1.  At the oral evidence session on 22 October, I promised to provide the Committee with additional information and to clarify some issues that were raised.

TALKS CHRONOLOGY

  2.  At the session, I explained that the talks between Royal Mail and the CWU had begun in March and had taken a long time to reach conclusion. I attach a chronology of the talks at Annex A.

  3.  Throughout the process, both sides expressed a willingness to reach a conclusion through talks. The complex nature of the issues under discussion, which did not just cover pay, was probably a contributing factor to the length of time that it has taken to reach agreement.

  4.  I believe that the agreement that has been reached is fair and sensible and one that sets Royal Mail on a path to becoming a modern and flexible organisation, capable of reacting to changes in market and changing consumer needs. It is good for all Royal Mail's customers.

PENSIONS

  5.  I have now had the opportunity to see a copy of Jane Newell's letter of March 2007 to members of the Royal Mail Pension Plan. From my reading, the letter seeks to convey the outcome of the agreement between Royal Mail and Trustees about addressing the deficit over a 17-year period rather than 40 years and sets out the contributions that Royal Mail would pay into the fund. It also explains that £1 billion has been put into an escrow account to act as security for the fund. This follows the agreement by Government to allow Royal Mail to use £850 million on the Royal Mail's balance sheet to be placed in a pension escrow account to support the pension fund. The company contributed another £150 million into a second escrow account thereby creating combined support for the pension fund of £1 billion.

  6.  At the Committee, members questioned whether this letter and Royal Mail's proposals for pension reform meant that the management was sending mixed messages to members of the pension plan and their benefits. I do not believe that this is the case for the reasons set out below:

Royal Mail made it very clear in its announcement of 8 February 2007 (copy attached at Annex B—not printed here) that it intended to come forward with proposals for pension reform. From the press release, I believe that there can be no doubt about this.

The Trustee of the Royal Mail Pension Plan operates independently from Royal Mail management. It was their decision to write to members of the plan in the terms set out in the letter. The letter contains good news as it reflects the agreement reached to address the pension deficit over 17 years and the additional security afforded by the pension escrow accounts. These two developments were significant and it seems sensible that they should be conveyed to the members. The letter clearly states, as you pointed out at the oral session, that the Trustee will write to members later in the year about Royal Mail pension consultation announced in February.

  7.  Both UNITE and the CWU have announced that they support these proposals but during the consultation process, the CWU has indicated that it wishes to explore with the company alternatives to the closure of the scheme for new entrants and the terms of the new proposed DC scheme.

STATE AID

  8.  I should clarify the state aid position relating to our support for Royal Mail and POL.

  9.  As Royal Mail operates in a fully liberalised market, any support that we provide to the mail side of the business has to be on a commercial basis. When putting the package together we have to ensure that it meets the requirements of the Market Economy Investor Principle (MEIP). We do not need to notify the Commission if we are satisfied that the support is commercial.

  10.  For POL, the support that we are providing is not commercially based and, therefore, we are required to formally notify the Commission and seek clearance.

  11.  The finance framework that we agreed in March 2007 (the £1.2 billion of debt facilities and the use of reserves on the Royal Mail balance sheet for the escrow account) and previous support provided to the mail side of the business, is under investigation by the Commission. There is no timetable for this investigation. My Department has provided the Commission with information to enable them to assess whether the support meets MEIP requirements. I am confident that the Government's support does meet these requirements and that we will be able to demonstrate this to the Commission.

  12.  The £1.7 billion funding package for the post office network has been formally notified to the Commission. There have been a number of iterations with the Commission about our notification. We believe that these have gone well but, of course, we must await the Commission's decision which we hope will be published before the end of the year.

COMMERCIAL AGREEMENT BETWEEN GOVERNMENT AND ROYAL MAIL

  13.  I said that I would consider letting the Committee have a copy of the Commercial Agreement relating to the 2007 finance framework for Royal Mail. After giving this careful consideration, I do not believe that it would be appropriate for me to let you have a copy. The full terms of the agreement are a commercial arrangement between Royal Mail and the Government as lender and are subject to a confidentiality agreement between us.

  14.  However, I appreciate that the Committee will wish to have details of what is covered by the Agreement so that they can scrutinise them. I have therefore prepared, at Annex C, a summary of the Agreement. This sets out the main points of the Agreement and I believe that it will enable you to understand the nature of the commercial deal that has been put in place.

  15.  So far Royal Mail has not drawn down on the debt facilities. It will do so on a commercial basis when it requires additional capital for the implementation of its modernisation plan as this progresses over the next few years. Given that use of the facilities involves interest charges, we expect that Royal Mail, like any commercial borrower with similar facilities, will seek to carefully manage its use of these facilities so that it minimises the cost to the business.

  16.  I hope that you find the above helpful. If you have any further queries about the above or what I said at the session, please do not hesitate to contact me.

  Parties to the Agreement:

—  Secretary of State

—  Royal Mail Holdings plc

—  Royal Mail Group plc

  The principle objectives of the Agreement are:

—  the Mails Reserve on Royal Mail's balance sheet to be utilised to fund the "Holdings" escrow reserve (to be held on Royal Mail Holdings plc's balance sheet) and to ensure that HMG provides funding to top this up to £850 million;

—  Royal Mail Group plc to set up a "Mails" escrow and to transfer £150 million into it;

—  the Holdings and the Mails escrow accounts (totalling £1 billion) to be used to provide security in favour of the company's pension fund trustees;

—  the extension and rolling forward of certain debt facilities on commercial terms consistent with the Market Economy Investor Principle as it applies to state aid;

—  the agreement that Royal Mail can implement a phantom share scheme to provide employees with entitlements of a value over the period of the plan equivalent to a 20% economic interest in the projected value of the Royal Mail group of companies on the basis of management's plan.

  The extended debt facilities are:

—  £900 million senior debt facility, repayable in 2014 at commercial interest rates; and

—  £300 million Shareholder loan, repayable in 2016 at commercial interest rates.

  The agreement then sets out certain technical issues including:

—  the mechanism for topping up the Mails Reserve and the creation of the escrow accounts. The Holdings escrow was to be created and credited with amounts from the Mails Reserve by way of a direction from the Secretary of State under section 72 of the Postal Services Act 2000;

—  that the Royal Bank of Scotland is the custodian of the escrow accounts;

—  a mechanism for the release of the amounts in the escrow accounts in the event that these are required by the Trustees or can be released for other use in due course;

—  that Royal Mail pursues the transformation of the business using the funds made available;

—  that Royal Mail, in relation to the phantom share scheme, commits to communicating the details of the scheme (including the agreed rules of the scheme) to participants in a clear and understandable manner and on the agreed terms;

—  that participants in the phantom share scheme can receive pay outs of up to the agreed cap of £5,300 including target stakeholder dividends over the period of the plan;

—  various general clauses covering information and monitoring arrangements, confidentiality arrangements and completion date mechanisms.

15 November 2007