Royal Mail pensions sell-off set to go ahead

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The UK government's plan to sell of the state-owned postal operator, Royal Mail, cleared its last Parliamentary hurdle yesterday, meaning the sale of as much as 90% of the company's £26bn of pension assets is now set to go ahead.






Royal Mail operates the UK's third-biggest pension fund, and its absorption onto the national balance sheet is a crucial part of the government's plan to privatise the post operator. Yesterday's passage of the Postal Services Bill clears the route for a sale of up to 90% of its shares.

As well as £26bn of assets, the plan comes with well over £30bn of liabilities, creating a pensions deficit last estimated at £8.4bn, which has crippled Royal Mail for years. It has been paying £814m a year towards filling the hole and the government is not likely to have found a buyer without dealing with the pensions issue.

The government's plan, explained to Financial News by a civil servant responsible for it at the Department for Business last October, is to absorb the £30.6bn cost of past staff's pensions entitlements onto the national balance sheet.

Current staff will continue to be the responsibility of the Royal Mail, which will continue with a pension liability of about £3.4bn - a tenth of its current size. A £3.4bn chunk of the assets will also be hypothecated to the new pension scheme, leaving it fully funded with no deficit.



The remaining £22.6bn asset portfolio will also go to the government, and the Department for Business will probably put it into some kind of "escrow" account, selling it off gradually to meet the pensions due, and making up the difference out of general taxation.

This is probably good news, on balance, for the Royal Mail Pension Plan's retired members. They will now have a government "guarantee" for their incomes, which in pensions is pretty much as good as it gets.

It is less positive for taxpayers, and certainly bad news for the Royal Mail Pension Plan's 12 fund managers.

The last time RMPP disclosed who they were, March 31 2010, the biggest of them was BlackRock. The US-based fund manager handled the scheme's £11.2bn portfolio of liability-driven investments - a complex portfolio of low-risk assets with a derivative overlay, specially designed to match the scheme's liabilities as far as is possible.



The other fund managers include Legal & General Investment Management, which handled £1.4bn in index equities; AllianceBernstein, which looks after about £900m in global equities; Beach Point Capital, which looks after £1.2bn in high-yield debt, Dimensional Fund Advisors, in charge of £860m in global small-cap equities, and Hermes - the in-house fund manger of Royal Mail's sister-scheme, BT - which looks after £3.4bn.

Standard Life Investments, the UK fund manager, and US group Wellington Management, look after £1.4bn and £2.7bn respectively in investment-grade credit. Meanwhile Walter Scott, an Edinburgh fund-management house owned by BNY Mellon, runs £1.4bn in equities.

There are also two private-equity managers, Pantheon Ventures and Pathway Capital, who look after roughly £420m between them.

Most of those assets will now have to be sold off. This will effectively give the renationalised pension scheme the same unfunded status as the public pension debts of the NHS, schoolteachers, civil servants and the armed forces, which are also paid out of general tax revenues.



Adding £30bn to that bill is just a drop in the ocean. The existing public schemes have total liabilities on the order of £1 trillion, which must be met over the course of the next century or so.