BT Halves Deficit With Profit Payback

(March 23, 2012)  —  The largest corporate pension fund in the United Kingdom has halved its pension deficit, shortened its recovery time horizon and boosted its share price this morning by over 6%.

The BT Pension Fund announced to the London Stock Exchange this morning that its deficit that had been valued at £9 billion in December 2008 had been reduced to £4.1 billion in June last year.

The fund’s assets stood at £36.7 billion, up from £31.2 billion in 2008, while its liabilities were stable at around £40 billion. A change to the rate of inflation used to measure liabilities – moving to the Consumer Price Index (CPI) from the Retail Price Index (RPI), which lowered the figure, was offset by an opposite move by corporate bond yields, which increased them.

The deficit reduction came partly from cash injections made by employer and the company announced a revised plan to make up the remaining deficit.

At 2pm in London, BT shares were trading at 233p, more than 6% higher than last night’s close of 220p.

Ian Livingston, BT Chief Executive, said: “This agreement under which the company makes an immediate contribution to the Scheme of almost half of the deficit reflects BT’s financial strength and re-affirms our commitment to the Scheme. BT’s long-term sustainable cash generation has improved significantly since the 2008 valuation and we remain focussed on improving BT’s financial strength, investing in our future and enhancing shareholder returns.”

BT has now committed to injecting the rest of the cash, starting with £2 billion at the end of this month, followed up with an annual £325 million until 2021.

Paul Spencer, Chairman of the BTPS Trustee, said: “Since the last valuation, BT has had a successful period, enabling it to pay a £2 billion upfront payment, and eliminate the deficit within ten years.”

The deficit repayment framework has been shortened by four years – and the new schedule does not make assumptions about investment return, a change from the previous set up which included a £1.5 billion allowance, the company said.

Investment consultants told aiCIO it was a sensible use of profit that would otherwise sit on company balance sheets – they warned, however, than investment and risks would have to be carefully managed to ensure the deficit did not reappear.

BT is waiting on the final outcome of the Crown Guarantee case, which centres on a legacy agreement to cover pensions belonging to former public UK companies.