Royal Mail in crisis as pension fund hole heads towards £6bn

Royal Mail's pension costs could soar to £1bn a year because postmen and women are living longer, pushing the organisation into bankruptcy, its chairman Allan Leighton warned yesterday.

The company disclosed that an actuarial review of its pension fund, due for completion in March, could increase the deficit in the scheme by another £2bn to £6.25bn, because of new assumptions about life expectancy.

This would require the company to pay £600m a year into the fund to close the shortfall over a 10-year period and £100m in interest charges in addition to its normal pension contributions of £300m.

Mr Leighton said the pension contribution would then be twice the £500m in cash the company currently generates, requiring it to double its profits to stave off collapse.

Asked what would happen if the Government did not agree to shoulder some of its pension liabilities and it was not allowed to raise stamp prices further, Mr Leighton said: "Then the deficit could bankrupt us."

Earlier this week, the minister for Postal Services, Barry Gardiner, appeared to rule out any government intervention to take on some of Royal Mail's historic pension liabilities. It wants to be relieved of £2bn of the deficit relating to pensioners and former employees.

Meanwhile, the postal regulator is refusing a request from Royal Mail to be allowed to increase the price of first-class post from 30p to 39p over the next five years to deal with its pension shortfall. Postcomm says a price increase to 34p is sufficient to deal with the current deficit provided Royal Mail makes efficiency improvements and cuts capital expenditure. But it has indicated it might allow some additional price rises if the deficit worsens.

The board of Postcomm was meeting yesterday under the chairmanship of Nigel Stapleton to finalise its price proposals which are due to be published before the end of the month.

The pension crisis comes at a critical time for Royal Mail. Interim results announced yesterday showed mail volumes have fallen for the first time in 25 years. Royal Mail also faces the complete opening of the postal market to competition from January and needs to find £2bn to modernise the network.

Mr Leighton said the company had reached the "tipping point" and disclosed it had asked Postcomm to postpone the price review for a year because of the risks and uncertainty surrounding the business.

Although operating profits rose 20 per cent to £159m for the six months to the end of September, the contribution from the letters business, which accounts for three-quarters of total revenue, fell 3 per cent to £173m.

Royal Mail also announced the departure of a second senior executive in as many months. David Mills, the chief executive of Post Office Limited, is leaving at the end of the year along with the finance director, Marisa Cassoni, whose departure was announced in October. They are being replaced by external candidates. Royal Mail is also due to announce the appointment of a managing director of its letters division, who will also come from outside the company.

Royal Mail delivered 125 million fewer letters in the first half of the year, a decline of 1.2 per cent. It blamed the fall on the economic slowdown and the growth in electronic mail and data transmission.

The volume of mail delivered on behalf of rival postal operators under so-called access arrangements increased from 13 million letters a month to 90 million and is projected to pass the 1 billion mark by the end of the year. The Post Office counters network shaved its losses fractionally to £57m but the group's European parcels business, GLS, increased profits 87 per cent to £43m.