nigel Stapleton warned that if Royal Mail was allowed to raise prices to tackle the deficit, it would drive customers away.

He said the best safeguard of Royal Mail's future and a one-price-goes-anywhere letter delivery service was for the state-owned company to improve its efficiency. The regulator has proposed that the price of a first class stamp should increase only from 30p now to 34p over the next five years. Royal Mail wants the price to increase to 39p to help close the huge hole in its pension fund.

But Mr Stapleton said: "There comes a point where you push too much on price and people go elsewhere. Our biggest concern is that people will move to e-mail or texting while direct mailers will move to business magazines and we will get into a horrible vicious circle."

Postcomm wants Royal Mail to increase efficiency by 3 per cent a year - saving £180m annually - and has proposed that it should be allowed to charge customers an extra £261m a year to help reduce its pension deficit.

Mr Stapleton said this meant Royal Mail was already receiving very generous treatment under the proposed new price controls which are due to take effect in April. The regulator will announce a final set of proposals later this month.

Postcomm has indicated that it might be prepared to allow some further increase in postal prices if Royal Mail's pension deficit worsens further. But it is opposed to any increase in stamp prices to address the deficit as it stands. The regulator was backed by the consumer watchdog Postwatch, which said in evidence to the committee: "We have seen no evidence or proposals which illustrate that the Royal Mail management has taken responsibility to find an internal solution to its pension deficit. It appears to be somebody else's problem. This we do not understand."

The Postwatch chairman Peter Carr said one of the reasons the deficit had grown so large was because the company had enjoyed a 13-year "pension holiday". He said customers would be vehemently opposed to any further increase in prices to make good the shortfall.