UK - BT has been described as "the UK's largest pension scheme which happens to own a telecoms network", as new figures suggest its true liabilities under proposed accounting and regulatory rules could stretch to £46bn (€61.4bn).
Telecommunications giant BT today revealed fourth quarter 2006 and last nine months to 2007 figures indicating its pension fund liabilities now sit at £38.8bn, under IAS19 accounting rules, while the scheme has moved from a net £1.1bn deficit in December 2006 to a net surplus of £700m - or £2.5bn gross in one year - thanks to the expected returns through asset allocation and a shift in market activity.
But in a note for RBC Capital Markets, independent consultant and former head of Boots pension fund, John Ralfe, warns whereas the stated pension liabilities are £38.8bn versus a cap of only £21.1bn, the true liability could be higher once the industry adopts proposed accounting reforms and Pension Protection Fund requirements, as it will reveal the true cost of the defined benefit pension scheme to be
£45.9bn, if based on realistic assumptions.
Ralfe points out the proposed ASB accounting reforms do not actually change the underlying economics nor are they to blame for P&L volatility but he believes under the new accounting regime "what gets measured, gets managed" and "increased transparency should also change management behaviour towards reducing costs and better risk management" of corporate pensions assets.
Were BT, for example, to restate its liabilities as discounted to a "risk free rate" - as suggested under ASB proposals - its liabilities would grow from £38.8bn to £42.9bn and the deficit would shift from £400m to £4.6bn
Problems could widen further, according to Ralfe, as he believes "BT's longevity assumptions remain weak" so were the fund to state its mortality assumptions as being "medium cohort" - ie two years longer than currently stated - the assumption is this would increase liabilities by £3bn to £45.9bn - 18% higher than currently reported.
All of this is based on expected returns to March 2008, but Ralfe also points out with market activity as turbulent as it has been, it is entirely possible the scheme will not see any actual gains on investments, and what is currently a £2.5bn expected return -6.4% x £38.8bn assets - could actually translate into a £2.5bn knock on its profits before tax, because a zero asset return would wipe out most of BT's profit.
The firm today reported third quarter profit before tax reached £601m, while total assets of the BT pension scheme were £39.7bn to December 31, 2007, compared with £37.8bn in 2006, adding: "The scheme's exposure to equities has been reduced through a continuing de-risking strategy. This hedges the downside risks associated with the scheme's equity exposure, from approximately 50% to close to 40% of the scheme's assets."
Nigel Labram, head of Hermes Pensions Management, told IPE while he can't give specific details at this stage, the de-risking is being largely achieved through the use of overlay hedging and other strategies.
"We have started this diversification and risk reduction, as previously set out, moving into hedge funds, private equity, commodities and infrastructure. But we are not investing in assets, rather using overlay and there are other strategies we are looking at as well. This is part of the specialisation at Hermes, so Rupert [Clarke] can concentrate on the asset management. This allows us to do the overlay without affecting the asset manager in any way" added Labram
BT's pension scheme is said to have longevity risk greater than the annuity portfolios of UK insurers Prudential or L&G, Ralfe's RBC paper reveals.
And just to meet the £1.4bn annual pensions already being paid needs £28bn of bonds at a 5% yield, whereas the scheme only held £8bn in bonds to March 2007, according to Ralfe.
So if these changes were the impact on BT's pension scheme, it would likely spread across the potential deficits and risks of other schemes too.
Other final results for 2007 issued today reveal the Rolls Royce pension fund now has a deficit of £123m following its £500m agreed "special contribution" last year, albeit this is largely the result of the overseas scheme, as the UK scheme has a £181m surplus.
Similarly, Unilever announced the credit on its pension financing increased to €158m and its overall net liability was €1.1bn to the end of 2007, compared with €3.1bn in 2006, as the funded schemes' surplus was €1.2bn compared with a deficit of €2.3bn on unfunded schemes - cut in part by a €300m special contribution.
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