Royal Mail wins stamp rise to fund pension gap

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The Independent Online

Royal Mail is to be allowed to raise the price of a first-class stamp to 36p to help fund its £4bn pension deficit, under final proposals published today by the postal regulator.

Postcomm said that this would enable Royal Mail to contribute an additional £320m into its pension fund. That would pay off the deficit over an eight to 10-year period if equity markets performed well or 17 years based on more "prudent assumptions".

The new price control, due to take effect next April, will enable Royal Mail to make an operating profit of £650m a year, said Postcomm, assuming it achieves annual efficiency savings of 3 per cent. It also provides for £1.2bn of investment in the network.

Postcomm has also agreed to provide Royal Mail with a "safety net" if its pension deficit worsens for reasons outside its control or letters volumes fall short of forecast.

This will enable Royal Mail to raise prices beyond 36p but only if the deficit increases by more than £2bn or letter volumes are more than 2 per cent below assumed levels.

The company had wanted permission to raise the price of a first-class stamp from 30p now to 39p by 2010 in order to tackle its pension deficit and fund a £2bn investment programme. Under Postcomm's initial proposals, published in May, it would have only been allowed an increase to 34p.

Royal Mail now has three months to decide whether to accept Postcomm's proposals or to appeal to the Competition Commission. Adam Crozier, its chief executive said: "Today's announcement from Postcomm shows that the regulator has moved a long way from its initial stance. But no one should regard these proposals as anything other than tough - particularly for a business with challenges on the scale that Royal Mail is currently facing."

The chairman of Postcomm, Nigel Stapleton, described the proposals as a "price control for pensions", and said he would be "disappointed" if Royal Mail chose to go to the Competition Commission because of the continued uncertainty it would create. "There is no way we would feel daunted by a referral but hopefully a further period of uncertainty is something Royal Mail will ponder very carefully before coming to a decision."

The new price regime, which runs until 2010 also includes tougher performance penalties against Royal Mail which could see it being fined as much as £280m if it misses delivery targets by 5 per cent or more.

Postcomm's initial price proposals in May would have allowed Royal Mail to contribute an extra £260m a year to pay off its pension deficit. The regulator said it had decided to increase this to £320m to take into account an actuarial review of life expectancy now being undertaken. Royal Mail believes increased longevity could add a further £2bn to its pension deficit, requiring it to inject an extra £400m to £500m a year on top of normal contributions. But Postcomm calculates that the deficit should increase by no more than £800m.