Royal Mail seeks £2bn bail-out for pension fund

Allan Leighton, the Royal Mail chairman, has asked the Government to shoulder half of the company's £4.4bn pension deficit as part of a sweeping overhaul of its balance sheet which could pave the way for an employee share buyout of 51 per cent of the business.

Allan Leighton, the Royal Mail chairman, has asked the Government to shoulder half of the company's £4.4bn pension deficit as part of a sweeping overhaul of its balance sheet which could pave the way for an employee share buyout of 51 per cent of the business.

Royal Mail said yesterday that unless the pension deficit was tackled urgently the company would be rendered technically insolvent under new international reporting standards which come into force this year. The new accounting rules, which require companies to include pension deficits on their balance sheets, will leave Royal Mail with negative net assets of £2bn.

Tony Blair, Gordon Brown and the Trade and Industry Secretary Alan Johnson are thought to have told Mr Leighton that they support an employee buyout of Royal Mail which could net the Exchequer about £1.5bn, even though Labour's election manifesto said it has "no plans to privatise" the organisation.

Royal Mail has told ministers it is seeking a cash injection of £2bn to £2.5bn. This would be used to buy the shares from the Government and place them into an Employee Share Ownership trust, invest in further automation and help plug the remaining deficit in the pension fund.

Mr Leighton intimated he was hopeful of progress on the restructuring of Royal Mail by Christmas as part of a review of the impact on the business of postal liberalisation.

The company's pension scheme has assets of £17bn but liabilities of more than £21bn on an FRS17 basis. Cash contributions last year reached £330m.

Of the 400,000 scheme members, some 220,000 are already drawing a pension. Mr Leighton wants the proportion of the deficit accounted for by these pensioner members to be transferred to the state because they are "historic" liabilities which pre-date the new management taking over Royal Mail. Mr Leighton is confident he can win over trade unions and Labour backbenchers by presenting the buyout as a move to spread employee share ownership.

Royal Mail executives are concerned that without fresh staff incentives, the success in turning the business around from losses of £1m a day three years ago to profits of nearly £2m now will be put in jeopardy.

The company confirmed it made record operating profits of £537m last year, up from £220m in 2003-04, on turnover of £8.96bn. Pre-tax profits were £207m. This enabled Royal Mail to pay a £218m staff bonus, worth just over £1,000 per employee. It also triggered a £9.6m payout to directors, which included £5.5m in performance awards even though it missed 11 of its 15 quality of service targets including the requirement to deliver 92.5 per cent of first-class letters the next day.

Rival postal service launched

The public will be able to start using a rival mail service next year to post letters anywhere in Britain.

Business Post said that its UK Mail division planned to begin trials with retail customers later this year using letter boxes in supermarkets. The guaranteed two-day delivery service is expected to cost 25p compared with the 30p cost of a first-class stamp. Paul Carvell, the chief executive of Business Post, said that if the trials were successful, the service would be rolled out nationwide.

UK Mail, which currently handles only bulk business mail, made a small profit in its first nine months. Business Post made a pre-tax profit of £20.5m in the year to the end of March.