BT agrees to replace DB with ‘hybrid' scheme

In October 2016, findings by index provider MSCI indicated that with a deficit of £9.5bn, the BT DB scheme may have been the second-worst funded pension scheme in the world.

The company will begin the process of closing the BT Pension Scheme from May 31 2018.

I think we need to be more innovative now in designing DC/DB combinations

Hilary Salt, First Actuarial

It will provide additional transition payments to former BTPS members transferring into the defined contribution BT Retirement Saving Scheme and temporarily raise its contribution rate to 11 per cent.

The deal between the company and the CWU covers 20,000 non-management staff. In January, BT reached an agreement with trade union Prospect over the pensions of 11,000 managerial staff.

Lower-paid workers will benefit

In a statement on its website, the company said: “It is intended that this new arrangement will combine elements of both defined benefit and defined contribution pension schemes.”

The scheme will have a salary threshold of £17,500. Pay up to this amount will enter the DB section of the scheme, with the rest of the worker’s salary entering the DC element.

The deal is still subject to a vote from CWU members. According to Nicola Marshall, senior policy adviser at the CWU, BT is aiming to have the new scheme in place by April 2019. The CWU is pushing for this to be brought forward to October 2018.

“We put forward the hybrid option,” she said. “BT weren’t overly keen at first, but they agreed to it.”

Marshall said that collective defined contribution had not been proposed as a solution for BT workers. “We didn’t want to go down that road because it involves having to get legislation in parliament, which would delay it,” she said.

Legislation for defined ambition schemes was laid in the Pensions Act 2015, but was never enacted.

But last week, pensions and financial inclusion minister Guy Opperman told the Work and Pension Committee that the government is “tempted to facilitate” Royal Mail’s CDC proposals.

Make the most of DC flexibilities

Ambitious attempts at deals seen with Royal Mail and BT suggest an industry that is in the throes of a creative movement.

Hilary Salt, actuarial director at First Actuarial, was involved in designing Royal Mail’s mooted CDC scheme, and is well-acquainted with the difficulties associated with building original scheme structures.

Shouldering responsibility as a first-mover is a “frustrating” hurdle, according to Salt. She praised the BT deal as sensible.

“I think we need to be more innovative now in designing DC/DB combinations,” she said. “Particularly, DC is a good, efficient way to build up a cash fill.”

This innovation could usher out a less flexible era that largely consisted of pushing consumers towards annuities. DC flexibilities "mean that you can design something that is allowing people to meet their needs”, Salt said.

Unions must offer viable solutions

The presence of influential trade unions in negotiations appears to be a consistent theme across some of the innovative solutions we have seen.

Charles Cowling, director at JLT Employee Benefits, recognised the role unions are playing, but cast doubt on the viability of most union proposals.

“There are still a vast number of challenges. For most employers they’re not going to represent a solution they think is workable,” he said.

The majority of employers will still look to the fixed cost nature of DC, as well as the “clear line of sight” offered by the scheme, according to Cowling.

These employers will not usually have to contend with the force of a well-attended union comprised entirely of its employees.

“I can see a small number of organisations like BT, like Royal Mail, making it work. But I don’t see it extending much beyond there,” he said.