BT Pension’s Levy Exemption ‘Illegal’, Says Top European Court

The top European court has ruled that the BT Pension Scheme’s (BTPS) exemption from paying an industry levy is tantamount to illegal state aid.

The European Court of Justice (ECJ) today ruled that the so-called “crown guarantee” given by the UK government to the BTPS should not mean the pension does not pay levies to the Pension Protection Fund (PPF), the UK’s lifeboat fund for defined benefit funds. The ECJ said the exemption was in breach of state aid rules, upholding a 2009 decision by the European Commission.

According to Reuters, ECJ judges said: “The court hereby dismisses the appeal [and] orders British Telecommunications plc and BT Pension Scheme Trustees Ltd to pay the costs.”

The pension has been setting aside money towards the levy since 2010, according to Reuters.

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A spokesperson for the BT Pension Scheme told CIO: “We welcome the clarity that the judgement provides and have proceeded to date on the basis that the levy would remain payable.”

In July, the UK’s Court of Appeal ruled that the crown guarantee provides a government backstop to BT’s funding obligations relating to all members of the pension, not just those who worked for the company when it was in public ownership.

The judgement stated that BT was “a solvent and prosperous company and the prospect of its ever going into insolvent liquidation is remote”, the Financial Times reported.

BT was sold off by the UK government in 1984. The government said at the time it would stand behind its obligations to the fund in the event of BT going bust. However, telecommunication company rivals have complained about the arrangement, which triggered the involvement of the European Commission.

The BT Pension Scheme has liabilities of more than £40 billion, dwarfing its sponsor’s market cap of £30.1 billion. However, the pension has taken steps this year to offload longevity risk, and in 2012 BT announced that it had dramatically reduced the fund’s deficit with cash injections.

A 2010 list of UK pensions with crown guarantees included sections of the Railways Pension Scheme, the BAE Systems Pension Scheme, and the Coal Pension Fund.

Note: An earlier version of this story reported that the crown guarantee had been deemed illegal by the ECJ ruling. The story has been corrected.

Pension funds will have to disclose hedge fund, private equity, and infrastructure exposure on a quarterly basis as Denmark grapples with “prudent person” guidelines.

Denmark’s financial regulator is to impose strict new reporting requirements on the country’s pension funds to monitor their exposure to alternative sectors such as infrastructure, private equity, and hedge funds.

It follows concerns raised by the Copenhagen-based Financial Supervisory Authority (FSA) in February that some pensions did not have sufficient internal resources to adequately monitor their exposure to these asset classes.

The FSA is to require pension funds to report their exposure to alternatives on a quarterly basis, according to Bloomberg.

“The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.”—Jan Parner, Danish Financial Supervisory AuthorityThe rule change also comes as Denmark grapples with the so-called “prudent person model”, which is proposed to be rolled out across the European Union in 2016. The model is part of the Solvency II set of rules primarily aimed at insurers. It allows investments to be made without specific limits, but Jan Parner, the FSA’s deputy director general for pensions, told Bloomberg the definition of a “prudent person” was not yet sufficient.

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Denmark is ahead of the game, having implemented a version of the prudent person model, but Parner said: “[Danish] funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is.

“The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.”

Parner emphasised the regulator was “not saying no” to alternatives exposure, but voiced a concern that funds could underestimate risks. Parner cited credit risk in particular, “which is cyclical and which funds haven’t previously had”.

FSA research, published earlier this year, reported that Danish pensions had invested roughly 7% of their assets—equivalent to about €152 billion—in alternatives, but the top 10 biggest pensions make up 90% of all alternatives ownership.

The Danish pension industry has been at the forefront of innovation in alternative investment, particularly in infrastructure. Earlier this month a group of eight Danish pensions joined forces to back a €1 billion infrastructure fund.