The UK Government's plan to wipe Royal Mail's pension deficit clean by taking on its £8bn pension deficit could be in jeopardy, following a challenge from the European Commission. Pension Funds Insider understands that the commission is threatening to block half the bailout if it deems the move to be anti-competitive

The European Commission (EC) noted on 29 July that it wishes to probe whether the Government's offer to clean up Royal Mail's finances would break rules on offering state support to firms. The EC's Vice President Joaquín Almunia said: "The Commission acknowledges the importance of the reform of the postal market in the UK. However, we must ensure that the state measures do not provide undue advantages to Royal Mail as this would distort the conditions of competition among postal operators in the Internal Market."

An EC spokeswoman explained to Pension Funds Insider that European Union guidelines stipulate that the government's aid to Royal Mail "must be limited to the strict minimum of the restructuring costs necessary to enable restructuring to be undertaken. Moreover, according to the same guidelines, the aid beneficiary is expected to make a significant contribution to the financing of the restructuring from its own resources or from external financing at market conditions."

Significantly, the spokeswoman continued to explain that "in the case of Royal Mail, (its) own contribution should be at least 50% of the restructuring costs." Retaining half of the £4bn deficit would be a big blow to the government's plans to sell the state postal operator, as any buyer would have to take on a money-draining multi-billion pound pension hole.

The commission is now in a process of consulting relevant parties and has also announced the "possibility for interested third parties to comment on the measures under investigation". No timeframe was given for the investigation and a spokesperson told Pension Funds Insider that "it is impossible to predict how long it will take, that depends a lot on the co-operation of the relevant British authorities".

On the attack

David Sibbick, Secretary of the Mail Competition Forum, which represents eight private postal operators in the UK including TNT and DHL, told Pension Funds Insider that his group are to respond to the EC's call for comment.

Sibbick said that his organisation was "not attacking postmen's pensions in any shape or form" and that they must be paid as promised. However, there was a real question over who should "pick up the tab".

"The commission must take a view on whether the taxpayer taking the burden is reasonable," he said. "Featherbedding Royal Mail at the expense of competition just isn't acceptable and what is proposed doesn't seem fair."

Sibbick criticised Royal Mail for mismanaging their pension scheme in the past, and suggested that the operator's deficit was made worse by it "failing to modernise".

"One of the things that irks us that if Royal Mail had met even the relatively modest efficient targets that the regulator had set for them they would be £600 million per year better off and their pension problems would have largely gone away, " said Sibbick.

"Clearly as private competitors, if we get into the same position as Royal Mail with our pension funds we have to sort it out, we aren't going to be bailed out by taxpayers," he added.

A particular point of criticism from Sibbick is the inclusion of a £1.7bn taxpayer-funded debt write-off for Royal Mail along with the proposals to relieve the pension deficit. He claims there is no mention of the debt proposal in the Postal Services Bill that passed through parliament earlier in the year.

Royal Mail response

Royal Mail, in response, has stated that "this is a matter for our shareholder, the Government. The EU State Aid process is a negotiation between the Member State and the EU Commission."

Royal Mail's hopes that the EC will approve the removal of its pension deficit are boosted, however, by the precedent of French postal operator La Poste, which was privatised in 2007. The French government guaranteed past and future pensions of La Poste employees to pave the way for a sell-off and an investigation from Brussels decided that these guarantees were a price worth paying for liberalising the French postal market.

The commission has been keen however to emphasise subtle differences between the planned Royal Mail deficit bail-out and the La Poste case. It has noted: "while the 2007 decision ensured that La Poste's effective social security costs were comparable to those of competitors, it seems at this stage that a large share of Royal Mail's pension deficit is due to the adverse conditions on the stock markets which have affected all UK undertakings alike".

A spokesperson for the Ministry for Business, Innovation and Skills told Pension Funds Insider that the investigation in Brussels was fully expected in the process of privatising Royal Mail. When the investigation was launched, Postal Affairs minister Edward Davey said: "State aid approval is the next critical step in our plans to put Royal Mail on a secure footing. Today's announcement was expected and is the start of the EU's state aid procedures.

"It is only right that the Commission has opened the State Aid process to properly investigate the case. However, we are keen to resolve the case as soon as possible, and are seeking a resolution by March 2012."

First published 05.08.2011

dbillingham@wilmington.co.uk