Royal Mail embarks on modernisation

[jemima]

From the Royal Mail group web site

http://www.news.royalmailgroup.com/news ... mail_group

Royal Mail Group today announced profits, in line with expectations, of £233m for the 2006-07 financial year - a fall of a third from the previous year, principally as a result of a sharp rise in pension fund costs by £193m to £722m. Underlying profits, omitting the benefit of £75m from the Government’s Social Network Payment to support the loss making Post Office network showed a steeper decline, at £158m, less than half the prior year’s result.

Royal Mail said that pressures on its performance from rising pension costs, falling mail volumes and increased competition underlined the urgency with which it now needs to put the next stages of its modernisation plan into action. The Group now has in place the key elements on which that programme is built:

• Around £4bn commercial funding package from the Government to enable us to modernise the business and incentivise our people through our new ColleagueShare scheme
• Agreement with the unions on the flexibility and changes in working practices that are vital to modernise successfully
• Support from the unions for the pension reform needed to allow the Group to become competitive and to protect a Defined Benefit pension scheme for our existing employees

During the first five trading months of the current year, 2007-08, the pressures of falling mail volumes and competitor activity in the wider communications market have become significantly more pronounced, with revenue in the Royal Mail Letters business down £78m compared to the same five months in 2006-07.

Key issues for the company as we move forward are the continuing high cost of funding the pension scheme, the continuing decline in volumes as customers move to other forms of communication and the beginning of the huge investment we will now make in the modernisation of the company. All these factors combined mean that this year and next we expect to be operating at around breakeven.

The full results for the year and a current trading update are set out in the attached statement from the Chairman and Chief Executive.

Ends

Issued by Royal Mail Group:
148 Old Street
LONDON
EC1V 9HQ
www.royalmailgroup.com

For the statement from the Chairman and Chief Executive, see http://www.royalmailgroup.com/portal/rm ... d=63500720

It's long so I won't post it all, but the pensions section reads;

"The challenge of rising pension fund costs
The cost of servicing the Company’s pension plans rose steeply in 2006-07 by £193m to £722m and accounted for the bulk of the drop in the Group’s profit. In addition the Group faces making cash payments to the pension fund of around £800m annually for 17 years to cover both ongoing contributions and the funding of the deficit. At the year-end the deficit stood at £5.0 billion in accounting terms. Against this backdrop it is clear that if the Group is to be successful as a business in the future it must tackle its long-term pension fund obligations.

That’s why we have recently outlined a series of proposals on which we are shortly to consult our people and other stakeholders - and which now have the support of the unions as part of our agreements on pay, modernisation and pension reform. Our number one priority is to protect our existing people’s pensions in a way that is affordable to the Company and which does not expose our people or the business to unacceptable risk going forward. The outline of the proposals is:

No increase in employee contributions;
Keeping a defined benefit scheme for existing employees;
An increase in the normal retirement age from 60 to 65 with effect from 1 April 2010. Employees could still retire at 60 if they chose but any pension earned from April 2010 would be reduced if taken before the age of 65;
Pension benefit earned from 1 April 2008 would be calculated on a Career Average Revalued Earnings basis, an approach that has emerged from our discussions with the unions over recent months;
Pension benefits earned to 1 April 2008 would remain in place, with the rate at which they grew in future continuing to be linked to final salaries; and
Closing the current defined benefit plan to new members on 31 January 2008 with a defined contribution scheme to replace it.
We anticipate that the Company’s current level of contributions to the pension plan – equivalent to 30% of the pensionable pay bill – will reduce to 22% in five years’ time, still well ahead of the average UK contribution."