Bt Pension Deficit Nearly Doubles To £7Bn

[Sancho Panza]

Telegraph 30/1/15

'BT has outlined a new plan to pay down its sizeable pension deficit, putting its finances in order ahead of a key Premier League rights auction and deal to buy mobile network EE.

BT will pour £2bn into the scheme over the next three years to pay down a deficit that has increased to £7bn, from the £3.9bn it revealed in 2012, following a triennial review.

Gavin Patterson, the company's chief executive, said BT was making "good progress" on its acquisition of EE and would make further announcements about the deal in due course."In the meantime, our Consumer mobile launch plans remain on track," he said.

The company also revealed adjusted pre-tax profits of £814m in the three months to December 30, up 13pc on the same period in the previous year. Mr Patterson said demand for fibre broadband remained strong, with orders reaching a record high in the period.

Analysts had expected BT's pension deficit to rise as record low interest rates and central bank bond buying programmes have depressed returns.

With the pension plan in place, BT said it would upgrade its fibre broadband network to achieve speeds of up to 500mb across most of the country within a decade.

^{BT's pension deficit has almost doubled in the past three years, despite the company making £2.65bn in payments (Source: BT)}

The changes come ahead of an auction in February for Premier League broadcast rights and as BT negotiates a deal to buy mobile operator EE for £12.5bn.'

EFinancial News 16/7/14

'BT has fought off a legal challenge from the UK government over its giant pensions bill – confirming that taxpayers could be on the hook for billions of pounds in the event the telecoms giant ever goes bust.

The dispute between BT and the government, which has been ongoing since 2010, concerns a so-called "Crown Guarantee" offered to BT upon privatisation in 1984, under which the taxpayer would pick up its pensions bill if the company ever went into insolvency.

Today, the Court of Appeal rejected a government appeal that the Crown Guarantee should only apply to BT workers who were employed at the time of privatisation.

The Appeal judge, Lord Justice Rimer, ruled that because new, post-1984 workers were enrolled into the same pension scheme, they were entitled to the same protection. If the government had wanted to avoid this, he said, it could have obliged BT to close its scheme down and open a new, non-guaranteed one.

In fact, it did not close the BT Pension Scheme fully to new joiners until 2001.

The ruling backs up a High Court judgement from 2011 and means the taxpayer is still on the hook. According to the independent pensions consultant John Ralfe, the BT scheme holds a current asset pool of £40 billion against predicted liabilities of £64 billion.

Ralfe said: "The interesting question is whether the existence of this guarantee has encouraged BT and its pension trustees to run a racier investment strategy than they otherwise would have. Of course, they would say 'no' until they are blue in the face. But from a trustee's perspective, the guarantee must give some comfort."

Ralfe has valued the scheme’s liabilities using the most conservative, “risk free” basis. According to the more conventional figures used in company accounting, which assume the scheme will continue to receive payments from a solvent company, BT’s pension deficit stood at £5.6 billion in March 2014.

The Court of Appeal did, however, uphold another element of the government's appeal.

According to Mr Justice Mann's 2011 judgement, the Crown Guarantee backstopped all BT pension liabilities in full, according to the most conservative estimate of their value; £64 billion. This implied that following BT’s insolvency, the government would have to finance the purchase of annuities from insurance companies to secure all members’ pensions.

But Lord Justice Rimer ruled that there was no such obligation; the guarantee only means the government has to fund the scheme on the exact same basis BT has been funding it; paying in the money gradually, instead of all in one go.

Rimer also pointed out in his judgement that "BT is a solvent and prosperous company and the prospect of its ever going into insolvent liquidation is remote".

A BT spokesman said: "Judgement was today handed down by the Court of Appeal in the case concerning the scope and extent of the Crown Guarantee, which was granted by the Government on BT’s privatisation. All parties will now need to consider the judgement and its consequences in detail, including the possibility of an appeal to the Supreme Court."

And BT's pension trustees, chaired by Paul Spencer, said in a statement: "It is possible that the trustee, BT and the government all decide to take steps to appeal the judgement to the Supreme Court, the final appeal court in the UK.

"It is important to remember that the Crown Guarantee is only relevant in the highly remote circumstances that BT was to become insolvent. The scheme continues to have strong on-going support from BT in relation to the scheme and its members."

A spokesman for the Department of Media, Culture and Sport, which brought the appeal on behalf of the government, said: “We are studying the judgement."'

[TheCountOfNowhere]

Dont worry, I can help bail it out whilst their company sponsors football players.

[zugzwang]

The deficit would disappear overnight if gilt yields rose.

BT is like taking a short on gilts.

Ah, yes. The unintended consequences of unlimited QE.

[crashmonitor]

One of my big concerns when it comes to figuring out if equities are fair value.....most of the FT 100 companies have eye watering pension deficits.

[Eddie_George]

One of my big concerns when it comes to figuring out if equities are fair value.....most of the FT 100 companies have eye watering pension deficits.

Good point.

[martymcfly]

All this talk that low interest rates and QE have increased pension scheme deficits due to lower yields, completely ignore the fact that they have also artificially propped up the value of the assets, be they gilts, equities, whatever.

Two sides of the same coin.

[onlyme2]

Not unknown though as the BoE placed their entire pension funds in gilts before pressing the button on qe.

Biggest insider trade ever in the UK when you consider how much they eventually spent.

Should have been trials and jail for that.

[martymcfly]

Not if your pension fund is in deficit (which most of them were and are) like BT.

Then you have to run very hard to try and buy enough gilts to fund their defined benefit pensions even as yields fall even further.

Schemes being in deficit or surplus makes little difference - the liabilities (pensions to be paid) have increased because gilt yields have gone down. Their assets (gilt, equities, corporate bonds, propoerty, etc) are at a higher level than would otherwise have been the case due to QE/interest rates.

Most reporting on the situaion mentions the liabilities going up due to gilt yields, but not the fact assets have gone up as well.

Pensions are in trouble not because of QE and interest rates, but because of longer term problems like underestimating life expectancy and overestimating investment returns.

[martymcfly]

Of course it matters.

Once you have bought a gilt with a certain yield and put it in a sock drawer, whether the face value rises or falls matters not if you hold until maturity.

However, if you are in the market of purchasing gilts, then the value of the gilts/yields makes all the difference. Particularly if you are in deficit because you are having to buy a lot of gilts to satisfy your obligations and they could then go down.

The face value matters quite a lot since what we're looking at were is a snapshot of the pension scheme's funding position @ the end of 2014. The deficit = assets - liabilities. The assets (which aren't necessarily all gilts) have been inflated in value, thus improving the (snapshot) position of the pension scheme.

I agree over the long term if the pension schemes are buying into a lot of gilts at potentially bubble prices isn't a good thing, but until (and if!) that bubble bursts, the snapshot position of the schemes is being made healthier by the increased market values.