Royal Mail is failing to invest properly, is too inefficient and is not developing sufficient new products, the industry regulator has said in a sweeping indictment of the business.

The criticisms by Postcomm are in response to a government review of the impact that competition has had on the state postal group.

Nigel Stapleton, chairman of Postcomm, said: “Royal Mail's problems are a lot more deep-rooted than having to deal with modest amounts of mail competition and regulation. Royal Mail is experiencing some fundamental changes in how senders are using mail following the rapid growth in the use of e-mail, text messages and the internet for communications and marketing.”

Mr Stapleton said: “There has to be a step-change in strategy and approach, such that Royal Mail moves forward decisively to address its legacy issues of under-investment, difficult labour relations and the massive burden of its pension fund deficit.”

The postal group recently warned unions that its pension fund trustees could be forced to liquidate the business or force through huge alterations of the pension scheme unless changes were made.

The warning over the £3.4 billion pension deficit comes as Royal Mail is facing another major industrial showdown with unions over planned pension changes, just months after the end of the last national strikes, which were triggered by pay. A clash moved nearer yesterday when the pension fund trustees approved the changes, which include ending the final salary scheme to all members and raising the retirement age from 60 to 65.

The Government's review, launched before Christmas, comes after the concern of postal unions about the effect of rivals to Royal Mail on its core business. Now there are renewed concerns about its profits, despite the organisation receiving a £3.9billion rescue package from the Government last year.

Mr Stapleton said: “The clock cannot be wound back on the competitive developments facing Royal Mail, which are bringing significant benefits to customers. It is perfectly possible, however, for ... [it] to transform its business and customer services rather than remain locked in the past.”

Postcomm highlighted the benefits of competition, such as lower prices and greater innovation for large business customers and record levels of service quality for residential customers.

Royal Mail said that competition was now far ahead of the forecasts from the regulator when the market formally opened to competition four years ago. The business part of the market, which is the only area properly active at present, opened four years ago when Royal Mail finally agreed access terms for its infrastructure.

Royal Mail said that Postcomm's criticisms had failed to recognised the postal group's universal service obligation (USO) - its duty to provide a flat-rate service anywhere in the country for domestic customers.

Adam Crozier, chief executive, said: “Royal Mail is the only company in the open market with the commitment to the USO, but the issue is how to maintain it when it's now loss- making and the large business customers who for years have subsidised it are increasingly using the internet to communicate or posting their mail with rival postal operators.”

Postcomm argued that the USO was not under discussion for the part of the review it responded to.

Mr Crozier rejected Postcomm's criticisms over efficiency. He said: “Since 2002 we have taken out £1.5 billion in costs and reduced headcount by 50,000, while at the same time we have met the efficiency and quality of service targets set by the regulator.”

Times Recommends

• Equitable Life halts £7bn sale on market turmoil
• Potential buyers emerge to save Woolworths staff
• Terrorist attacks close Bombay Stock Exchange