UK - British Telecom has agreed a 17-year recovery plan with its trustees in an attempt to tackle a £9bn (US$14.1bn) deficit.
BT and the trustee of the BT Pension scheme announced their agreement on the triennial actuarial funding valuation and recovery plan this morning - revealing a near-tripling in the pensions deficit since the last valuation in December 2005, when the shortfall was calculated at £3.4bn.
BT blamed the sharp rise on the trustees "very prudent" approach to the valuation and changes to mortality assumptions, with a two year increase in the average life expectancy of scheme members since 2005 adding £2.5bn to the figure.
As previously announced, BT will make deficit payments of £525m per annum for the first three years of the 17 year recovery plan, the first payment of which was made in December 2009.
The payment in the fourth year will be £583m, then increasing at 3% per annum. The payments in years four to 17 are equivalent to £533m per annum in real terms.
BT said if the valuation had used a 'median estimate' approach - which reflects how investments might on average be expected to perform over time and the expected impact of the pensions review changes implemented on April 1, 2009 - the deficit would have been about £3bn.
It said this implied the funding valuation included a margin for prudence of about £6bn - or 15% of the scheme liabilities. The valuation assumes future improvements in life expectancy have increased by about two years compared with the 2005 valuation.
BT said the regular joint employer/employee contributions reduced to 13.6% principally as a result of the pensions review changes that were implemented on April 1, 2009.
It said the value of the scheme's assets have increased by about 10% from £31bn at December 31, 2008 to about £34bn at December 31, 2009.
Other features of the legal agreements with the Trustee providing support to the scheme are:
- In the event that cumulative shareholder distributions exceed cumulative total pension contributions over the three year period to December 31, 2011, then BT will make additional matching contributions to the scheme. Total pension contributions (including regular contributions) are expected to be c.£2.4bn over the three years.
- In the event that BT generates net cash proceeds greater than £1bn from disposals and acquisitions in any 12 month period to December 31, 2011 then BT will make additional contributions to the scheme equal to one third of those net cash proceeds.
- A negative pledge that provides comfort to the scheme that future creditors will not be granted superior security to the scheme in excess of a £1.5bn threshold.
BT said the valuation and recovery plan had been submitted by the Trustee to the Pensions Regulator for their formal review.
However, BT said The Pensions Regulator's initial view voiced "substantial concerns" over the deficit and certain features of the agreement - but said both the company and the trustee would continue to work with the Pensions Regulator to help them complete their detailed review.
In a statement, The Pensions Regulator said the valuation was a "correct reflection" of the scheme's funding position.
It added: "We look forward to working with BT, the pension trustees and their advisers to enable us to complete our detailed review."
BT chief executive Ian Livingston 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 re-affirms 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."
BTPS Trustee chairman Rod Kent said: "The trustee is pleased we completed this agreement before the March 31, 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."
The Communication Workers Union welcomed the company's commitment to tackling the funding problem.
CWU deputy general secretary Andy Kerr said: "Last year was a really tough one for staff in BT.
"The negotiated changes to the pension scheme have brought significant savings to BT while securing the long-term future of the pension scheme for our members. It's hard to say whether there would still be a decent pension scheme in the company if those changes had not been made at that time.
"Today's announcement of an agreement between BT and the trustee of the pension scheme to clear the deficit is very welcome and show BT's commitment to this key staff benefit. While the projected deficit has increased to an estimated £9bn, this reflects a prudent approach to financial assumptions taken by the trustee."
The trustee advisers included Towers Watson as scheme actuary and adviser on longevity, investment returns and discount rates; Penfida Partners in respect of their reviews of covenant and affordability; telecom specialists in respect of BT's long term strategic position in its core fixed line business; and Lovells in respect of legal advice and the framework underpinning the process.
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