Royal Mail wants stamp price rise to save pensions

Royal Mail has asked Postcomm, the industry regulator, to allow further rises in the price of stamps to pay for a £330m pension fund shortfall.

The cost of first-class and second-class stamps is to rise by a penny to 28p and 20p in April but the postal group wants to break an agreement freezing prices for three years after that. The pensions crisis at Royal Mail – which is already losing £1m a day – stems from the collapse of the stock market. But it also faces a £120m bill from higher national insurance contributions.

A spokeswoman said: "We are not asking for another penny on postage but we want the flexibility to be able to do so."

Royal Mail's retirement scheme covers 443,000 workers and is made up of two funds valued in March at a total of £15.6bn.

Share prices have since plunged and the postal group believes that it will have to pump in an extra £330m over the next two years to make up for its poorly performing investments.

The group's claim is buried in a 100-page submission to Postcomm, which is due to set price controls for Royal Mail next month.

The regulator has already approved the penny rise but wants the average price of all Royal Mail's services to be frozen until 2006.

Allan Leighton, the chairman, has warned that such a move could cost the group £460m and negate the benefit of the stamp price increase. He has long argued that Postcomm's strong stance is hampering the business's drive to return to profitability.

The recovery programme involves 30,000 job losses from a workforce of 200,000 – half of which have already been made. Reports in February suggested that the lay-offs could lead to a pension shortfall of £800m – claims dismissed by Royal Mail as alarmist.

The looming pensions deficit is not the only problem likely to face the new chief executive, Adam Crozier, when he joins the group in February. The former Football Association chief executive also needs to find a total of £280m to fund government loans provided for the recovery push.

A Postcomm spokesman said that the regulator would give a "considered reply" to the request for price increases next month.

He added: "People are worrying that Royal Mail is teetering on the brink of disaster because of what we are going to do to them. But it's not going to happen like that. We are not going to force Royal Mail out of business."

Royal Mail faces further challenges from Wednesday, when competitors will be allowed to move into the bulk mail business.

The sector is likely to attract up to 500 companies for a slice of a lucrative market that represents about half of the typical daily postbag. The entire postal market will be open to competition from April 2007 when restrictions on entering the market are abolished.

Postcomm said that increased competition would improve services but Royal Mail said its continental counterparts would have an unfair advantage. It said the British market was being opened up to competition at a much faster rate than elsewhere.

"We will fight for every single letter, but Postcomm's fast- track approach is opening a large slice of the market at a stroke," said a spokesman.

"It means that powerful, profitable European postal companies such as the German and Dutch post offices will be able to attack the British market using profits from their own domestic markets – which will be closed to the level of competition coming into the United Kingdom.

"Rivals who will target the bulk mail market will be able to choose their customers, an approach that paves the way for cream-skimming of the market."