Increased contributions for BA scheme rewarded by investors

Schemes will be paying close attention to the impact of funding negotiations on their employer covenant, but experts suggested that trustees should look beyond the share price to the underlying health of the business.

The BA agreement was signed in principle on the back of the latest actuarial valuation, as at March 31 2015, which showed that the scheme’s funding level had increased to 82.7 per cent from 78.3 per cent in 2012.

However, the fund’s deficit increased over the period, to £2.79bn from £2.66bn. As a result, BA’s contributions will increase to £300m until September 2027.

Trustees should think about the business from a credit perspective rather than an equity perspective

Alex Hutton-Mills, Lincoln Pensions

In a newsletter to members, the trustee added: “As part of the agreement, the Trustee has updated the detailed package of protections and other measures that provides additional support to NAPS and includes the potential for further payments of up to £150 million each year depending on various financial metrics.”

Extra contributions will be paid to the scheme if BA’s cash exceeds £2.2bn at the end of every year to March 31, or if BA pays a dividend higher than 35 per cent of profits to parent company IAG.

The agreement caps the deficit recovery payments and additional contributions at £300m and £150m respectively. The capacity to pay greater shareholder dividends pleased equity analysts and drove IAG’s share price up 5.2 per cent.

Look past stock prices

While trustees should keep an eye on share prices and consider their impact on the employer’s ability to raise capital, the underlying health of a business is more important, according to Alex Hutton-Mills, managing director at covenant specialists Lincoln Pensions.

“A pension scheme is an unsecured creditor of the employer,” he said. “They should think about the business from a credit perspective rather than an equity perspective.”

Hutton-Mills said that schemes should take notice of the equity value of their sponsor when assessing the company’s dividend policy in relation to the contributions pledged to the scheme.

“If there’s a disproportionate share that’s being paid to shareholders that’s a red flag for the Pensions Regulator,” he said.

Does length matter?

The new NAPS funding plan gives the scheme a recovery period of 12.5 years to clear the deficit, which according to IAG is “based on an assumed steady switch of three per cent of the assets each year from return-seeking assets such as equities to liability-matching assets such as bonds.”

In recent years, regulatory focus has shifted away from the length of recovery plans and has allowed for longer strategies where affordability is an issue for the employer.

As such, the length of the NAPS plan did not surprise Richard Butcher, managing director professional company PTL. “If the employer can only afford a contribution of x then that’s all they can pay,” he said.

But equally, he said schemes and employers should not take this model as a default, and short recovery plans should be pursued where possible.

“If you’ve got a cash rich company, why not fund down the deficit quickly?” he added.

Breakdown in relations

British Airways Pension Trustees Limited said they were “pleased” to announce the NAPS agreement, but all is not well with the Airways Pension Scheme, also sponsored by BA and run by BAPTL.

Litigation brought by BA is now underway in the High Court, disputing the trustee decision to grant a discretionary pension increase of 0.2 per cent in 2013. The trial is scheduled to last until December this year, and the judgement is expected to be released in early 2017.

In a statement, the trustees said: “The Trustee maintains that it acted appropriately and within the rules of the Scheme at all times in its decisions.”