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BT cannot increase prices to solve pension deficit, regulator rules

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UK - BT will not be allowed to raise wholesale charges for telecoms services in order to help recoup its pension fund deficit, telecoms watchdog Ofcom has ruled.

Ofcom, which sets the prices BT's wholesale access division Openreach can charge other communications providers, announced its final decision at the end of a year-long consultation.

At present, Ofcom allows for ongoing pension service costs, but excludes payments made by BT in respect of any pension fund deficit.

However, following increases in BT's pension deficit contributions over recent years, Ofcom, supported by BT, started a review in late 2009 into whether this approach was still appropriate.

Ofcom has now said that following consideration of the evidence, it is maintaining the current approach.

The regulator said: "The alternative - including deficit repair payments in regulated prices - could potentially lead to those prices being set at levels which do not accurately reflect the relevant underlying costs. It would also be inconsistent with the basis on which BT's prices have been regulated since the company's privatisation."

Ofcom has also decided to continue with the current approach to ongoing service costs and to the cost of capital.

A spokesman for BT said: "We are disappointed that Ofcom has decided to maintain its current approach in the way it treats BT's pension costs.

"We believe that we have provided strong evidence that pension deficit payments should be reflected in our costs.

"However, whilst we never expected this to have a material financial impact on BT, we felt it was appropriate to ask Ofcom to consider this matter, as there is a precedent from other regulated industries for BT to be able to recover some proportion of its total pension costs through regulated charges," he added.
 
The position for other regulated industries varies, but some providers can recover a proportion of their total pension costs through regulated charges.

For example, Ofwat, the water providers regulator, allows 50% of deficit repair payments, while Ofgem, which regulates the energy markets, allows all "efficient and economic" deficit repair payments.
 
BT added: "We will be reviewing Ofcom's document in detail before deciding on an appropriate course of action."

The telecoms provider previously said it would consider a lawsuit and it is understood that the company is still considering its legal options.

BT's pension deficit payments are currently running at £525m per year.

In its first document, Ofcom considered proposals that might have resulted in a -3% to +4% impact on prices.
 
However, it is understood that the full upside of a positive consultation was only ever likely to have recovered "tens of millions of pounds" to revenue.

BT's pension fund deficit now stands at £2.3bn for IAS19 purposes, following the decision to switch to the consumer price index (CPI) from the retail price index (RPI).

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