The UK has proposed to give financial aid to Royal Mail, as it struggles with diminishing revenues and a £8.4bn pension deficit, and has asked the European Commission for its approval based on the Rescuing and Restructuring Aid Guidelines (RR Guidelines).

The UK has made this decision because it believes it is not possible for Royal Mail to “achieve viability and thereby be in a position to attract private sector capital without prior action to relieve RMG [Royal Mail Group] from the burden of the RMPP’s [Royal Mail Pension Plan] historic pension liabilities and strengthen RMG’s balance sheet”.

RMG’s external revenue fell by 3.1% between 2008/09 and 2010/11, while ‘inland addressed’ delivered volumes decreased by 11.7%. At the end of the 2010/11 financial year RMG’s working capital and net operating assets were both negative. At 31 May 2011, the company’s pension liabilities (on an accounting basis) were over 60 times its EBITDA, whereas most FTSE100 companies have a ratio of pension liabilities to EBITDA that is less than two.

The UK claims the pension deficit is at the heart of the current financial problems of RMG. The commission said in its report: “According to the UK, the size and volatility of the scheme is out of all proportion to RMG’s current business and has proved to be a severe handicap to RMG’s ability to compete on its own merits in the liberalised UK postal market. They believe that by taking certain liabilities over from the RMPP and thereby contributing to the restoration of RMG’s viability, RMG will, as the sole universal service provider in the UK, have the ability to adapt to the liberalised industry environment through modernisation.”

RMPP operates under normal UK pensions law applied to private pension schemes and had about 436,000 members at 31 March 2011, of which almost 130,000 were active members, about 118,000 were deferred members and about 188,000 were pensioners.

In April 2008 RMPP moved from final salary to career average, while the retirement age was raised to 65 for service accrued from 1 April 2010 and closure of the RMPP to new members with effect from 1 April 2008.

The UK proposes to set up a new statutory pension scheme, which will be a liability of the UK government and will have no legal connection to RMG or RMPP. Certain parts of the accrued liabilities and assets of RMPP will be transferred to this scheme.

The EC said in its report: “It is anticipated that approximately £1.5bn of assets and £1.5bn of liabilities will be left with the RMPP after the pension relief. For the purposes of illustration, based on 31 March 2010 actuarial valuation figures, the new pension scheme will be taking over £32.9bn of liabilities. It will also take over £24.5bn of associated assets. However, the exact amount to be left with the RMPP will depend on the valuation as at 31 March 2012.”

After the pension relief RMG will continue paying normal pension contributions to RMPP. The pension relief will concern only the pension deficit, the report said.

The commission wrote that RMG is indeed a company in difficulty within the meaning of the RR Guidelines, but has doubts as to whether all the requirements for compatibility under the RR Guidelines are met. This is because RMG is also present on unregulated markets including, via its subsidiary GLS, outside the UK.

“On the basis of the information currently available, the commission has doubts on the compatibility of the notified aid measures under either of the bases for assessment which it has considered. As the measures are designed to fundamentally restructure the business of RMG, the commission is particularly interested to give third parties the opportunity to comment. Furthermore, at this stage, the commission also has doubts concerning the quantification of the aid amount that would result from the pension relief,” the report concluded.

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