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BT agrees £1.5bn pension contribution as deficit jumps by one-third

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BT has agreed to a threefold increase in deficit-reduction payments to the BT Pension Scheme (BTPS) after its most recent valuation showed the fund’s deficit had risen to £7bn (€8.7bn).

The telecoms provider said the revised recovery plan was a “good outcome” for members of the £40.2bn scheme and the company, stressing that the £3.1bn increase in its funding shortfall over the previous triennial valuation in 2011 was a result of the low-interest-rate environment.

Tony Chanmugam, BT’s group finance director, said the 16-year plan – concluding in 2030 – reflected the “strength and sustainability” of the company’s future cashflow.

Paul Spencer, chairman of the BTPS trustee, added: “The valuation reflects the economic and market conditions at the valuation date and the improved financial position of BT.

“The agreement with BT secures an updated funding plan for the scheme supported by a range of enhanced protections.”

Under the terms of the agreement, BTPS will receive payments of £1.5bn by the end of April, split almost equally between two payments in March and April.

The payment is a significant increase on the £655m contribution planned for 2015 under the previous recovery plan, meant to address 2011’s £3.9bn deficit.

Despite the large payment in 2015, the company will not pay significantly more into the scheme over the three-year period to 2017, only boosting contributions by £3m over 2011’s proposal.

Through to 2024, trustees accepted the same annual level of payments as agreed in the previous recovery plan, with an additional £495m for five years from 2025.

Despite returning 5.8% over the three years to June 2014, BTPS saw liabilities increase by £6.4bn, which it attributed to the significant falls in real interest rates over the period.

However, the scheme has also revised its inflation and longevity expectations since 2011, predicting that average inflation as measured by the retail price index (RPI) would be 3.5%, up by 0.3 percentage points compared with 2011.

It similarly predicted that the long-term rate of the consumer price index (CPI) would be at 2.5%, also an increase of 0.3 percentage points.

Additionally, BTPS offered a more granular breakdown of the life expectancy for its 300,000 members, dividing them into low, medium and high pay brackets.

Both women on medium and high pay saw life expectancy increase, with the higher-paid cohort predicted to live for an average of 89.2 years.

Highly paid men similarly saw life expectancy increase, although the creation of two separate estimates for medium and high pay brackets meant expectations for the former were revised downwards.

Low income male workers also saw a slight revision downward in life expectancy, with actuaries now predicting an average lifespan of 86.1 years rather than 86.3 years in 2011.

For more on how BTPS deals with its longevity risk, read about the fund’s £16bn longevity transfer, executed by a wholly owned insurance company

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