Royal Mail to abandon final salary pension for new staff

Leaders of 190,000 Royal Mail workers registered "shock and anger" yesterday over a decision by the state-owned company to close its final-salary pension scheme to new recruits to fill a massive £6.6bn black hole in its retirement fund.

The £1bn increase in the pension deficit means that Royal Mail arguably has the biggest pensions shortfall of any organisation in Britain.

The growing liability helped to cut the Mail's interim profits by 86 per cent in the first six months of the financial year. Returns fell to £22m between April and September last year compared with £159m in the same period a year earlier.

The Royal Mail sought to sweeten the pill by unveiling plans to give "phantom" shares to its workers, which it estimated would be worth £5,300 per employee over five years, depending on financial performance.

The Communication Workers' Union (CWU) said the pensions announcement was a "complete shock" and that the promise of shares for employees was "nothing but jam tomorrow". Employees' leaders believe the equity promise presages moves to privatise the corporation.

Ministers have tried to end final-salary schemes for new entrants in other parts of the public sector but have been forced to compromise.

Servicing costs for the Royal Mail pension scheme, with nearly 170,000 active members, 174,000 pensioners and 105,000 deferred members, increased by £280m to £730m in the past year.

The Royal Mail's chief executive, Adam Crozier, said it was important to safeguard the future of the fund. "The cost of servicing the pension fund clearly damages our competitiveness as we need to increase the price of our products and services to pay for it.

"Around 93 per cent of our mail volumes come from business customers, and they should not have to pay for the increased cost of our pensions - and if we ask them to do so, more of them will simply go to the competition."

He said that to ensure the problem did not get worse, the company would begin a six-month consultation exercise on replacing the final-salary pension scheme for new recruits with a defined contributions scheme. It would also try to work out the best way to safeguard an "affordable" final-salary arrangement for existing employees.

Under the terms of the suggested share scheme, which will be similar to one run by the John Lewis Partnership, about a fifth of the value of Royal Mail will be earmarked for workers and up to £1bn could be redistributed if modernisation targets are met.

The postal group published a five-year investment plan, agreed with the Government, to help it compete with its rivals and address "major funding challenges".

Ministers have agreed a £1.2bn debt facility, on commercial terms, to modernise the service, while a £1.7bn plan to restructure its network will go ahead as planned, including 2,500 post office closures.

A further £1bn will be invested in pensions, including £850m from company reserves.

Allan Leighton, Royal Mail's chairman, said management needed to transform the company's operations. "We will do so while also rewarding our people for their efforts and allowing them to share in our continued transformation."

Dave Ward, deputy general secretary of the CWU, said his organisation had not been made aware of the company's pensions plan. "The Government and Royal Mail have had a responsibility to discuss the future of the pension scheme with us and they have failed to do so.

"Ignoring the union on the crucial issue of the pension scheme is irresponsible and so is the plan to discriminate against future employees. We are both shocked and angry at how this announcement has been made."

The union said it had campaigned for more than two years to maintain public ownership of the Royal Mail, but voiced concern about the share scheme.

Paul Reuter, national officer at Amicus, said his union would "vigorously oppose" any suggestion that the share scheme might lead to privatisation.