Royal Mail fund makes 29% in a year on derivatives bets

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A sophisticated derivatives strategy has helped the £26bn pension fund for the UK's Royal Mail Group to make a 29% return on its money last year, reducing the company's £10bn deficit and potentially helping along its privatisation.

The Royal Mail Pension Plan exploited the recovery in financial markets during the year by doubling its exposure to equity futures. These are contracts, usually with a bank, where the fund can purchase equities for an agreed price at a future date. It will then profit if equities rise, or lose out if they fall.

The Royal Mail plan increased its exposure to equity futures from 10.5% to 20.1% during the 12 months to March 31, it said in its recently-published annual accounts.

Since the contracts cost relatively tiny amounts, Royal Mail has not had to invest much of its physical holdings of assets to acquire them - but they represent large potential gains or losses.

The pension fund's physical holdings in equities are relatively small - worth another 20% of the fund as of March 31. This was actually reduced during the year, from 24% at March 31 2009.

The £6bn profit during the year has reversed the losses the fund for the state-owned operater racked up during the credit crunch. The pension fund's deficit has since fallen from £10.2bn to around £8.4bn, after accounting for an increase in its liabilities. The liabilities increased because of a fall in bond yields, which are used to value pension liabilities. The scheme is now 76% funded, up from 66% a year ago.

The deficit is at the centre of the ongoing debate over the sale of Royal Mail. The UK government has tasked Richard Hooper, the former deputy chairman of regulator Ofcom, with a re-examination of options for the company's future. Swiss bank UBS has been retained as an adviser on a possible sale.

He had previously recommended a part-privatisation of Royal Mail to the UK's former Labour government, which decided not to proceed. But during Parliamentary discussions, former business secretary Lord Mandelson had suggested the government might take on responsibility for the deficit as part of any sale.

Nevertheless, the reduction in the deficit this year will not affect the £2.8bn funding programme Royal Mail has agreed with its pension-fund board over the 10 years to 2023. UK pension funds are fully valued once every three years, and the March 31 2009 valuation, which recorded the £10.2bn figure, is the relevant figure. This will not be re-examined until March 31 2012.

The Royal Mail Pension Plan's accounts also revealed it had virtually doubled its holdings in investment-grade credit during the year. As a result, the fund manager Wellington International has been brought in to run £2.2bn in global investment-grade bonds, alongside existing fund manager Standard Life Investments, which handles UK investment-grade.

Royal Mail did not respond to requests for comment.

[DGP1]

reducing the company's £10bn deficit and potentially helping along its privatisation.

Sorry to be a bit thick but I thought the only way to save the pension fund was privitisation good pension fund - privitisation bad pension fund privitisation