Connected Research

Union policy research in the 21st century

Ofcom consultation on BT’s pension costs: apoplexy in west London*

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Ofcom yesterday published its previously-trailed consultation on whether BT’s regulated wholesale prices should in the future include any costs in respect of deficit repair contributions to its pension scheme, whether there should be some changes or whether things should stay pretty much the way they are (which is that BT’s reported pension service costs, as measured by the IAS19 accounting standard, can be included in the assessment of its costs).

So far, so usually esoteric Ofcom stuff. But the announcement of its consultation was greeted with consternation by BSkyB and Carphone Warehouse, who promised in newspaper reports to resist the ‘plain wrong’ move ‘as hard as we can’. Here, we should note that the consultation is not only open for business, so to speak, but is open-minded: Ofcom has not yet decided to do anything other than to ask the question of whether or not this is a good idea.

The essential background both to the move and to the consternation with it was greeted by BT’s rivals largely consists of two factors: in other industries (e.g. water and energy supply), regulated bodies are able to take into account deficit repair costs; and the size of the deficit in the BTPS (and, consequently, the scale of BT’s repair costs). No doubt Ofcom would not have chosen this point in the BTPS deficit cycle – when the deficit is likely to be at its height (‘likely’ because the actual deficit, not the one measured by accounting standards, is not yet known) – to have launched such a consultation. The timing here is not entirely of its own making, however, since this issue (specifically, the discrepancy with how other regulators view the issue of deficit contributions) cropped up in BT’s response to the Ofcom consultation earlier this year on the pricing framework applicable to Openreach.

The concerns of BSkyB and Carphone Warehouse are, in one respect, evident enough: their costs as customers of BT will rise. Of course, the costs of all such industry customers of BT (including those of BT Retail, BT’s own customer-facing business) will rise, and by the same amount, so the issue is not one of a loss of competitive position but one of how those costs are then dealt with (either by being absorbed or else passed on to the customer – or, of course, some combination of the two). Neither will such customers be meeting the costs of the overall deficit in one year – it is the annual costs of the deficit repair charges that is the concern. [Edit 4 December to reference this blog post: some clear factual inaccuracies but, in the context of the WSJ being published by News Corporation, which owns 39% of BSkyB, quite a brave one!]

Nevertheless, we can’t escape the truth that these are costs that should have been present in BT’s regulated cost structures all along: pension deficit charges are a normal business cost and need to be treated as such. Say that Carphone Warehouse or BSkyB (just for the sake of example) ran a defined benefit pension scheme for their employees (crazy example, I know!) and that this was running a deficit: the costs of financing that deficit would be passed on to customers: the money to do so can’t just be magicked up, somehow abstractly from the results of trading activities (even in a paper-based world). Not to pass on the totality of such costs might even be treated as a company trading fraudulently. So, allowing regulated companies to encompass the totality of their pensions costs in their assessed cost structures is a sensible move.

BSkyB has also made serious accusations (see above link to newspaper reports) about having to ‘bail out BT for the mismanagement of its pension fund’. Perhaps, these are even libellous ones. Firstly, the job of managing the pension scheme is not the job of BT but of the trustees of the scheme. BSkyB seems to be over-focusing on ‘aggressive investment policies’ (partly, from a reference to investment policy in the consultation document). Yet, the BTPS investment policy has not been any more aggressive than others: it is a mixed one, designed to maximise investment returns (and therefore focusing, like any other investment manager, on more risky assets) but balanced enough with low risk investments to ensure that pensions can be paid. Ofcom’s consultation document makes it clear that the effect of the investment policy is that returns on assets have ‘consistently outperformed’ its benchmark and are ‘in line’ with a separate independent benchmark. BSkyB needs to think very carefully before making such allegations.

The other part of BSkyB’s accusations was that BT has ‘systematically undercontributed’ to the scheme in the past. There are two major sub-themes here, which also feature in the consultation document:

– BT has taken a pensions holiday from the BTPS in the past (when the legislation on pension schemes – and for fairly good reasons, at the time – sought to prevent companies from over-funding schemes, essentially using them as vehicles for tax dodging). With hindsight, that is a regrettable set of circumstances, although it should be noted that deficit contributions in the past few years have surely wiped out the holiday

– the BTPS has been used to bear the costs of the company’s leaver schemes prior to Newstart. This is to some extent true – although such schemes have not been used for several years, while the Trustees have also required BT to make additional contributions in respect of such costs.

Once again, we have to remember that pensions are long-term investments: an improving economy and growing investment returns will see pensions deficits falling – even to the point of schemes perhaps one day even again being in surplus (when pensions-based costs would clearly fall). (Shurely shome mishtake?) These are abnormal times and basing policy on the impact of such abnormality is, on top of the regrettable short-termism which characterises company policy-making, an unlikely foundation for rationality. At the same time, as Ofcom recognises, BT has already taken steps to reduce the costs of the BTPS by agreeing with Connect and the CWU changes to the scheme’s benefits structure. So, the costs of the deficit are not spiralling out of control and may well fall.

Nevertheless, in the wider scheme of things, particularly were defined benefit schemes still to be the norm, it’s evident that treating the full pension costs of regulated companies may well be seen as one further nail in the DB coffin since, in a regulated environment, this is increasing the consumer-based pressures on companies with such schemes to get rid of them (either partially, as many have already done; or completely, as some are now doing). Should Ofcom decide not to include deficit repair charges in regulated cost structures, that puts pressure on the other regulators to re-think their approach which, in turn, puts pressure on good quality pension schemes in those industries.

Some tough thinking awaits.

* BSkyB lives in Isleworth; Carphone Warehouse in Acton.

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Written by Calvin

02/12/2009 at 1:32 pm

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