Government may plug BT pensions

Only days after BT averted strike action by reaching a £50 million deal on staff pay, its trustees are going to the High Court to seek a ruling on the extent to which the government should underwrite its £9 billion pension deficit.
 

If the ruling goes in the telco’s favour and the government underwrites its pension scheme via a ‘crown guarantee’, it may be able to reduce the large payments it is currently making to fix the hole in what is the UK’s biggest defined benefit pension scheme, enabling it to increase returns to shareholders.
 
The company cut its dividend by 59% in May last year because of problems at its Global Services business and because it was obliged to increase top-up payments into its pension scheme from £280 million to £525 million per year until 2011.
 
If the ruling goes against BT, however, it may be forced to speed up the rate at which it remedies the deficit. Earlier this year, the company agreed with its pension fund trustees that it would pay its liabilities off over 17 years. The current goal is to pay off £525 million for the first three years, with the figure subsequently rising to £583 million and increasing by three per cent per year.
 
The increase meant that 27% of BT’s cash flow in financial year 2009-2010 was used to plug the gap in its pension scheme, which covers 336,000 staff with pension entitlements amounting to £40.2 billion. The liabilities dwarf the firm’s market capitalisation of £10.6 billion, however.
 
BT’s pay deal with the unions, meanwhile, will cost it £50 million – or about 5% of its annual profits - over the next three years, researchers Bernstein told the Daily Mail. Under the arrangement, 50,000 engineers and call centre staff will receive a 3% annual pay rise in each of the financial years through to 2013.
 
This compares with the company’s previous offer of a 5.1% increase during 2010 and 2011, which was rejected by the Communications Workers Union (CWU). The CWU will hold a consultative ballot of its members over the next few weeks, recommending that they back the deal.