Britain is looking to sell the Royal Mail to escape Out of Control Pension Costs

Posted by PITHOCRATES - July 13th, 2013

Week in Review

The United States Postal Service isn’t the only postal service flirting with the idea of privatization.  So is the Royal Mail.  And, predictably, some are not happy about making government jobs like private sector jobs (see Royal Mail privatisation ‘will lead to soaring prices and job losses while taxpayer keeps debts’ by Graham Hiscott posted 7/11/2013 on the Mirror).

STAMP prices will soar and jobs will be slashed when the Royal Mail is privatised.

The warning came from critics as the Government announced its controversial plan to kick off a £3billion sale.

It is feared the sell-off could see a big chunk of the company snapped up by foreign investors, with investment banks raking in millions in fees.

So while the Treasury pockets a pre-election windfall, the taxpayer will still be paying for Royal Mail’s £12billion pension deficit.

Chuka Umunna, Labour’s Shadow Business Secretary, said it amounted to “nationalising its debts and privatising its profits”.

This pretty much says it all.  Pension costs are so out of control that the only way the Royal Mail can survive is with huge government subsidies.  And if they cut those subsidies they will have to pay for those pensions with the revenue from stamps.  Which means stamp prices will have to rise to replace those lost subsidies.  So these government workers can continue to enjoy those generous pensions.

Britain has an aging population.  Like most of the developed world.  People are living longer.  Giving them more time to suffer more diseases.  Raising the cost of pensions and health care for retirees.  Ponzi schemes like state pensions worked when there was an expanding population growth rate with more people entering the workforce than were leaving it.  But those days are long gone.  As are the days of defined benefit pension plans.  Where today they only result in unfunded pension obligations.  And companies like the United States Postal Service and the Royal Mail unable to pay their bills.

The reason why unions resist the privatization is that these business models cannot survive in the private sector.  For their labor costs (pay and benefits) far exceed anything available in the private sector.  And the only way they can keep those generous pay and benefit packages is by having the taxpayer subsiding their cost.  But if they go private and it costs $7.50 to mail a utility payment people aren’t going to mail their utility payments anymore.  And people will see the true cost of union labor.  Which means either unions must match the pay and benefit packages they have in the private sector.  Or they will lose all their union jobs.  Because no one is going to pay $7.50 to mail a letter.

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Email and Electronic Bill Paying as well as Retiree Benefits are Bankrupting the U.S. Postal Service

Posted by PITHOCRATES - February 10th, 2013

Week in Review

The United States is not the only country having trouble with their postal service.  Email and electronic bill paying have taken away a huge source of revenue for the postal service in the US.  As well as in the UK (see Post Office will shut one in five branches after ‘losing £40m a year’ by Anna Edwards posted 2/7/2013 pm the Daily Mail).

The Post Office said they were losing £40 million [$63 million US] a year, so it was seeking retail partners for 70 branches, enabling them to stay in their current locations…

CWU general secretary Billy Hayes said the announcement was a ‘huge blow’ to the Post Office network, saying: ‘Staff will be in shock at the scale of what will effectively be the closures of Crown post offices across the country.

‘This move will have a huge impact on the high streets of small towns earmarked to lose their Crown post office.

‘These offices provide a dedicated specialist service to communities which will not be replicated by a window or two in a bigger shop…

‘It leaves huge questions about the future of the Post Office – how can it realistically deliver services for passport applications, identity services and a range of financial services while being dramatically pruned back? What does it mean for Metropolitan Police plans to move into London post offices?’

Robert Hammond, of Consumer Focus, said: ‘The Post Office network must change if it is to be sustainable.

‘These changes to Crown post offices are part of the biggest-ever programme of change to the network and consumers will want to see Post Office services that are high-quality and accessible, and offer the products and services they need. This is more important than the issue of who operates the post office itself.

People are using Royal Mail less in the UK.  So to save the postal service the UK is taking drastic action.  Basically privatizing as much of it as they can.  By partnering with other retail outlets that can cut the overhead cost of standalone post offices.  Some people may not be happy about these developments.  But it’s their own fault for using email.  And paying their bills online.  If they want to keep the postal service this may be their only chance.  Something the Americans should consider.  Based on the money they’re losing (see Postal Service loses less, but still in trouble by Jennifer Liberto posted 2/8/2013 on CNN Money).

In the three months ended Dec. 31, the agency lost $1.3 billion — considerably less than the $3.3 billion lost in the year-earlier period.

The service was hurt as the volume of first-class mail, which most consumers use to pay bills and stay in touch, decreased by 4.5.%, said USPS chief financial officer Joseph Corbett. But it got help as shipping and package volume for the busy holiday season increased 4% compared to the prior year.

Still, the service is in trouble. The key culprit remains a 2006 congressional mandate, under which it has to pre-fund healthcare benefits for future retirees. The USPS has been borrowing billions of dollars from taxpayers to make up for the shortfalls…

The Postal Service on Wednesday unveiled a plan to end Saturday delivery of mail, a move which is expected to save $2 billion a year, a drop in the bucket compared to the $16 billion loss the organization reported for 2012.

The US has about 5-times the population of the UK.  So if we multiplied their losses (in US dollars) by 5 it comes to $316 million.  A far cry from the $16 BILLION lost in 2012.  The U.S. Postal Service has a far greater crisis on its hands than the Royal Mail.  And it goes to that unfunded retiree health care plan that the U.S. government is now forcing them to fund.  Compounding the problem of email and electronic bill paying.

Employers who provide retiree pensions and health care benefits are supposed to put money aside for their current workers’ retirement.  In accounting terminology, this retirement expense should be expensed on the income statement (lowering profits) with a credit going to the balance sheet to show the money owed.  A liability.  When a person retires and starts incurring retirement costs the employer pays for these and debits that liability account.  Reducing it.  And credits a cash account.  Reducing it.  When an employer pays a retiree it should be entirely a balance sheet transaction.  Completely off the income statement.  With no impact on profitability.  This payment should reduce their cash balances.  As well as their liability account for retirees.  For as they pay their retirees it reduces what they owe their retirees.

The U.S. Postal Service didn’t do this.  They simply paid and expensed these retirement benefits as they incurred them.  Greatly understating their retirees’ costs.  And overstating their profitability.  Leaving a massive unfunded retiree health care liability.  Funding this massive unfunded liability is bankrupting the U.S. Postal Service.  Or rather these massive retiree costs they were hiding off the books are now bankrupting the U.S. Postal Service.  Unions want to go back to NOT funding these retirement costs.  And have the U.S. taxpayer bail them out.  Just like they bailed out the UAW retirement plans when GM and Chrysler went bankrupt.

The U.S. needs not only to privatize portions of the U.S. Postal Service like the UK they also need to privatize pensions and health care plans.  Like most businesses have.  Give employees money to put away for their own retirement needs.  For the old ways just don’t work anymore.

Funny how progressives hate all of the other old ways.  Like thrift, going to church, waiting until marriage before having sex, etc.  But pensions?  Retiree health care benefits?  No, when it comes to these things they’re all for going back to the Fifties.

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The British Government takes over Royal Mail’s Underfunded Pension Fund for Short-Term Deficit Reduction

Posted by PITHOCRATES - March 18th, 2012

Week in Review

The U.S. Postal Service (USPS) is going broke.  Why?  Two reasons.  People email and text today.  Even pay their bills online.  So they’re not mailing letters.  And every piece of mail the people don’t mail is lost revenue for the USPS.  Which can be a problem in an organization that has a high overhead.  And an aging and retiring workforce.  Which brings us to the second reason.  Pensions.  Just like in Britain (see Government to take on Royal Mail pension to pay down debt by Matt Falloon posted 3/19/2012 on Reuters).

Chancellor George Osborne will use a 28 billion pound ($44.36 billion) asset transfer from taking on the Royal Mail’s pension fund to pay down government debt next year, a government source said on Sunday.

The transfer of the state-owned mail company’s pension scheme – subject to European Union approval and due to be announced in next week’s budget – will reduce the government’s budget deficit next year, while the liabilities from the scheme, worth 37.5 billion pounds, will show up on the government’s accounts across the next two decades as they are drawn on by scheme members…

In the long run, however, there will be an overall cost to the Treasury from the transfer because the scheme’s liabilities outweigh its assets.

The Royal Mail is no different than the USPS.  People are emailing, texting and paying their bills online in Britain, too.  Which means neither 20th century postal service can make it in the 21st century.  They both need to reinvent themselves.  And fast.  But the LAST thing either nation should do is to bail out their postal service.  Not when each nation is struggling under record deficits.  For this will only delay the day of reckoning.  And make it far more costly.  Allowing greater losses to accrue.  In the face of growing pension payouts.

Short-term fixes for long-term problems is very bad policy.  It’s what we call kicking the can down the road.  It doesn’t fix any problems.  It only makes them more difficult to fix.  Burying the country under ever growing deficits.  And placing incredible tax demands on taxpayers not even born yet.   So you know the Americans will follow suit.  And bail out the USPS.  Because of late they seem to have a penchant for making bad decisions.

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