BT clashes with Sky over pensions impact of Ofcom's overhaul plans
A report commissioned by Sky sets out ways to separate Openreach from BT Group without putting pension scheme members at risk, following the telecoms giant's warnings.
It comes on the back of pressure on communications regulator Ofcom to make Openreach a wholly-owned subsidiary of BT following complaints from Sky UK and other providers that BT is too dominant in the market.
The report produced by Sackers for Sky sets out four ways to achieve the separation while ensuring members of the BT Pension Scheme (BTPS) are protected. This is despite BT Group citing the scheme as an obstacle to the separation, warning 300,000 members' pensions could be at risk.
Ofcom said in February it wanted to reform the relationship between Openreach and BT Group to give the former more independence and autonomy. The regulator has indicated it could do this by either structural separation or functional and legal separation, although it prefers the latter which would result in Openreach being a separate legal entity and wholly-owned subsidiary of BT.
Sackers' report said there have been suggestions the employer covenant may be a bar to the separation of the Openreach business.
The law firm believes the most straightforward way to achieve the separation would be to allow the Openreach subsidiary to join the BTPS as a participating employer. There are two ways to achieve this, which would both be restricted to only Openreach employees who participate in BTPS.
The first option would lead to Openreach taking responsibility for making contributions to cover future service pension costs only while past service liabilities would remain with BT.
Under a second option, in addition to paying future service costs, Openreach would also take on contractual responsibility for paying a share of deficit contributions for past service liabilities of its employees who have pension benefits in the BTPS.
A third way would be to split the scheme into two segregated sections under one trust, and the fourth would involve Openreach setting up its own mirror image scheme.
The report said the options would be much easier to implement if the government amended the Crown Guarantee to cover the pensions liabilities of Openreach under BTPS if the business is separated from BT.
The guarantee, which was put into place when BT was privatised in 1984, can only be triggered if BT is wound up and relates to BT's obligations to BTPS. It does not cover liabilities of the group's other companies that have started participating in BTPS since privatisation.
It has been unclear whether Openreach's liabilities would still come under the Crown Guarantee upon becoming a separate entity or a subsidiary of BT Group.
Amending the guarantee to ensure it still covers Openreach's liabilities would not increase the total liabilities it is currently subject to, said Sackers' report.
A spokesperson for BT responded: "Sky cannot simply wish away inconvenient truths. The kind of governance changes they have suggested for Openreach would have a material negative impact on the pension position.
"We at BT are clear about this, and our view is supported by authoritative, independent analyses by KPMG, PwC and Freshfields.
"Sackers have raised the importance of the employer covenant and the critical impact this will have, but unlike KPMG and PwC, they are not employer covenant advisors."
The funding deficit in BTPS grew by almost £3bn from 30 June 2014 to 20 June 2015.
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