News that BT had suffered a £9 billion shortfall in its pension fund came as a shock to many, given that at £379 billion it was the largest private sector guaranteed fund in Britain.
There was once a running joke in the industry that BT was a pension fund running a telecoms business. All the comedic content has since drained out of that particular line following the collapse of the fund in the wake of the global financial downturn.
BT has had talks with unions and its trustees on a range of possible changes to boost the fund, which was closed to new members in April 2001 but still has 360,000 members and 65,000 staff who contribute. Possibilities included raising the retirement age to 65, increasing staff contributions and basing payments on career average rather than final salary.
On the 11th February 2010 however, BT announced a recovery plan that had been agreed with the trustees of the Pension Scheme (BTPS Trustee) and subsequently sent to the Pensions Regulator for approval. BT also reported that the recent stock market recovery meant that the scheme's assets increased by 10% from £31bn at 31 December 2008 to £34bn at 31 December 2009.
The £9 billion deficit was calculated using a "triennial funding valuation", the same control used to work out the pension deficit of £3.4 billion in 2005. However BT argued that the £9 billion figure might well have been £6 billion lower if a "median estimate" valuation had been used instead.
This recovery plan allowed for a repayment schedule to be spread out over a seventeen year period, with an initial payment of £525 million a year for the first three years followed by a further payment in the fourth year of £583 million. After that, payments would continue increasing by 3 per cent a year. The first payment was already paid in 2009 meaning the payments from 2012 to 2025 will be equivalent to £533 million a year in real terms.
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."
Although this recovery plan has been agreed with the trustees, the Pensions Regulator has expressed "substantial concerns" about certain areas of the agreement but has not clarified as yet what those concerns are. The Regulator has the power to veto any proposed agreement if it thinks that the measures in the recovery plan are not "prudent enough".
BT chief executive Ian Livingston commented that the regulator would examine the plan and could even refer it to an independent tribunal. If this was the case, then the process could take a "very, very long time to settle". He went on to comment on the agreement with the Trustee: "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."
All these concerns and publicity surrounding the pension deficit have actually eclipsed what has amounted to solid third-quarter results from BT, including a strong turnaround from its global services division which was previously in dire need of an overhaul. In the final three months of 2009, BT generated a profit of £178m, almost three times more than the same period in 2008. For the first nine months of its financial year, it made a profit of £819m, a fall of just £2m on a year earlier.
There are also wider concerns as to how BT's recovery strategy might affect its business going forward. Last December UK communications regulator Ofcom instigated some research into how the intended repayment plan would affect its wholesale market and any subsequent increases in charges to ISPs for example.
British Telecom's pension fund deficit is clearly a complex and highly emotional issue that raises questions on several levels. This is a story that is destined to rumble on for some time to come.