How pensions got lost in the post

June 29, 2009


— Neil Collins is a Reuters columnist. The views expressed are his own —

Business Secretary Peter Mandelson has finally abandoned the idea of selling slices of the Royal Mail. It’s less than three weeks since his hapless Business Minister, Pat McFadden, had to defend the policy in the House of Commons but political reality necessitated this mercy killing.

Behind the difficulty of getting a law onto the books stands the brutal fact that the business as it stands is worthless. The pension liabilities will overwhelm any number of internal efficiency gains, fresh investment or new business plans, so it’s a relief that Mandelson has effectively acknowledged as much before he did something silly.

Not that he would ever say so directly; rather, he’s discovered that the parliamentary timetable is so bursting with exciting new ideas that there is insufficient time for the debate.

Instead, it’s likely that this important business will struggle on with an unwritten guarantee from the state that it will not be allowed to fail. This may be the least bad solution available.

The Royal Mail is the tip of the iceberg of public sector pensions. Since it is a public limited company rather than a government department, it must acknowledge its liabilities. Last month it admitted that the deficit on its scheme had jumped from 2.9 billion to 6.8 billion pounds in the year to April, dwarfing the perfectly creditable operating profit of 321 million pounds.

Since then, John McFall, chairman of the UK Parliament’s Treasury committee, has put the deficit at between 9 and 10 billion pounds. The combination of low yields on long bonds and increased longevity mean the deficit is rising faster than any amount of money the business can generate.
The root cause is the promise of index-linked pensions linked to final salaries, awarded when the business was state-owned.

Governments operate public sector pensions like a giant Ponzi scheme, where today’s taxes fund today’s payments, with no regard to meeting future promises. According to Neil Record of Record Asset Management, these liabilities have now passed 1,100 billion pounds, unfunded and unseen.
This accounting sleight-of-hand had allowed Mandelson his chance for a sale.

Were the government to take back formal ownership of the Royal Mail’s fund, it would also get its 25 billion pounds of assets, to go towards reducing the public sector’s borrowing requirement.

Since the public sector pension liabilities are not acknowledged in the government’s books, there would have been nothing to show for the extra liability. We have at least been spared that particular piece of prestigitation.

(Edited by David Evans)

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