Implications of transferring the historic deficit of Royal Mail’s pension fund to the public sector

The Government announced in June that it intends to take on Royal Mail’s historic pension deficit with effect from April 2012 and also restructure the company’s balance sheet. This support is conditional on state aid approval.

Under the proposals, the Government would take over the pension liabilities accrued up to March 2012 and a share of the pension fund’s assets, leaving behind a fully funded pension scheme. The Treasury estimates the value of the assets being transferred at around £25 billion, with the present value of the liabilities around £35 billion. The assets would largely be transferred to the Government immediately. The liabilities would crystallise over time in the form of payments to pensioners as current employees retire and existing pensioners continue to draw down their pensions.

It is likely that in the National Accounts the initial transfer of assets would be treated as a capital grant from the private to the public sector. The liabilities would be treated as a contingent liability which would not affect the National Accounts but would feature in the Whole of Government Accounts. Although it remains dependent on the final amount and breakdown of the assets and liabilities transferred, the Treasury’s provisional estimates are that:

• central government net cash requirement (CGNCR) would be reduced by around £2 billion, reflecting the cash transferred. There would be no immediate impact on the CGNCR from the transfer of other assets;
• the transfer of assets in the form of cash and gilts held by the fund could reduce PSND by around £10 billion in the fiscal year in which the transfer is made;
• if sold, the remaining assets would decrease the CGNCR and PSND further;
• PSNB would be reduced by the total value of the assets transferred of around £25 billion in the year that the transaction takes place;
• interest and dividend income from the assets or from the proceeds from these assets will reduce PSNB by between £0.8 to £1 billion each year; and
• payments will raise public sector expenditure and PSNB over time, by between £1 and £1.4 billion in each year of the forecast period.

The immediate impact on the public finances would appear to be significantly beneficial. But the net effect over the long term would probably be negative as the current present value of the pension fund’s liabilities significantly exceeds the current present value of its assets.