BA changes its pension fund take-off time
Perhaps the most significant aspect of British Airways’ (LON:BAY) plan for its pension fund is not that is has the agreement of the unions but that the Pensions Regulator seems to have allowed the airline to rip up its triennial valuation and substitute a better figure.
At the March 2009 valuation date the BA’s main fund had a £2.7bn deficit but that was the bottom of the equity markets. By March 2010 the value of the investments had risen by £2bn, largely eliminating the deficit. The combined deficit on its two funds was £3.7bn – dwarfing the company’s stockmarket value – but BA’s proposals, helped by the market, could eliminate that within five years. Although they were presented to the regulator only in June he appears to have been consulted along the way so is unlikely to reject it.
But he has gained something from the negotiations too. BA originally used a 2.5 per cent discount rate to value its scheme – effectively assuming that its investments would outperform inflation by that much each year. That’s a high-flying assumption, but with the cushion of that investment gain over the year, the airline has been able to keep the regulator happy by reducing its discount rate to a more prudent 1.7 per cent.
And that – and this may be where the union won in the company’s negotiations – allows BA to maintain final-salary pensions when other companies are axing them.
There are other tweaks, not least moving the accrual rates for the schemes from 1/60th to 1/67th and then 1/75th, and making the employees increase their contributions by 3 per cent this year and another 1.5 per cent next year. Retirement dates also move from 60 to 65 (or staff can accept lower accrual rates or lower contribution rates) and if the company finds itself with £1.8bn of cash in its balance sheet it increases its already rising contributions even further. But those are the sort of tweaks many other companies are going through.
The worry about moving the valuation date so blatantly is to wonder what would have happened if stock prices had collapsed in the year to March 2010 rather than risen. Would the company have stuck to its old, inflated, figure and would the regulator have demanded it substituted the worse deficit?
But, assuming the regulator rubber stamps the new proposals, BA now has to convince only Iberia, its merger partner. The Spanish airline has the right to call off the deal if it does not like the pension position but it has made sure that all the funding and all the liability for the BA schemes come from the British airline with no contribution, subsidy of guarantee from Iberia or the holding company that will be the new parent. The regulator’s concern is to stop Iberia getting its hands on BA’s assets while denying the pension liabilities.
