The Post Office – a large pension fund with a company attached

Yesterday the Commons debated Post Office closures. This century the Post office has been struggling to make a profit on both its counters businesses, and in its main mail delivery activity. The former has been damaged by the government’s decision to switch a lot of its business away from Post Offices to automated systems using the internet, the latter by the growing competitive challenge mounted by competitors. As the Post office confessed in its own Report for 2006-7, the competitors are 40 more efficient than the Post office putting its business under considerable pressure.

It is sad to see the decline of this once proud and profitable nationalised industry. The Counters business lost £99 million on revenue of £868 million last year, a painful level of loss. The government has agreed a staggering £4 billion package of financial support for the business, and has managed to keep that within state aid rules. The 2007 balance sheet shows the Group in net deficit to the tune of £2.2 billion – in other words the liabilities of the Post office exceed its very considerable assets by that amount. The Post Office may have many properties, a big fleet of lorries and vans, a vast array of sorting and delivery equipment, yet add it all up and it’s not enough to cover all the future liabilities. That’s why it needs the government funding package and revenue subsidy.

The main reason is the pension fund.It is the crowning riony that the government’s attack on pension funds by tax and regulation should have brought the main fund of a principal nationalised industry so low. Future employees will get a less good deal, as the management wrestles with the huge deficit. The company has to show the £5 billion deficit on the fund on its balance sheet, and has to make large payments each year into the fund to try to repair the damage. It still employs over 200,000 people directly, as well as the franchisees that run its still substantial network of sub Post Offices. The management is currently battling to cut the future costs of the pension scheme, against Union objections.

The debate in the Commons was largely about the consultation process itself, and the way the management and government go about identifying the 2500 Post Offices they think they need to close to cut the losses. The problem is that closing too many all in one go can make it more difficult in the short term to return to profitability and generate the cash the Group needs. Closures entail costs, whilst they reduce revenues. Unless the Group cuts its overheads more than proportionately it can struggle to get to profit by the negative approach of cutting.

The middle and senior line management of the Post office is not trusted to run their own assets or to grow their own businesses in the way that would be common in private sector activities. Finding new business activities that would adapt well to sales over the Post office counter would be a better model than trying to close too many offices all at once. Trusting managers to redevelop valuable property sites for other uses and to use the cash they free from that to buy or build purpose built facilities in more accessible locations would be a help. If the Post office insists on closing lots of smaller offices, it needs to understand that many of the larger offices are not big enough or modern enough to handle their existing business, let alone the extra business that will be visited upon them following the closures.

The Directors last year between them received over £7 million of pay and bonus, so they have plenty of incentive to get it right. There need to be more and better incentives further down the line, and more power to individual managers to make a difference. I find that the Post office is gripped by the incapacity to change because it is a highly centralised operation, where the measure is cut costs, rather than grow the business.

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2 Comments

  1. A Ellis
    Posted March 20, 2008 at 4:22 pm | Permalink

    Articles 87,88,89 of the Amsterdam treaty lay out the rules governing monopoly, as a result our so called sovereign government has to seek permission from the EU commission on state aid and funding for the royal mail and Post office.
    EU directive 97/96EC `Privatisation of Postal service` establish a universal postal service within the EU.
    The second Postal Service Directive (2002/E39/EC).
    The Post Office is in the situation where it is obliged to deliver the unprofitable mail, while half of the profitable mail throughout the EU is taken by the Dutch TNT and Deutsche Post.
    Any packages that the unreserved sector do not wish to handle, can be passed back to the Royal Mail to deliver, at 13p per item.
    It's no wonder that the Royal Mail's operating profit fell by 86% to just 22million in the first half of 2006/07.
    Your masters in Brussels, ( the competition commissar) allowed the subsidy to run until March 2008. The Amsterdam treaty forbids our sovereign government from subsidising our rural post office network. While at the same time bringing in directives that undermine it's profitability.
    This despicable government removed it's custom purposely to undermine the profitability of the Royal Mail, to create a reason it could give to the public to cover up, yet another, treacherous act about to be perpetrated upon our nation.

  2. Michael Corby
    Posted October 13, 2008 at 5:08 pm | Permalink

    The state of the PO has got much much worse.

    The latest PO pension fund report shows that the deficit has risen to over 5 bn.

    Since then equities and property values have crashed, and these will cost the fund at least another £5 bn, without allowing for lost dividends.

    But the bad news does not end there. In the short run inflation as measured by RPI will increase, and it provides RPI index linked pensions.

    But, the bad news does end there – – – the last valuation was before the substantial up-rating of life expectancy, so there is a hidden deficiency waiting to be applied at the next formal revaluation.

    But, the bad news keeps coming. The PO paid in out of its reserves, and HMG put monies into an escrow account (just under £2bn in total) to allow the deficiency to be paid off over 17 years instead of 10 years. However the contribution form the government will have to be repaid.

    And the transfer from the PO reserves has correspondingly devalued the business.

    And the bad news keeps coming – – – the mail business is now ex growth: it was ex growth before the credit crunch began to take effect. The mainstays of the business are business mail, particularly advertising, circulars and financial mail. This will be really hard hit. So – – an ever increasing pension deficiency having to be underwritten by ever decreasing revenues.

    Is this going to be the next big government bail out?

    If not what then for the mail services there is nothing much left to cut, and price increases will be counter productive.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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