BT shares fell sharply today after the telecoms group revealed the “substantial concerns” of the UK pensions watchdog over a deal to plug its record £9bn (€10.2bn) pension scheme black hole.
BT said it had won the support of pension trustees for a 17-year plan to tackle the massive deficit, which will see it pump in £525m (€601m) a year for three years, rising to £583m (€667m) in the fourth year and then grow at a rate of 3% annually after that.
But the company admitted that “the Pensions Regulator’s initial view is that they have substantial concerns with certain features of the agreement”.
The plan is still under review with the regulator and may take a “long, long time” to complete, according to BT’s boss Ian Livingston.
BT shares slumped 9% on the pension uncertainty, which overshadowed third quarter figures showing a 39% leap in underlying pre-tax profits to £466m (€533m).
The pension deficit, based on a triennial valuation at the end of 2008, is the biggest ever recorded by a UK private company.
And although a private sector scheme, it has unprecedented protection that would see the taxpayer cough up should BT go bust under a guarantee made by the Government when BT was privatised in 1984.
BT said it had agreed a “prudent” funding plan with trustees, which was secured just a month ahead of a March 31 deadline.
Rod Kent, chairman of the BT pension scheme trustees, said there had been “exhaustive” efforts over the last 18 months to reach the funding milestone at a time of unprecedented financial turbulence.
He added the agreement “secures significant additional support” for the scheme’s 340,000 members.
Mr Livingston sought to assure that recent improvements provided enough cash to support the pension payment plan, as well as shareholder dividend payouts, investment in the business and debts.
He confirmed the group made its first £525 million pension fund payment in December.
However, resistance from the Pensions Regulator poses a significant threat, given that it has the power to step in and demand changes.
Neither BT nor the regulator would comment on what the “substantial” concerns were, with the pension watchdog saying only it was “aware of today’s announcement from BT and this is a correct reflection of the current position”.
Will Draper, analyst at Execution Noble, raised fears over a “risk that terms of BT’s deal with its pensions trustees will worsen”.
Analyst Morten Singleton at Collins Stewart also added caution over the size and scale of the pension funding plan.
“The major concern may reside around the longevity of the recovery plan, with 17 years of pension payments,” he said.
It is thought the Pensions Regulator – which has never before used its powers to alter funding plans – may be worried over the 17-year timescale, said usually to prefer a 10-year schedule.
But the regulator may be assured by the degree of taxpayer protection offered to the scheme, previously thought to be 75% and a point that is currently being brought to court for clarification by trustees.
BT’s rivals may also be forced to share in the funding pain under a current review by telecoms regulator Ofcom.
The watchdog said in December one of the options being looked at would see firms such as Carphone Warehouse and BSkyB pay up to 4% extra for using wholesale telephony from BT to take account of its pension deficit payments.
Likewise, its funding fears may be eased by recent improvements in financial markets.
BT confirmed the scheme’s assets rose by 10% over the past year, to £34bn (€39bn), while it also estimated that a “median estimate” calculation would have put the deficit at closer to £3bn (€3.4bn).
The group shut its final salary pension scheme to new members in April 2001 and changed the terms in April by raising the retirement age to 65 and cutting the traditional link with final salaries in a bid to reduce soaring liabilities.
Despite the Pensions Regulator hurdle, the Communication Workers Union welcomed news of the funding deal for BT staff, who have suffered a year of pay freezes and massive job cuts.
Andy Kerr, deputy general secretary of the union, said: “Last year was a really tough one for staff in BT. The negotiated changes to the pension scheme have brought significant savings to BT while securing the long-term future of the pension scheme for our members.”
BT is cutting 15,000 jobs – 10% of its workforce – by March 31 to slash costs. This programme has helped save the group £1.6bn (€1.8bn) in the nine months to December 31.
BT had been hit by trading difficulties at its troubled global IT services division, which left the company more than £100m (€114m) in the red last year.
Today’s figures confirmed a turnaround in the business, with underlying earnings in the global services division rising £28m (€32m) since the second quarter to £123m (€141m).
The wider group made revenues of £5.2bn (€5.9bn) in the quarter to December 31, which was 4% lower than a year earlier.