The government has today unveiled a £1.75 billion package to help Royal Mail tackle its pensions black hole and modernise its services.
Trade and industry secretary Alistair Darling said the agreement would give the postal firm "the right basis from which to take forward an ambitious modernisation programme, helping to deliver a world class service".
It comes as Royal Mail publishes its annual results, which show the firm made an operating profit of £355 million last year - £53 million more than the previous year - while the Post Office made a loss of £111 million, £12 million less than in 2004.
However, the company is facing a pensions fund deficit of £5.6 billion, and it has warned that without some form of assistance from its shareholder - the government - it will be unable to compete in the postal market, which was fully liberalised on January 1st.
Today's package includes a loan of £900 million and the release of £850 million from the Royal Mail reserve for the company to support its pensions fund, to ensure employees do not lose out "in the unlikely event" that the company goes bust.
The loan, which is an extension of an existing £884 million unclaimed loan facility, will be on commercial loans, allowing the government to deny that they are subsidising Royal Mail to the detriment of the other postal providers.
"Giving Royal Mail the freedom to use its financial resources to invest for the future puts the company in a stronger position to successfully compete in the marketplace and also deliver a financial return for the taxpayer," Mr Darling insisted.
He said that once the necessary changes had been made, any money left over from the reserve fund would be returned to the government. Meanwhile, the Treasury has also agreed to meet costs for changes to the Post Office network until 2008.
Announcing the company's annual report this morning, Royal Mail chairman Allan Leighton said the firm had delivered an "outstanding financial performance" over the past year, and said it was beginning to turn itself around.
He also announced a payout of nearly £100 million to employees through the share in success programme, saying he was proud of the hard work they had put in to the company, but warned there could be "no let-up".
Chief executive Adam Crozier added: "Royal Mail faces a challenging future - the need to modernise, securing the future of the Post Office network, increasing the focus on customers and improving service yet further, generating the cash to ensure the pension fund continues to meet its obligations, and all the time bringing our people with us."
He added: "But the key to future success is to ensure that the investment plan, which has been approved in principle by the shareholder, is brought to a successful conclusion with the right incentive plan for our people who are, as always, the key to our success."