UK BT: Pension shortfall is the easy part

... Credit :
Shadrach   in Alternatives

Last updated: 08 January 2020, 05:55 GMT

It was announced by the UK opposition Labour party that it would nationalise BT’s Openreach network and provide free full-fibre broadband to every home and business in the country which took everyone by surprise.

There were a bunch of articles being written about the political and competition problems of nationalising Openreach, but what about BT’s huge pension scheme? Could it be possible that pensions will be an expensive stumbling block to Labour’s ambitions?

Currently, BT has the UK’s largest company pension scheme with £63 billion of liabilities and that is three times the company’s £20 billion market capitalisation and a £5.5 billion deficit, at September 30. It was closed to employee members in 2018, and currently it has almost 300,000 members in three sections.

However much BT wants to reinvent itself as a 21st century company, it has a very 20th century pension problem round its neck.

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And in spite of the risk posed to BT by the sheer size of pensions, it continues to run a major asset and liability mismatch. Of the scheme's £57.5 billion assets, about £20 billion remain in equities, infrastructure, and property, the same value as its market capitalisation.

Adding to the size and complexity, a Crown guarantee was issued at privatisation in 1984. If BT ever goes bust, the government would meet its pension obligations.

Openreach Ltd — run at arms-length from BT following pressure from the telecoms regulator Ofcom — would be sold to the government in exchange for cash or gilts. The pension scheme would stay with BT, which would pay all future deficit contributions, and the Crown guarantee would remain in place for all members.

To compensate for the loss of Openreach, which is a major part of overall profit and cash flows, BT would make a one-off pension contribution from the sale proceeds. There are many examples of this — including Pearson selling the Financial Times to Nikkei in 2015, and Invensys, the engineering group, selling its rail division in 2013.

The total amount of sale will proceed to  BT and would pay is governed by a legal agreement with the pension trustees from 2008, renewed every three years. Under this agreement, disclosed in its annual report, BT commits to pay into the pension scheme a third of any “net cash proceeds” from disposals over £1 billion in any year.