Connected Research

Union policy research in the 21st century

Heat and light and the BTPS deficit

with 2 comments

Today’s announcement of BT’s third quarter results was accompanied by the long-awaited outcome to the discussions between the company and its trustees on the most recent triennial valuation, due at the end of December 2008.

In brief, the upshot is that the scale of the deficit – as at December 2008 – is some £9bn and that the company has agreed with the trustees of the scheme to make annual payments to clear the deficit as currently envisaged over the next 17 years, starting with £525m per year for the next three years, increasing to £583m in the fourth year and indexed by 3% thereafter. The Regulator, however, which has also been involved in aspects of the discussions up to this point, has concerns over parts of the agreement and will be undertaking its own review of the recovery plan.

The news was greeted rather poorly in the barrowlands of the City, with the results of the day’s share trading activity seeing an 8.6% drop in the value of the company, taking it to a market capitalisation of £9.3bn – just a little over the size of the deficit, incidentally (and some 30% of the asset value of the BTPS). This is despite BT making sufficient free cash from its operations to support a recovery plan of that scale:

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. (quote from Ian Livingston, BT  Chief Executive; same link as above)

At the same time, the news was accompanied by an announcement that the trustees of the scheme are to seek a court ruling to clarify the precise scope and extent of the Crown Guarantee given to the members of the scheme on privatisation back in 1984. The question of the Crown Guarantee was examined in today’s Peston’s Picks and it is here where the most heat has been generated (not Peston’s fault – I’m thinking of the uninformed and prejudiced comments on his blog post).

The key lack of understanding here surrounds the circumstances of the Crown Guarantee coming into play – i.e. an insolvent BT with insufficient assets to meet the debts of the scheme. It has to be admitted that such a circumstance is an evidential possibility – but it remains an extremely remote one. The question of how much of the total amount of the debt would then fall on the taxpayer as a result of the Crown Guarantee is the subject of the court case since it may not be all of it – we simply don’t know. The £9bn current deficit is thus, from the point of view of the state, very much a worst case scenario. The circumstances around why the case is being taken now are likely to reflect BT’s contributions to the Pensions Protection Fund and the role of the Crown Guarantee in reducing these which resulted last year – one year ago to the day, coincidentally – in the announcement of the outcome of a European Commission investigation on the grounds of state aid.

The accepted debt of £9bn would put the BTPS’s funding situation at about 79.5% (remembering that this is the picture as at the end of December 2008 – i.e. immediately prior to the rise in the stock market over 2009 which would have inflated asset values).

The Pensions Protection Fund has recently produced the 2009 edition of its Purple Book which provides a comprehensive indication of the state of health of defined benefit pension schemes as at the end of March 2009 – so, more or less similar to the end of the period covered by this BTPS valuation. The Purple Book‘s estimate of the overall funding position of schemes at that point was also 79.5%. Thus, the BTPS was no worse off than the average scheme at that point. It looks worse, because of the size of the deficit which, according to Robert Peston, is a record – but that’s because of the sheer size of the scheme. Given its size, the size of the deficit is, actually, in line with what you might have expected given the average state of health of schemes generally.

The scale of the overall deficit in March 2009 – some £200bn – has, in the nine months in the interim, been reduced to £52bn, indicating an overall funding position of 94% based on total scheme assets of £860bn. The BTPS is also likely to have seen a rise in its funding position in this period although this – and the exact scale of the recovery – is clearly open to conjecture.

Will BT have to pay back this total £9bn – possibly, if the actuaries have their sums right. Depending on the outcome of the next valuation, it may be less than this if stock market recovery continues (or if some of the other assumptions underpinning the valuation change). Of course, that’s an uncertain bet. But if it does, the next valuation will indicate a different basis for the amount to be recovered (and, perhpas, the period over which it needs to be done).

Pensions are long-term investments and the difficulty with valuations is that they provide only snapshots of what is a continually changing picture. Once the regulator has conducted its review of the recovery plan, the reasons for its concerns may become clearer. But, what matters for now is that BT believes the recovery plan to be fair and that it is capable of meeting the costs of this – that, and that the trustees of the scheme are content with the strength of support of BT as scheme sponsor.


Written by Calvin

11/02/2010 at 5:37 pm

Posted in Pensions

Tagged with , , , ,

2 Responses

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  1. Thank goodness for some sane and informed comment about the BTPS deficit. Why O why does every grudge hound and whinger feel they have to call for everyone else’s pension to be slashed if they have either not bothered or not be given the opportunity to accrue their own pension. BT’s plan to pay off the deficit is sensible, measured and absolutely achievable. The company and the trustees should be congratulated on putting together a recovery plan that will ensure that that there is no need to call on the Crown Guarantee and all the rest is just fluff

    Adrian Askew

    11/02/2010 at 6:09 pm

    • Excellent analysis, and reassuring for those of us who are active members of the scheme with lots of years still to go. It really was rather bad luck that this valuation was timed to co-incide almost exactly with the lowest point in the recession. As Calvin says, a valuation taken now would almost certainly be radically different.

      Philip O'Rawe

      13/02/2010 at 5:06 pm

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