Connected Research

Union policy research in the 21st century

BT’s pensions deficit

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BT published its first quarter report and accounts yesterday – a set of numbers which certainly seemed to excite the City although I’m not quite sure that it counts as a green shoot. Certainly Livingston was disounting that in his conference call to analysts.

Anyway, the accounts did disclose a doubling of its pensions deficit, to a net figure of £5.8bn (since the gross amount of deficit can be offset against tax), over the last three months. Despite the overall rise in the stock market in this period, which added over £1bn to the assets of the scheme, taking it back above £30bn, changes in the company’s assumptions about rates of return on those investments and about inflation exacerbated the liabilities by a much higher figure.

The deficit as revealed by the accounts has no implications for what the company needs to do in practice about the scheme. The IAS19 measure – which is the basis of accounting for final salary pension schemes – is a snapshot of the state of the scheme from the perspective of the timeframe of the annual accounts; that is, the position were the scheme called upon to pay liabilities within the year. (Incidentally, the role of this measure in exacerbating the public panic on pensions is one factor in the decline of private sector defined benefit provision that seems to have been forgotten about these days, although it’s also true that the City boys and girls yesterday didn’t seem to notice the size of the deficit, or else they discounted it…) By itself, it changes nothing.

In contrast, the real deficit in the scheme is the one revealed by the triennial valuation of the BTPS, which was due at 31 December 2008. This is the one that will force the company to put more money in the scheme (as is likely) and we don’t know what the size of the deficit as revealed by the valuation is going to be: it may be worse than the above figure; it may not. At the annual accounts presentation in May, the company said that it had reached ‘an advanced stage’ in its discussions with The Pensions Regulator over the valuation (that it was having discussions with the Regulator at all is highly unusual and a sign of the interesting times in which we live), but clearly no public progress has been made to shift that ‘advanced’ stage into the ‘final’ one.

The interesting thing about the publication of the accounting deficit figures yesterday is that they reveal a decline in the AA bond rate (which is used to assess rates of investment return into the scheme), from 6.85% in the annual accounts to 6.2% now; and a rise in the inflation rate, which is used to discount the value of liabilities extending into the future, from 2.90% in the annual accounts to 3.25% now. The decline in the AA bond rate was expected (as Robert Peston explains) but the rise in inflation at this point was less so. The measure focuses on RPI which, as we know, is currently heavily negative although the current position is less important than what will happen in the long-term.

BT’s accountants clearly think it is prudent to allow an increase in the inflation rate at this time, compared to what the figure was three months ago, but I wonder whether this is also the view of the Pensions Regulator?

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Written by Calvin

31/07/2009 at 9:40 am

Posted in Pensions

Tagged with ,

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