Royal Mail warns cost of pension fund will soar to £800m

Royal Mail warned yesterday that its pension fund contributions will have to double to almost £800m a year to plug the huge deficit in the scheme.

This will wipe out most of the net profits the organisation hopes to start making once its three-year rationalisation programme is complete next March, meaning that it is unlikely to resume dividend payments to the Government for years to come.

The final-salary scheme has a £2.5bn deficit, based on the last actuarial valuation carried out in March 2003. For the previous 13 years, Royal Mail had taken a pension holiday, making no contributions at all.

Marisa Cassoni, Royal Mail's finance director, said its pension fund trustees had now decided that the deficit in the scheme needed to be made good over the next 12 years, rather than the 40-year timescale it had been working on. They have also decreed that the proportion of the fund's assets held in riskier but higher-yielding shares must fall from 80 per cent to 65 per cent, meaning that more money will have to be pumped into the fund to meet its liabilities.

The Royal Mail scheme is the fifth biggest in the country with 430,000 members - 250,000 of whom are already drawing their pension. In addition to the company's regular pension contributions of £300m a year, an extra £140m will be paid into the fund this year to help tackle the deficit, together with a one-off payment of £200m to meet pension entitlements of those retiring early under Royal Mail's redundancy scheme.

Ms Cassoni said the pension deficit contribution was likely to rise to £500m a year over a period of time, meaning the total amount being paid in by Royal Mail would reach £800m. That is £200m more than Royal Mail made in its most profitable ever year - 1998-99, when it recorded a pre-tax profit of £608m.

News of the increasing pension contributions came as Royal Mail said it was on course to hit its target of a £400m operating profit this year after making profits of more than £1m a day in the first half of the year.

The achievement of the £400m target will trigger a flat-rate "sharing in success" payment of £800 to all 190,000 Royal Mail staff at a cost of £160m. However, the organisation's top management, led by its chief executive Adam Crozier, stand to collect millions of pounds in performance bonuses.

Postwatch, the consumer body, criticised Royal Mail for failing to achieve 14 of its 15 letter delivery targets despite the huge increase in operating profits from £55m to £217m for the six months to the end of September.

But Royal Mail retorted that its performance on first class letters was one of the best in a decade in the July-September period, with 92.1 per cent being delivered the day after posting compared with a target of 92.5 per cent. The company expects to pay about £50m in compensation to customers this year for under-performance, the same as it paid last year.

All four divisions of the company improved their financial performance in the half-year, with the letters business Royal Mail increasing its operating profit to £261m, the 15,000-strong Post Office network cutting its losses from £90m to £52m, Parcelforce more than halving losses to £16m, and the General Logistics business turning a £2m deficit into a £16m profit. The pre-tax profit for the period was £55m compared with £3m a year earlier.

Allan Leighton scotched speculation he would step down as chairman in March.