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BT mulls contingent asset deal as pension deficit swells

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BT, the UK communications giant, is considering a contingent assets deal with its £50bn (€57.3bn) pension scheme as it tries to rein in a growing deficit.

In its annual report for 2016-17, BT said it was considering “a number of options” for addressing the scheme’s £7.6bn shortfall as it prepares for its triennial actuarial valuation.

“These options include considering whether there are alternative approaches to only making cash payments, including arrangements that would give the BT Pension Scheme [BTPS] a prior claim over certain BT assets,” the annual report said.

The report gave no further details, but according to Richard Farr, director at Lincoln Pensions, an employer covenant specialist, there were a variety of options open to both parties if BT wanted an alternative to cash contributions. 

However, some options were less appealing than others, he said.

“The UK network is BT’s biggest asset, but why would the trustees want security over that if that’s what causes a future problem?” Farr said.

Instead, the trustees might prefer a guarantee secured by assets not correlated to the UK business, such as subsidiary companies in other countries.

“The key question is what value and flexibility can BT obtain from the negotiations and how will the stock market price the impact on BT’s ability to manage its business effectively,” Farr added.

Holding assets directly linked to the employer can also reduce a scheme’s annual payments to the Pension Protection Fund, depending on the type of asset and strength of the guarantee.

Contingent assets deals are often linked to property, but some employers have found more novel ways of guaranteeing pension scheme funding.

In 2013, the Dairy Crest Group Pension Fund struck a deal with its sponsor, Dairy Crest, giving it “a floating charge over maturing cheese inventories with a maximum realisable value of £60 million”.

Three years earlier, drinks giant Diageo agreed a joint investment deal with its pension fund to invest in whisky.

BTPS’s only direct investment link to its sponsoring employer – according to the annual report – was a £10m allocation to index-linked bonds issued by BT. The annual report did not give any detail about this investment.

Any contingency asset deal would have to be signed off by the Pensions Regulator (TPR). Responding to the mooted BT arrangement, Charles Cowling, director at consultancy firm JLT Employee Benefits, highlighted a recent shift in focus by TPR that could see it scrutinise funding arrangements to ensure an adequate balance between deficit contributions and dividend payments.

BT is one of the highest-yielding companies in the FTSE 100, according to Morningstar. In the last three financial years, the company paid out £3.4bn to shareholders while contributing £2bn to the scheme in deficit reduction payments, on top of its regular contributions.

BTPS achieved a 21% investment return in the 12 months to 31 March, the sponsor reported. However, this strong performance was effectively wiped out by a falling discount rate, which meant the scheme’s deficit still climbed by £2.4bn.

“The return reflects strong asset performance across all asset classes, in particular equities and government bonds which increased by 16% and 23% respectively,” BT said.

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