UK - The £3.7bn (€4.1bn) deficit in British Airways' two defined benefit (DB) schemes is not going to "vanish overnight", say pensions experts, despite an agreement with trade unions on a new benefit structure for the pension funds.

Figures released by BA in December 2009 confirmed it had agreed the assumptions of the pension deficit with trustees, which comprised a £1bn shortfall in the Airways Pension Scheme (APS), and a £2.7bn deficit in the New Airways Pension Scheme (NAPS). (See earlier IPE article: BA deficit exceeds €4bn as trustee chair steps down)

The company has been working with trustees to formulate a recovery plan to submit to the Pensions Regulator (TPR) by 30 June 2010. As part of this, the airline has consulted with its trade unions - BALPA, GMB and Unite - on the design of the future benefits of the DB schemes.

Under the main proposal agreed by the parties, BA confirmed members of the NAPS scheme would have the choice of either receiving lower future benefits and maintaining the current level of contributions, or paying an additional 4.5% in contributions to receive the existing level of benefits.

However, BA added: "There will be a mechanism to help offset the impact of contribution increases on lower paid employees."

The new benefit structure will now be proposed to trustees and will form part of the negotiations on the recovery plan, as the changes are intended to avoid the closure of the DB schemes while maintaining the sponsoring employers' pension contributions at the current level of £330m a year.

David Lane, partner at Lane Clark & Peacock (LCP), noted BA's pension deficit is a particularly important issue as it is a potential barrier to the completion of the merger deal with the Spanish airline Iberia.

He added the agreement on an increase in member pension contributions and reduction in future benefit accrual "will help reduce the cost of providing pensions going forward, but, unless combined with other measures, will not have any impact on the huge existing deficit. Instead, it will take many years to eliminate this. BA's pensions risk is not going to vanish overnight", said Lane.

This is supported by recent research by Hymans Robertson on the funding position of DB schemes in the FTSE 350, which revealed BA is one of five companies where the pension deficit exceeds its market capitalisation at 249% of the value. Calculations from the consultancy's report also showed it would take just under 10 years of earnings to pay off the current pension deficit. (See earlier IPE article: FTSE 350 deficits would take up to five years' earnings to clear)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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