Hold on and BT’s pension deficit will close
The size of the £9bn deficit on the BT pension fund is only a billion below the market value of the telecoms group itself and is bigger than the capitalisation of most FTSE 100 companies. The old joke about a pensions fund with a phone business attached is dangerously true.
The fact is that the pension fund tail is wagging the telecoms dog. The deal for reducing that deficit limits BT Group (LON:BT.A) in paying dividends, making sales or repaying debt. If there is any money in the phone group, the pensions fund grabs its share.
The final-salary fund has been closed since 2001 but BT is paying £525m a year in contributions, increasing that by 3 per cent a year, in the hope of breaking even over 17 years. But if payments to shareholders over three years exceed the pension contributions it has to put the difference into the fund, and ditto if disposals exceed £1bn. BT can thus only degear if it cuts its pensions liability too.
The £9bn deficit, reported in February 2010, was calculated at December 2008. This is late news therefore, but at least stockmarkets have risen since then. However it compares with £3.4bn at the previous 2005 valuation and an extra £840m had been paid in to close the gap since then.
The problem is that the valuers are being more cautious, but so are the fund managers – suggesting they will not have benefited fully from that rise in share prices. The discount rate has been raised from 2.2 to 2.5 per cent.
The worrying difference is in the longevity estimates however. Over the three years it has been assumed that BT workers will live for an extra two years. If that was extrapolated over the 17 years to rebalance the fund, the company would be bust: as it is the actuaries reckon that members’ expected lives will extend by an extra year every decade. BT is chasing a target that its getting further away like running for a moving bus.
At £34bn the BT fund’s gross assets are nearly twice the company’s turnover and more than a third of its market value. As BT made a loss in its last year, the profits ratio is irrelevant but you can bet the shares wouldn’t be valued on 17 years’ earnings if there were any – ie, shareholders wouldn’t wait that long to get back their money.
There is a government guarantee for the fund, but if that was ever called, shareholders would already have lost their investment.
The next valuation is due at the end of 2011, but when it is eventually reported it will be at least a conservative. But the fact is that pensions are a long-term liability and so long as BT is a long-term business and so long as it has positive cashflow, the pensions deficit can safely be rolled over from one generation to the next, nevermind one year to the next.
The company is in constant negotiations with the pensions regulator but he should ease up and force nothing precipitous: the deficit will come right in the end even if pensioners have to lower their expectations.
