Royal Mail payments won't plug pension hole

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http://investing.reuters.co.uk/news/art ... YMENTS.xml

By Laurence Fletcher

LONDON (Reuters) - Royal Mail's plan to clear its pension deficit is set to leave a 2.9 billion pound hole because the group is understating the size of the deficit, a leading pension consultant said on Tuesday.

In a note for RBC Capital Markets, independent consultant John Ralfe says the company's latest annual report shows it is basing its 17-year plan of inflation-linked annual payments of 260 million pounds on a deficit of 3.4 billion pounds -- below the 5 billion pound deficit under accounting standard IAS 19.

Such a payment plan is set to leave a deficit of 2.9 billion pounds, meaning the group may have to raise charges to customers.

"Even if this cash drain is sustainable, the payments are not enough to clear the 5 billion pound deficit -- after 17 years there will still be a 2.9 billion pound IAS 19 deficit," Ralfe says in the note.

The Royal Mail pension scheme's 450,000 members make it the UK's largest corporate pension scheme by that measure.

Ralfe's note comes shortly after the state-owned group, which lost its 350-year monopoly on postal services last year, faced strikes by workers over pensions, pay and shift changes.

The company said last week falling mail volumes, rising competition and a payment into its pension scheme led to a one-third drop in annual profit. It also attracted controversy by saying Chief Executive Adam Crozier would collect 74 percent of his performance-related bonus

"FINGERS CROSSED?"

Ralfe said Royal Mail's shortfall in payments could lead to higher charges for customers.

"Customers are paying for the pension deficit through higher stamp prices, agreed with Postcomm in the 2006-2010 price control review," he said.

"A complex mechanism also allows price rises if the deficit increases beyond a certain point -- so customers remain on the hook and should brace themselves for further price rises."

He also said the scheme was taking a huge asset allocation bet by having 65 percent of its assets in equities.

"Royal Mail is relying on the continuing equity bet -- 65 percent of assets or 15 billion pounds are in equities -- to clear the pension deficit.

"Are the board, the government and Regulator Postcomm managing the implications for customers and taxpayers of the huge risk in this equity bet or just keeping their fingers crossed?"

Ralfe said changes to pension terms -- agreed with the Communication Workers Union and now in consultation stage -- would save 20 million pounds in the first year by closing the scheme to new members. Basing pensions on an average over an employee's career save 50 million pounds a year, while raising the retirement age save 160 million pounds a year, he said.

A Royal Mail spokesman said: "The funding package agreed between Royal Mail and the trustees of the pension schemes fully addresses the deficits. The trustees are content and the Pensions Regulator is content."

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http://globalpensions.com/?id=me/17/news/27/48708/35/

by Keren Holland 06-11-2007

Moves by Royal Mail to clear its £5bn pension deficit within 17 years will still leave a hole of almost £2.9bn, according to analysis by independent pension consultant John Ralfe.

In the latest RBC Capital Markets' Open Forum Note, Ralfe, former head of corporate finance at Boots, pointed out Royal Mail is currently making inflation linked deficit contributions of £260m a year, versus only £233m net operating profit in 2007.

Ralfe said, even if Royal Mail could sustain the contributions, there would still be a large deficit at the end of 17 years.

He said: “Royal Mail is relying on the continuing equity bet – 65% of assets or £15bn are in equities – to clear the pension deficit. Are the board, the government and regulator Postcomm managing the implications for customers and taxpayers of the huge risk of this equity bet or just keeping their fingers crossed?â€