Royal Mail pensions blow despite £2bn cash injection

Published on Thursday 8 February 2007 14:08

THE Royal Mail today announced the closure of its final salary pension scheme for new employees despite a £2 billion cash injection from the Government.

But bosses sweetened the pill by announcing a "phantom" share scheme that could give staff up to 5300 in bonuses over the next five years.

The firm's chairman, Alan Leighton, and chief executive Adam Crozier, announced the pension scheme change as Trade and Industry Secretary Alistair Darling agreed to lend the company 1.2b of taxpayers' money and pay another 1bn into the pension fund.

The Edinburgh South West MP said the cash would protect existing pensioners' retirement benefits and finance major modernisation of the firm's equipment.

But despite the extra money, Royal Mail decided to open consultations on closing the final salary pension scheme, which includes 167,000 of its 190,000 workers.

It said that with the gap in funds for the scheme standing at 6.6bn, it was no longer viable as new rivals came in to compete for business deliveries.

Instead it plans to introduce a contribution-based scheme for new employees and entrants that will apply to senior managers as well as postmen and women.

But it hailed the new "phantom share scheme" based on a similar system operated by John Lewis stores as a major step forward.

Under the scheme, workers will get the equivalent of 20 per cent of the firm's shares, and if the business does well, could receive up to 5,300 in dividends by 2012.

The phantom shares will be distributed free, and each year an annual share of profits and increased value will go to workers, which could eventually reach a total bill of 1bn.

The move is a compromise after the trade unions rejected the plan to hand over 20 per cent of the share capital to staff in an employee share scheme.

The Royal Mail defended the decision to close its final salary scheme because of a loss of big contracts since the opening up of business post to commercial rivals last year

It has lost several Government schemes including one worth 12 million from the Department of Work and Pensions.

Mr Crozier said: "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.

"To ensure the problem does not get worse for the company or our pension fund members, we will now begin a six-month consultation on replacing the final salary scheme for new recruits with a defined contribution scheme, and on the best way to safeguard an affordable final salary scheme for our existing employees."

The Government agreed to lend the Royal Mail 1.2bn from Treasury coffers at commercial rates, to pay for restructuring and modernisation, including new computerised systems. It also approved the paying of 1bn into a ringfenced account for pensions.

"We fully support the business in delivering the programme of reform that it needs to undertake," said Mr Darling.

"We recognise that there are a number of difficult changes that need to be made to the way the company operates, including limiting the pension liability going forward, and fully support the business in making them.

"It is for the management and staff to make the changes necessary to give the company a sound platform on which to build for long term success in a competitive market."