Royal Mail privatisation through the fire sale of Royal Mail shares briefly became a bit of an embarrassment to the Government – with Sir John Major claiming that the Company had been “catastrophically undervalued” – and calling for an enquiry into the flotation!
Well there’s little chance of that – although the Parliamentary Select Committee hearings will doubtless be uncomfortable for some. The shares may well have been seriously under- priced but the Government succeeded in raising £1.7 billion from the sale. At the same time, Royal Mail Privatisation allowed the Government to rid itself of involvement with the unrest that’s brewing in the largely union dominated workforce.
All in all Royal Mail privatisation was a success – under which everyone benefits … or did they? The Royal Mail was the business about which even Margaret Thatcher said she was “not prepared to have the Queen’s head privatised”. We don’t know about the employment prospects of the workforce – but we do know about what happened to the pension fund.
The Royal Mail Pension Plan, a ‘funded defined benefits scheme’ with upwards of 430,000 members and £30 billion of assets, was the third largest in the UK – but with a gaping hole in its finances. Closed to new entrants in 2008, the fund carried a deficit of around £10 billion in 2012. This massive deficit was the liability of the Royal Mail and was in receipt of huge injections of cash from the business, to contain the deficit and maintain pension payments to retirees.
The existence of this huge deficit scuppered any possibility of a sale of the business and was the subject of Parliamentary discussion 5 years ago. At that time Alan Duncan, Shadow Business Secretary spoke of the Labour Government’s proposals of the Royal Mail and said “the (Labour) government’s plan, to steal the pension assets to help reduce their borrowing figures, whilst taking out a massive mortgage to cover Post Office pension liabilities for 50 years is nothing more than a massive accounting scam”.
So how did George Osborne present this within his March 2012 Budget Speech. He said this:
“The transfer of £28 billion of assets from the Royal Mail Pension Fund to the Exchequer, will free it from its crippling pension debts, ensure the pensions of hardworking staff are paid and help to bring in new private sector investment. Some would have been tempted to spend the windfall, I do not presume to spend it, instead, I have used it to pay off debt”.
Well this ‘windfall’ as a result of Royal Mail privatisation is (or was) the assets of the scheme. Now they’ve gone, we’re left with the entirety of the liabilities – last valued at around £38 billion!
Quite how we stop ‘em’ writing out promissory notes, to be redeemed by future taxpayers, whilst running endless budget deficits is becoming a bit of a challenge. Like teenagers at university, they claim justification for their impecuniousness – another £38 billion of Royal Mail pension liabilities? – no problem, not worth mentioning. £50 billion on a near useless non-stop railway line? – of course, lots of other folks have got ‘em!’ And a record £116 billion budget deficit this year – don’t worry it’s all under control!
Well good, providing the international markets keep stumping up the cash, we’ll keep running up the debts. Payback time is inevitable but we don’t know when. Over the last 12 months 10 year Gilt Yield had risen by 50%. At the moment, they’re tiny figures (up from 1.84% to 2.77%) but there’s only one direction of travel.
On HS2, Patrick McLoughlin, the Transport Secretary, this week lambasted his opponents for questioning the sanity of the HS2 project with jibes at them being “doubters and defeatists”. He said we “owe it to our children” to make it happen.
As US Senator Everett Dirksen once famously quipped “a billion here, a billion there, pretty soon, you’re talking real money!”
What I think we owe to our children, is to ensure their inheritance of an economy that is debt free, unburdened by crippling debt repayment costs and as a result becomes a beacon of vibrant entrepreneurial opportunity.
It’s evidently a work in progress! Please feel free to comment on this BLOG. We would love to hear from you.
Geoff Stait – 29th November 2013
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