The letter sent by Jane Newell to the business secretary, released to the media by his department

Postal Services Review

Further to our meeting of 13 February, perhaps I could confirm the trustees' views in respect of the Hooper report, in so far as it affects the Royal Mail pension plan.

Let me reiterate the trustee's position. The trustee has a fiduciary duty to protect the benefits of the 450,000 members of the Royal Mail pension plan. The trustee's prime concerns, therefore, are the security of members' benefits and the strength of the covenant of the plan sponsor.

As you know, Royal Mail's position is weak in respect of its covenant and there is a significant pension fund deficit, which is a long-term drain on the company's cash. Royal Mail is already balance-sheet insolvent.

If the recommendations of the Hooper report were not implemented, the consequences could be very severe indeed for the Royal Mail pension plan and for Royal Mail itself.

In particular, in light of the weakness of Royal Mail, the trustee would consider it necessary to seek to significantly strengthen the funding basis for the 2009 actuarial valuation.

On a self-sufficient basis, this would value the liabilities far higher, resulting in a deficit that would be significantly larger than the £5.9bn quoted in the Hooper review, which is on the existing ongoing basis.

The law gives the trustee and Royal Mail until 30 June 2010 to agree this valuation.

Whatever its precise amount, the deficit resulting from a strengthened funding basis for the 2009 valuation is highly unlikely to be affordable by Royal Mail, with potentially devastating consequences.

If this were the case, the plan's financial resources would not be sufficient to provide the full value of benefits, which would need to be very significantly reduced. At present, in a winding-up, the plan would not even be able to provide as much as 50% of members' benefits.

In theory, the pension protection fund would act as a safety net for members, but I would not like to speculate on its ability in practice to absorb the plan without putting an intolerable levy strain on remaining UK pension schemes.

Consequently, the trustee of the Royal Mail pension plan, subject to obtaining satisfactory guarantees from government, is in favour of the Hooper report's recommendations.

We very much look forward to these being implemented, as soon as possible, for the benefit of all concerned.

Jane Newell

• Mandelson releases letter from Royal Mail trustees
• Ministers want to sell 30% stake to private sector

Lord Mandelson tonight raised the stakes in the battle over the future of the Royal Mail by releasing a letter from its pension trustees warning that if part privatisation does not go ahead, staff may have to see the value of their pension slashed in half.

The letter to the business secretary from Jane Newell, chairman of the pension fund trustees, comes ahead of Thursday's bill on reform of the service.

Mandelson has decided to launch the bill in the Lords to give him more time to gauge the kind of concessions that will be necessary to prevent a full scale backbench revolt in the Commons.

The union accused the government of scaremongering.

At present more than 140 Labour MPs, including the former cabinet minister Peter Hain, are opposed to part privatisation, and the Communication Workers Union is due to hold a rally at Westminster tomorrow at which threats to disaffiliate from the Labour party will be made. Mandelson and the post office minister, Pat McFadden, have released the letter in a bid to drive home to staff and MPs that leaving the Post Office as it is in public hands will have dire consequences.

They want to shake up the rebels and make them recognise they have to negotiate on the terms on which the private sector could be involved, including commitments on a new regulatory structure. Ministers want to sell a stake of about 30% to the private sector to help pay for the modernisation of the service.

As part of the deal to allow a minority private sector stakeholder, the government has said it will take over the Royal Mail's pension fund deficit. The proposal that private sector expertise be introduced to help Royal Mail modernise was the chief recommendation of the Hooper report commissioned by the government.

Ministers will formally respond to the Hooper report alongside publication of Thursday's bill and point out that Royal Mail business is falling at a rate of 8% a year.

Newell warns in her letter: "If the recommendations of the Hooper report were not implemented, the consequences could be very severe indeed for the Royal Mail pension plan and for Royal Mail itself."

The letter suggests the deficit for 2009 on the basis of no external government support "is highly unlikely to be affordable by Royal Mail, with potentially devastating consequences. If this were the case, the plan's financial resources would not be sufficient to provide the full value of benefits, which would need to be very significantly reduced. At present, in a winding-up the plan would not even be able to provide as much as 50% of members' benefits".

The pension fund has more than 450,000 members, and Newell's warning will disturb members as they decide how far to take their opposition to the government's reform. The letter was sent following a meeting between Newell and Mandelson on 13 February. She stresses her views reflect those of all trustees.

The Hooper review warned the deficit on the existing ongoing basis was £5.9bn, but says the figure next year would be significantly larger. Newell says the law gives the trustees and Royal Mail until June next year to agree this valuation.

The pensions watchdog is warning Britain's major employers to maintain payments to their guaranteed retirement schemes despite concerns that the widening deficits in the funds will lead to steep cuts in dividend payments to shareholders.

In a statement to be issued today, the regulator said the trustees of occupational final salary schemes should not bow to pressure from cash-strapped employers to take pension holidays. It said employers might seek to maintain dividend payments at the expense of pension contributions, but this should be resisted.

It said: "When the sponsor company is under pressure there is potential to renegotiate previously agreed plans to repair pension deficits (recovery plans). There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency. But the pension recovery plan should not suffer, for example, in order to enable companies to continue paying dividends to shareholders."

The timing of the warning is likely to dismay investors already concerned that falling profits will have a knock on effect on dividend payments this year. Steep falls in stockmarkets around the world have knocked billions of the value of UK employer retirement schemes. In its latest survey the regulator revealed the deficit had soared to more than £200bn.

The CBI and other employer groups have pleaded with the regulator for a more lenient attitude to pension fund deficits to allow employers to maintain profits and dividend payments. In a review last month the CBI said companies should be given a longer timescale to make up shortfalls in their funds.

Today's statement from the regulator is expected to be seen as an opening salvo in an intensely fought war with employers that are currently finalising their year-end accounts and taking a decision on dividend payment levels.

All employers have committed to reduce the deficits in their funds over a maximum of 10 years following discussions with the regulator. Employers have already poured billions of pounds into their retirement schemes in recent years to boost funding levels, but they fear they will be asked to give even more just as the economy is turning sour.

The regulator believes that finance directors are preparing to confront pension scheme trustees to argue that the sponsoring company will be placed in jeopardy unless it is granted a payment holiday.

Trustees should tell the company to raise money from other sources to fund dividend payments, the regulator said, before seeking to cut their contributions to a scheme in deficit.

• Money was thought to be held in a safe haven
• Fund was actually invested in toxic mortgage debts

Standard Life is to make payouts to 97,000 investors who lost money in a pension fund they believed was invested in low-risk assets.

Last month it emerged that the insurer's £2.4bn Pension Sterling fund, which many had regarded as a safe alternative to the stock market, had been invested in toxic mortgage debt, which has recently plummeted in value.

Savers were shocked when on 14 January Standard Life told them their investments had fallen by 4.8%, reducing the value of an average £19,100 deposit to £18,200, with many complaining they had not been told of the risks associated with their investments.

While some believed they were invested purely in cash deposits, in reality only 12% was in cash and 44% was invested in asset-backed securities, considered at the time of purchase to be a safe alternative to cash. The insurer said it had made it clear that the fund was not just invested in cash, but promised to reimburse a small group of savers and look into the marketing of the fund.

Today it admitted that some of its literature "fell short of our own high standards" and promised to return £100m to savers who have lost out.

"Having conducted our own review of the literature for the Pension Sterling fund and listened carefully to what customers and advisers have been saying to us, it is clear that many people were not fully aware of the nature of the fund," the insurer said today.

"Against this background we feel strongly that the right thing to do is to put all customers back to the position they would have been in had we not reduced the value of the fund on 14 January."

Standard Life's managing director of customer service, John Gill, added: "Standard Life would like to take this opportunity to apologise to any customers who have been affected by the fall in value of this fund ... We have listened to our customers and advisers and believe that our response underlines our commitment to our long-term relationship with them."

The insurer said it believed the fund was still a good investment choice for many customers, insisting that overall assets held in it were of a high quality, but it warned customers that the value of their holdings could fall again in future.

Investors with other fund managers have also seen the value of holdings in cash-style funds fall. In January, Threadneedle's £450m money market fund was down 16.6% year-on-year, while Prudential's Cash Haven fund had dropped by 0.3%.

If I were 18 years old again, it would probably be in my interests to start a riot. Even if I came from a decent, upstanding middle-income family, there would appear to be few reasons not to throw a rock through the window of a retired policeman, teacher or BT engineer. A note on the rock would ask "why can't I have even a tiny shred of your comfort and security?"

If I was caught, what would I have to lose? A criminal record is not of much concern, when you will never be able to afford a home. If I had a family, the lifestyle enjoyed by my parents will be beyond my reach. As for retirement – that option was snatched away by the first generation baby-boomers who grabbed final salary pensions and pulled the drawbridge up behind them.

The only young people with a bright future will have either secured a blue-chip education or have parents prepared to hand on some of their assets, sell them or borrow against them.

Not so, say Gordon Brown, Barack Obama and most mainstream politicians – we can all benefit from future economic growth when the wheels start turning again.

The solution must be to borrow billions of pounds to reflate western economies, kickstart corporate and personal lending and raise disposable incomes.

But what if all the spending of the last 15 years has left the cupboard bare? And more than that, put us in a position where it is hard to see how we repay the debt and at the same time enhance our living standards.

It's a huge simplification, but I wouldn't be the first person to ask where our prosperity has come from in recent times. Hard working, productive factories and service industries account for some of our growth. Yet it was supplemented in the 1980s by regular cash from privatisations and North Sea oil. In the 1990s we sold our mutual building societies and insurers. In the last decade, we borrowed for consumption and married that with the export of financial services.

All the cash from these sales served to disguise the levels of investment in the economy when they were miserly. The billions of pounds pouring into people's pockets also allowed them to avoid confronting widening inequality.

We can look back now and see that Tony Blair's refusal to confront inequality was only possible because lower income groups were able to borrow large sums for the first time. A tax on the rich isn't needed when a loan is only a two-minute phone call away. Tax credits also played their part, boosting the living standards of low income families from money the government didn't have.

Compared to the last 30 years, the next 10 look especially bleak. There are no more privatisations of any note, all the largest mutual firms have been sold (bar Nationwide) and the borrowing bonanza and financial services boom has ended. Tax credits will no doubt be maintained, but it is hard to see how they can be raised dramatically.

Last month, Peter Mandelson called for more investment in manufacturing. He asked pharmaceutical firms and other "knowledge-based" industries to lead us out of the recession and into a brighter future.

While his work will undoubtedly be positive it doesn't seem overly cynical to say it will be a side show.

The fact is that most people with significant pension savings in this country – those aged 55 to 65 – don't care about increases in productivity to help future generations. The drive behind their pension fund is in one direction. The only concern is with pushing the value of their assets back up to something like 2005 levels.

Pension funds now own most of the UK's commercial property and much of the stock market. Tax breaks introduced by successive governments have encouraged most wealthy savers to channel their spare cash into a pension. As owners of capital they have dictated the short-term agenda that dominates the City (or in their ignorance allowed it to prevail). They funded the banks and pushed them to indulge in reckless behaviour. They pay the huge bonuses of City fund managers, despite plenty of research to show they add little value to investment decisions. They bow to the demands of chief executives when seek to increase profits at the expense of long-term investment decisions, again to trigger massive bonuses.

Why would a pension fund take a short term decision when they have long term liabilities, you might ask. The answer is in recent figures from the funds themselves. For 10 years they battled rising life expectancy and falling interest rates. If they look healthy in any year, it is usually an accounting trick. This year all UK defined benefit schemes clocked up a massive £200bn shortfall.

Like a family on benefit that has promised themselves a flatscreen TV, pensioners have promised themselves a comfortable retirement without the means to pay for it. Now they are looking to the younger generation to pay and accept at the same time they will never enjoy the same benefits themselves.

Young workers believe they are being asked to work longer hours for less pay because they must compete with the Chinese and Indians. The truth is they are working harder to drive up the profits for investors and they are in the main UK pension funds.

Investors are dictating how we emerge from recession and who wins and loses. Their stupidity and craven search for the gold needed to fund their pensions has pushed the system they created almost to extinction. Now they are pulling it back from the brink, be under no illusion it is for their benefit.

The only solution for the young is radicalism and real political debate that identifies the new haves and have-nots. We need a new debate because the winners and losers are not in the old-fashioned traditional blocks. They fit new categories.

Of course, the rich and the super rich are obviously a factor and must also be addressed. But one could argue they have always been around and a force for self-aggrandisement during every recession. What is new and has only occurred in the last 15 to 20 years is the rise of the middle income pension saver and the terrible effect these baby boomers have on the rest of us.

Contributions to employees' schemes set to be the next money-saving area

Concerns are growing that Britain's cash-strapped companies will cut contributions to their employees' pension schemes as they take increasingly drastic action to stay afloat.

With staff in a number of hard-hit industries already accepting pay freezes in exchange for promises of saving their jobs, pension contributions are expected to be the next battleground.

Pensions consultants who advise employers about how to administer their schemes say a growing number are beginning to ask how they can reduce their costs.

"We are talking to clients about it - it's not something that they want to do, it's a last resort, but cashflow is absolutely critical for them," said Paul McGlone, principal at pensions consultancy Aon. "Pensions is a big cost." Some of McGlone's smaller clients have already reduced their contributions, but he expects more to do so in the coming months.

American firms that have already cut contributions to their US staff's schemes during the downturn are said to be the first in the queue. The European branch of crisis-hit car-maker General Motors is said to be in official consultations with its staff about its scheme.

Many firms have already closed down the final salary schemes that provide a fixed benefit to retirees at the end of their careers, and replaced them with so-called "defined contribution" schemes, in which the pension paid on retirement depends on the performance of financial markets.

Cutting contributions to a final salary scheme is extremely difficult, because the pensions regulator monitors the level of deficits and can prevent contributions from being reduced, but it can be easier to cut contributions to a defined contribution scheme, depending on how it is constituted.

At a time when up to £300bn has already been wiped off the value of pensions portfolios by the crash of 2008, Brendan Barber, general secretary of the TUC, said reductions to company contributions would be disastrous.

"Cuts in employer contributions to defined contribution pensions are nothing more or less than a cut in wages, and will meet with an immediate and robust response from unions, especially when there is any evidence that employers are using the recession as an excuse to cut contributions they can easily afford."

Employers have a legal obligation to "consult" their workers about any major changes to their pension scheme, but a spokeswoman for the pensions regulator said that depending on the make-up of the scheme, how much a firm pays in is often ultimately at its discretion.

Workers may also be choosing to trade off their retirement security against a short-term cash squeeze. John Ralfe, an independent pensions consultant, says he has heard a growing number of stories in recent months of staff members choosing to opt out of their company scheme.

"That is a double whammy," he said, "because most defined contribution schemes involve matching by employers - so you're losing not just what you're putting in, but what the company's putting in too."

New laws to be implemented in 2012 will mandate a minimum employer contribution of 3% of salary, and the National Association of Pension Funds is worried that there will be a "levelling down" of schemes towards that figure. At the moment, the average contribution to a defined contribution scheme is 6% of salary, according to official figures.

Sick of earning a pittance on your savings and seeing the value of your investments plummet? As uninspiring as it might sound, turning to tax planning could take the sting out of the downturn and provide a golden opportunity to make worthwhile savings to beat the gloom and doom.

Regardless of how much money you have, there is a tax planning tool for you. And note that even losing your job could trigger a tax rebate just when you need the money most.

Claiming a tax rebate if you lose your job
If you lose your job before the end of the tax year, you are likely to be entitled to a rebate.

"A person's annual allowance (currently £6,035) under PAYE is divided into 12 months to cover the tax year. If you were made redundant at Christmas, for example, you'll only have used nine months, with the remaining quarter unused - and this could amount to around £600 for a higher-rate taxpayer," says Angela Beech of accountants Blick Rothenberg. To claim a rebate, complete form R40 (available from hmrc.gov.uk), attach your P45 and send them, with a letter asking for a refund, to your tax office. If you've had

a company car, you could be eligible for a further rebate. "Once that's gone you're no longer due to be taxed on it, but you will have paid tax on this as if you'd had it for the whole year," says Beech.

Reclaiming overpaid tax
The self-employed or higher-rate payers with substantial investments may find they have overpaid tax. If you pay tax "on account" - before your tax liability is finalised - you may have paid too much. This way, you are required to pay tax in two tranches, each half the previous year's tax bill, which may be too high if your earnings have slumped and investment returns have tumbled.

For example, the first payment of tax for the year April 2008 to April 2009 is made during the tax year on 31 January 2009, and must be half the tax paid in the previous year. The other half should be paid in July 2009 after the tax year has finished, but before returns have been finalised.

So if you expect your salary or earnings from investments to be lower, you can apply to make a lower payment than usual. You need to request this by filling in form SA303.

"Do a rough calculation of your liability if your profits are taking a nosedive, and divide that by two - that should have been the amount you paid towards this year's tax bill by the end of January," says Beech. "You can tell the tax office you want to reduce your liability - and even do it after the event provided you then complete the form and give a reason."

Gary Telford of accountants PricewaterhouseCoopers adds this warning: "Don't take your payments on account down to zero, thinking you're being clever, as you'll have underpaid and will face paying interest and penalties."

See hmrc.gov.uk/incometax/overpaid-thro-job.htm.

Making the most of tax credits - even if you're not entitled to them
If you have a family and think you might lose your job, put in a claim for child tax credit as soon as possible, even if you don't reckon you qualify, says Beech.

"You can only put this in once each tax year, and claims can't be backdated. The secret is to put one in and, even if you're told you aren't eligible, it will still be registered if your circumstances change before the end of the tax year."

Boosting your pension pot
Maximise relief on pension contributions. If you pay £80 into a pension, this attracts £20 basic-rate tax relief, and higher-rate taxpayers can claim back a further £20 on their return. If you are worried about rocky stock markets, money in a pension - either a company money-purchase scheme or personal pension - can be held in cash if your provider offers a cash fund. "Although remember, this locks your money up until age 55," says Beech.

Cash in self-invested personal pensions is usually held in a bank account, although rates are currently low. "It makes sense for those approaching retirement, as they receive a greater return through tax relief than any available in savings accounts at present," adds Beech.

Paying into a pension for your partner or children

Pensions can also be taken out for low- or non-earners, including spouses and children. You can pay up to £2,880 a year into a stakeholder, for example, with tax relief topping this up to £3,600. You should also put accounts into the lower tax-paying partner's name.

Claiming mortgage interest relief
Buy-to-let property owners can claim relief on mortgage interest, with the interest portion of mortgage repayments offset against rental income.

If you haven't got a mortgage on your let property, but have one on your home, you can offset the interest you pay on your home mortgage against your rental income. The only condition is the mortgage cannot be greater than the value of the let property when you started to let it. "If you have a small mortgage on your let property, why not top it up to take advantage of this?" says Beech.

Passing on assets tax-free
While depressing for investors, asset prices on a downward spiral can be useful to those planning to pass them on to future generations. If you wish to pass on property or shares to members of the family for inheritance tax planning purposes, there is normally a capital gains tax charge. So you are strongly advised to seize the opportunity presented by tumbling property and share values. "You'll be gifting assets when they're at a low value, and you can give anything away - shares or a property, for example - as long as you don't retain an interest in it," says Beech.

You can give away assets worth up to £3,000 per year per beneficiary, so if the value of an asset has dipped below that, you can give it away free of inheritance tax. Alternatively, gifts can be made outright, and if you survive for seven years they become tax-free.
harriet.meyer@observer.co.uk