BA agrees pensions plug ahead of tie-up

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A deal struck by British Airways on Tuesday to plug the £3.7bn hole in its two pension schemes will restrict it from making any dividend payments to its new parent company, after its planned merger with Iberia, for at least the next two years.

The deal helps clear a potential obstacle to the BA-Iberia tie-up – due to be completed by the end of this year – that has loomed since the merger was first announced in November.

Iberia has the right to scrap the merger if it does not like the plan to tackle the deficits, which are so big that some analysts describe the UK carrier as a “pension scheme on wings”. The £3.7bn combined deficit dwarfs the £2.5bn market capitalisation of the airline.

As part of the recovery plan, which will set a benchmark for other underfunded pension schemes in the UK, BA has agreed with fund trustees to keep its annual contributions at the rate of £330m for this year.

From next year, the airline will increase contributions by 3 per cent for at least the next 16 years, and some employees will make higher payments. BA had planned to eliminate the shortfall much earlier.

Keith Williams, BA’s chief financial officer, said the airline had agreed not to make dividend payments to the new holding company to be set up after the BA-Iberia merger – to be known as International Airlines Group – until the next valuation of the pension schemes’ assets, due by the end of 2012.

“We have agreed we won’t pay dividends until 2012,” he said, adding that the lossmaking airline had not been planning to make such payments.

BA has agreed to make extra pension deficit contributions if its year-end cash balance is higher than £1.8bn. The airline had £1.7bn at the end of its financial year on March 31 2010.

Asked how this money would be allocated between the pension schemes and the rest of the company, Mr Williams said “the concept is it would be shared 50-50 between the parties”. “There was a similar mechanism in the last valuation,” he said, adding that it would also be kept in place until 2012.

The pension deal came after the Pensions Regulator pushed BA to make sure its merged parent could not extract assets or revenues at scheme members’ expense, according to people familiar with the matter. The regulator must approve changes to these terms.

Iberia said Tuesday’s agreement was “a positive step towards the merger process”, although it had been expected, and the next step would be Iberia’s decision on whether to approve it, due by September 30.

The recovery plan must also be approved by the Pensions Regulator, which declined to comment. Mr Williams said the regulator’s initial response “has been positive”.

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