Monday, 11 May 2009

Royal Mail - sleight of hand?

Robert Peston reports the government's "sleight of hand" in separating the Royal Mail's assets and liabilities in order to sell it off.

Well, there's some argument there. But perhaps this is the only way the organisation can be saved.

There are two reasons this might be a good policy:
  1. A thriving, efficient and well-managed Royal Mail provides a boost to the economy. It's a key part of our infrastructure and, when it works properly, it helps to speed up projects and increase GDP. When it doesn't, it interferes with business activities (and those of consumers), creates risk and delay, and gives people excuses for not delivering their side of an agreement. In short it creates friction in the economy, which destroys economic activity with no corresponding gain (a negative-sum game). If this separation is a necessary step toward privatising the organisation, we will all gain from it.
  2. The pensions are likely to be more efficiently handled as part of a larger public pensions pool. The connection between employer and fund manager is broken (which the last twenty years of experience show is invariably a good thing), and the overhang in public pension liabilities can be dealt with all at once instead of piecemeal.
And along with this, the government might score a political point as a side-effect. Big deal. Let them.

Incidentally, the £650 billion of total public pension liabilities are unlikely to cost that much. The current figure is inflated by low gilt yields - which are likely to increase over time as the economy recovers. This (and a volatile stockmarket) is what led to the big private sector pension deficits of a few years ago - which mostly went away with an increase in the FTSE.

And one final point: the government is already liable for the Royal Mail's pensions. So pooling them with ordinary civil service liabilities is not going to cost us anything.

2 comments:

Gaz said...

So why should the Royal Mail deferred pensioners be given preferential treatment to the thousands of private sector pensioners who have had to take a cut in pension benefits upon Scheme wind-up? In the private sector an underfunded Scheme would be wound up and assets transferred to the PPF - but a lot of members' pension benefits would also be reduced in line with PPF benefits.

If the govt is to rescue the RM fund (which is probably too big for the PPF to handle!) then surely it should be on the same terms as that faced by the private sector pensioners.

Leigh Caldwell said...

I broadly agree with this. Pensions are two things. One, a way of sharing the economy's output between productive workers and retired people. Two, a promise to reward people for saving (i.e. investing or deferring consumption) during their working life.

If, as a society, we have made promises on behalf of future workers which they are unwilling to fulfil, then we may need to renegotiate. There's only a certain amount of income to go round, and if 60% of it ends up being promised to over-65s, it is highly unlikely that the workers are going to cough up.

Contractually there is always some kind of room for manoeuvre, because the pensions are denominated in terms of currency which can be revalued by deliberate inflation. That's the 'nuclear option' but it's always there as a lever which can help with the negotiation.

Thus I do think that we will come up with an accommodation between the generations which will approximately reflect what society sees as a fair division between producers and retirees, and will roughly maintain a relationship between those who saved more of their income and those who get a higher pension payout.

If either side is unhappy with the share they end up with, there's always the opportunity to increase the size of the pie by extending the retirement age. It's widely regarded as inevitable that retirement ages will increase, but this is simply a choice - as everyone makes throughout their lives - between time worked and income received. I suspect that people - as a group - will be willing to work more in return for more money.