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Royal Mail posts profits rise but pension plan still to be delivered

Volumes continue to fall, with strikes only on hold

Royal Mail delivered what looked like impressive half-year numbers yesterday, revealing that operating profits were up 4 per cent to £184m on the same time last year.

Adam Crozier, chief executive, was joined by the Business Secretary, Lord Mandelson, in hailing the company's controversial modernisation programme, which he claimed was helping to get the business back on track.

"We have come a very long way since seven years ago when the company was losing more than £1m every working day and failing quality targets, to the position today where all four businesses within the group are profitable and – setting aside the impact of the recent strikes – quality targets are being met," Mr Crozier said.

A spokesman for Lord Mandelson's Department of Business, Innovation and Skills added: "Today's figures confirm that Royal Mail must press ahead with its modernisation plans."

However, there is likely to be little celebration. Blaming the recession, Mr Crozier gave details of a worrying drop in demand for the services offered by the group. The daily postbag averaged 72m items, down 3m on 2008, and 12m on 2006. Revenues at the group fell by £73m in the period. At the same time, Royal Mail has been hit by crippling strikes, and about 5,000 jobs have gone.

The profit is also unlikely to curry favour with the Communication Workers' Union (CWU), which last month agreed to halt industrial action over the modernisation process in return for talks with Royal Mail management. The discussions are being chaired by the former Northern Ireland parades commission chairman Roger Poole.

The crux of the dispute, which could lead to more strikes if the talks fail, has been the extent to which modernisation plans are introduced, a pay freeze and how many jobs will be lost.

"Postal workers are now working harder than ever before and we believe they deserve to be rewarded for the success they have brought to this change process which has delivered a 4 per cent increase in half-year profits," said Dave Ward, deputy general secretary of the CWU. "A pay freeze is no way to thank staff who have seen colleagues leave and workloads rise."

A potentially even bigger headache for Royal Mail is its burgeoning pension deficit, which even the company concedes is "daunting". It is expected to have ballooned to over £10bn when an actuarial review is completed in the new year. The last review, completed in 2006, showed a shortfall of £3.4bn.

A spokesperson for Royal Mail said that the group was spending £800m a year on the fund, and echoed CWU calls for the Government to take charge of the problem. Ministers seem less keen on the idea. Lord Mandelson's department introduced the Postal Services Bill in Parliament earlier this year, which would have led to it taking charge of the deficit, only to withdraw the Bill in July, blaming "market conditions". The Bill was intended to introduce reforms, including opening up Royal Mail to the private sector, and it is not clear when, or if, it will be reintroduced.

"The Government's policy on Royal Mail has been in limbo since the draft Postal Services Bill was withdrawn," said John Thurso, the Liberal Democrats' business spokesman. "Any improvement in profitability is welcome, but Royal Mail still faces many structural problems, including a decline in its core business and a pension deficit that has now topped £10bn."