The BT Pension Scheme has agreed a revised plan to conquer its £7bn deficit, a deal that experts say will give the scheme particular reliance on the company.
Historically low gilt yields have compressed pension schemes’ funding levels, forcing many to look anew at their ability to back the schemes. Already this year, household-name companies John Lewis and Tesco have shared plans to cut off full defined benefit accrual.
BT's payment plan
Under the plan BT will pay the scheme:
a lump sum of £1.5bn by April 30 2015;
£250m in both 2016 and 2017;
a series of contributions totalling more than £2.8bn from 2018 to 2021;
three annual payments of £670m;
five annual payments of £495m; and
a lump sum of £289m in 2030.
BT's recovery plan, which starts this year, will pump close to £9.6bn into the DB scheme over the next 16 years to repair the scheme's £7bn deficit. At just over £40bn in assets, it is one of the largest corporate pension schemes in the UK.
In a release announcing the plan, the company said: “BT and the trustees will review the funding of the scheme in the normal way at the 2017 valuation. If the deficit is lower than the remaining recovery plan, that will be reflected in the new recovery plan.”
Hugh Nolan, chief actuary at consultancy JLT Employee Benefits, said the initial lump sum would give the employer flexibility to invest in its business in 2016 and 2017 while also giving the trustees some security. He said: “It’s an example to me of the employer and trustees working really well together.”
Alan Collins, director at consultancy Spence & Partners, said the recovery plan, which runs until 2030, would require the scheme and employer to work closely together.
He said: “The trustees will be happy they’ll get a big slug up front. [It] does place significant reliance on the company. You’d expect the trustees to closely monitor the business. The announcement does reference that.”
The 2014 triennial funding valuation calculated the deficit had increased from the £3.9bn calculated in 2011. This represents a deterioration of the funding level to 85.2 per cent from 90.4 per cent in 2011.
The recent reductions in long-term interest rates mean the deficit could have risen still further since the valuation was completed in June 2014. Nolan said lower gilt yields were driving deficit growth at the scheme, but in his view the level of correlation was unusual.
“I’m surprised by how much [the deficit] reflected the gilt yield when I suspect their investment strategy is much more sophisticated,” he said. “It seems like maybe a slightly conservative approach.”
Collins said many of the assumptions were conservative. “The assumptions to me do look quite prudent, save for perhaps the life expectancy is possibly at the lower end, but they’ve presumably got a lot of scheme experience to base it on,” he added.
“It’d be interesting to see what if any contingency plans are in place should the funding level deteriorate.”
