UK – The 48.8 billion-euro BT Pension Scheme is trapped by its own actuarial valuation method, says pensions consultant John Ralfe.

“BT is trapped by its method of actuarial valuation into retaining a high equity rating,” Ralfe wrote in a research report. “Any move to bonds would increase BT’s actuarial deficit, requiring it to further increase cash contributions.”

Ralfe explains that the telecoms firm faces a problem if it wants to reduce risks for shareholders, bondholders and members by shifting to bonds from equities. BT is trapped because it discounts liabilities at “the estimated rate of return reflecting the assets of the scheme”.

A shift from equities to bonds would reduce the estimated return on assets and the discount rate, Ralfe says. This would increase the value of liabilities, the size of the deficit and the required cash contributions.

A spokesman for BT expressed confidence in the scheme actuary, Watson Wyatt, saying its assumptions were very conservative. “We see no reason to doubt their calculations,” he said, although he conceded that Ralfe had made “some valid points”.

“We don’t choose the method,” he said. “We take our advice from them.” Watson Wyatt declined to comment, saying it was a client matter.

Ralfe says the BT scheme, the UK’s largest, has a “significant” mismatch between its assets and liabilities.

“Since half its members are pensioners, conventional wisdom suggest BT Pension Scheme should hold 50% in bonds or property to match pensioners and, say, another 15% for the age profile of employees and deferred pensioners, or 65% in total,” Ralfe said

“A strategic allocation of only 35% bonds and property is a significant asset and liability mismatch.”

Ralfe is known for his role in shifting Boots’ pension portfolio into bonds when he was corporate finance chief at the UK retailer. He has since set up his own consulting firm.