Royal Mail continues to wrestle with its pension costs

Royal Mail is suffering from the problem common to all postal monopolies, big pension liabilities.

The threat of strikes at the UK mail and e-commerce logistics provider has arisen again over attempts to reform the pension scheme. With characteristic rhetoric, the head of the Communication Workers trade union has promised to “smash Royal Mail to bits”. A ballot is being held for strike action, although this does not mean a strike is inevitable.

The problem is that the annual contribution by the company into the present pension structure is set to double over the next few years, from its present £400m. This would obviously depress profits in a market environment which is far from easy.

Such problems are not unique. Deutsche Post suffered from continuing disputes with the Verdi union several years ago. Although this was predominantly about direct pay rather than pensions it was heavily influenced by Deutsche Post’s restructuring in the face of declining mail volumes and the need to adapt to e-commerce. The pension deficit of the United States Postal Service is vast and the organisation struggles to pay the many billions in annual contribution required.   

The pensions liabilities of Royal Mail were also vast. However, proceeds of the privatisation of the former state monopoly were in part used to reduce the pension fund deficit. Yet still the fund is a burden to Royal Mail.

The company has struggled to grow out of its legacy problems. It has grown and sustained its margins in the face of a shrinking physical mail market. Productivity has risen, with many operations increasingly automated, although the key ‘last mile’ activity remains labour intensive. However, growth from e-commerce has been moderate and insufficiently profitable to support the continuing demands.

What the story of Royal Mail illustrates is how to manage these issues. The pension fund is a problem for the workers, management and shareholders of Royal Mail, not for the British taxpayer. The privatisation of Royal Mail is an example to other nations struggling with the liabilities of their postal monopolies.

Source: Transport Intelligence, September 19, 2017

Author: Thomas Cullen


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