Royal Mail has been granted permission to raise the price of stamps to fund investment in services ahead of the opening up of the postal market in January.
Industry regulator Postcomm has authorised a two pence increase on first-class stamps to 32p, and one pence on second-class stamps to 22p, which it estimates will generate an extra £320 million for the postal service.
However, this is considerably short of the request made by Royal Mail to increase the cost of stamps to 39p and 27p respectively, which it argues is necessary to narrow its £4 billion pension deficit and fund £2 billion of modernising changes.
On January 1st, Royal Mail will lose its monopoly over Britain's postal services and the entire market will be opened up to competition. There are concerns that the service in its current state will not be able to survive.
Postcomm chairman Nigel Stapleton said today's agreement, which also puts a cap on stamp increases of 36p and 25p to 2010, was a "fair deal" for customers, Royal Mail and the new entrants into the postal market.
"The rises in stamp prices are substantially less than Royal Mail wanted and a little more than we planned," he said.
"But without a contribution from customers, Royal Mail's weak financial position, brought on by its large pension deficit, would have put its ability to provide the universal service at risk.
"The long period of uncertainty about how Royal Mail is to be funded and how to deal with its pension deficit has been damaging.
"We hope, therefore, that these proposals can serve as the catalyst to enable these issues to be addressed quickly so that Royal Mail can focus on delivering better standards of service, greater innovation and higher efficiency."
The Communication Workers' union (CWU), that represents postal workers, issued a cautious welcome to the deal, saying it was pleased that Royal Mail's pensions deficit had been taken into account.
Deputy general secretary Dave Ward said the union now looked to the Treasury to extend the 'nil dividend' period - where it suspends its right to take profits out of Royal Mail - until 2010.
"This will enable Royal Mail to address the problems caused by decades of under-investment and ensure the business remains viable into the future," he said.
However, while consumer watchdog Postwatch said it would take a careful look at the agreement, chairwoman Millie Banerjee said that on first reading it was "difficult to conclude that it represents a good deal for customers".
She continued: "Postwatch are clearly disappointed that customers will be asked to pay 20 per cent more for their stamps over a four-year period. This is well in excess of inflation.
"Moreover, the increases will be front-loaded: as a result customers will pay more for longer. In return for their cash customers are not being offered any increase in the minimum quality of service targets set down in Royal Mail's licence."