Royal Mail privatisation: public sector pensions claim another victim

The coalition government announced today that Royal Mail is going to be privatised. The economic argument is of course no stronger than it has been every other time the sale of Royal Mail has been touted, but in an age of austerity, it is no surprise that the government wants to get this loss-making enterprise off the balance-sheet.

Royal Mail has of course been run like a business for a long time now – which is why we can even talk about its profitability. Most public services would make a loss in the private sector - that is why they are public services, to ensure public goods are delivered irrespective of market value. The fact that we pay for Royal Mail services doesn’t necessarily mean that it is a state-owned business; it could easily be viewed as a form of co-production.

The argument goes that the growth of email and social networking fatally undermines demand for Royal Mail. That is right, at least to some extent. But it doesn’t necessarily mean that the private sector would be able to cope more effectively with falling demand. In fact it may demonstrate that Royal Mail’s failings are due to exogenous factors rather than public sector inefficiencies. If the private sector is to return the Royal Mail to profitability, it will surely do so by ceasing the most costly services – typically used by people who have least access to the internet anyway. It is not hard to imagine already-strained local authority and voluntary sector organisations stepping into the breach to ensure that the most vulnerable members of society in this regard (including older people in remote areas) receive some form of mail service even if they are ignored or priced out by a privatised Royal Mail.

So, the argument on profitability is not convincing, and privatisation could lead to worse outcomes for many people. What is really behind the government’s move? The devil lies in the detail: the Royal Mail’s enormous pension scheme deficit. Figures released this year suggest that it now stands at over £10bn. This means its liabilities to pay its members’ final salary-related pension benefits far outweigh the value of the assets in the organisation’s pension fund. This has been perhaps the main reason private sector firms have been loathe to gamble on Royal Mail. For all the talk of digitalised mail, Royal Mail – which provides a vital public service for many people – is in financial difficulty precisely because of the way its pension fund has been organised and managed. Independent pensions consultant John Ralfe told the Telegraph in 2009 that the Royal Mail pension fund had been over-exposed to equity losses.

The structural problem in the pension fund, of course, is that it is paying retired former employees for far longer than it expected to when they commenced employment with Royal Mail. We are all living longer and both public and private sector pension schemes – not to mention state pensions – face long-term funding crises. The government has promised to back Royal Mail’s historic pension liabilities but does not want to risk taking on a growing deficit in the future. The debate on whether public sector pensions are legitimate or affordable could rage on and on. It just seems very strange that a public service could be sliced up and sold off for this reason. It is hard to see that privatisation is an economic answer to the pension problem. It is, however, a political answer. It means that a private company could massively reduce the generosity of Royal Mail’s pensions at a greater distance from the public gaze than the government could. Is the loss of a public service really a price worth paying for this political pensions fix?

Craig Berry is a Senior Researcher at International Longevity Centre-UK and former Policy Advisor on state pensions at the Treasury. This article was originally published by ILC-UK.