BT’s hopes of reducing its large top-up payments into its pension scheme have increased following changes to the way retirement benefits are calculated.
BT said on Thursday that its defined benefit scheme’s liabilities would fall by £2.9bn because of the government’s decision to link pension increases to the consumer prices index.
Analysts said BT was now in a stronger position to cut the size of the payments it makes to remedy the pension scheme’s deficit, which on an actuarial basis stood at £9bn at December 2008. The shares closed up 3.9p at 161.6p.
BT had to cut its dividend by 59 per cent in 2008-09 because of the need to increase the annual top-up payments into the pension scheme from £280m to £525m.
Under an agreement between the pension fund trustees and BT, unveiled in February, the £9bn deficit is to be fixed through payments spread over 17 years. The pension regulator expressed “substantial concerns” with the deal, which are widely assumed to focus on the lengthy deficit repair period.
Analysts said improvements in the value of BT’s pension assets since December 2008, coupled to the decision to use the CPI measure of inflation when calculating the defined benefit scheme’s liabilities, meant it was realistic that the company could cut the annual top-up payments. Alternatively, it could reduce the 17-year period.
Any reduction in the annual top-up payments could not take place until after the next actuarial valuation of the defined benefit scheme.
The government said in June it would start using the CPI measure of inflation, rather than the more generous retail prices index, as the basis for cost-of-living increases awarded to public sector pensioners. The CPI will also replace the RPI in calculations of the minimum inflationary increases that private sector defined benefit schemes must apply to deferred pension rights and retirement benefits in payment.
BT said the switch from the RPI to the CPI, which has been agreed with the trustees, reduced the defined benefit scheme’s liabilities by £2.9bn under accounting rules.
The deficit fell from £7.9bn at June 30 to £5.2bn at September 30 under the same rules.
Inflation experts said BT’s calculations assumed a larger gap between the RPI and the CPI than has been the case historically.