BT plan to plug £9bn pension deficit meets with regulator concern

Trustees approve scheme to pump £525m a year into fund. Pension's Regulator has significant reservations over deal

BT has said trustees of its pension scheme have approved its plan to pump an extra £525m per year into the fund over three years.

The Pension's Regulator has expressed "substantial concerns" about BT's plans to plug the £9bn hole in its pension fund, the largest private sector scheme in the UK.

Announcing third-quarter results this morning, the company said the trustees of the scheme have approved its plan, outlined last May, to pump an extra £525m per year into the fund over three years. However, it also emerged that the pension's watchdog itself still has significant reservations.

The telecoms company admitted that "the Pension's Regulator's initial view is that they have substantial concerns with certain features of the agreement", but refused to provide any further details.

BT also unveiled the crucial triennial funding valuation for the scheme this morning. At the end of 2008 the fund was £9bn in the red. But since then, BT reported, the recent stock market recovery means that the scheme's assets increased by 10% from £31bn at 31 December 2008 to £34bn at 31 December 2009. The previous triennial funding valuation showed a funding deficit of £3.4bn at 31 December 2005 and BT paid deficit payments, under a 10-year recovery plan, equivalent to £280m per annum over the three years to 31 December 2008.

BT has been in close contact with the regulator while it has thrashed out a deal with the trustees, but the watchdog has yet to sign-off on the deal. Shares in the company fell over 5.5% in early trading in London today, down 7.4p to 124p.

Concerns over the deficit in BT's pension scheme, which has almost 360,000 members, has weighed heavily on investor sentiment in BT for the past year. To try and calm fears, BT set out plans in May last year to pay an annual £525m over three years into the scheme to plug the gap. But concerns have persisted that it may need to inject more in order to placate the regulator, and today's news will do little to calm those fears. BT itself has suggested that £525m may not be enough. In the deal with trustees – which is actually a 17-year plan – BT admitted that after the three years, payments would increase to £583m. In fact, after three years BT will carry out its next triennial funding valuation and a new short-term investment scheme will be announced.

During the negotiations with trustees there has been a lot of speculation about the existence of a "crown guarantee", which was put in place by the Thatcher government when BT was privatised. It guarantees the pensions of anyone employed by BT at the time. BT stressed in its deal with the trustees, however, that the existence of the crown guarantee "has not been taken into account in determining the valuation results".

Ian Livingston, BT chief executive, said: "I am pleased that we now have an agreement in place with the trustee. This is a prudent valuation and a recovery plan which reaffirms BT's commitment to meeting its pension obligations. The operational improvements we are making in the business are generating sufficient cash flow to support the pension scheme whilst allowing us to pay dividends, invest in the business and reduce debt. The scheme is well managed and asset values have grown strongly since the valuation date. We will continue to work with the Pensions Regulator during their detailed formal review."

Rod Kent, chairman of the scheme's trustees, said: "The trustee is pleased we completed this agreement before the 31 March 2010 statutory deadline. This agreement secures significant additional support to the benefit of scheme members, underpinned by a strong sponsor. The valuation was performed at a time of particularly difficult conditions in the global financial markets. In arriving at this agreement the trustee has spent exhaustive effort over the last 18 months in detailed analysis supported by leading independent expert advisers."

News of the pensions deal came as BT announced a rise in third quarter profits, thanks to a better performance from its BT Global Services arm. Global Services provides IT services to large corporations and governments, and its wildly over-optimistic projections of its own performance were responsible for a string of profit warnings a year ago.

BT announced a third-quarter pretax profit of £466m, before exceptional charges including its ongoing redundancy programme, up from £335m last year. Revenues, however, continued to slide as BT faces intense competition, especially in the UK telephony market. Revenues of £5.19bn were down 4%.

Third-quarter revenues were lower across all four of BT's business units, although the group's profits were slightly better than analysts had been forecasting.

Source: The Guardian, 11th February 2010

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