UK – Morgan Stanley has de-rated shares in telecoms group BT Group from overweight to equal weight, partly over predictions of a ballooning pension fund deficit.
The brokers warned that the deficit, calculated at £2.4bn (€2.7bn) in June 2011, the date of the last triennial valuation, will have increased to £6bn by the next valuation in mid-2014.
The fund as a whole was valued at £36bn at 31 December 2011.
BT has agreed to pay extra contributions of £325m into the pension fund during 2013 and 2014, and £295m per year between 2015 and 2021.
The note, published by Morgan Stanley Research Europe said: "Lower real yields mean a lower discount rate on pension liabilities, raising the present value of the liability.
"These lower yields could impact the next triennial and we move to a £6bn pre-tax deficit from £2.4bn previously," the note continued, adding: "Funding this close to low current rates still means a notional interest cost of £75m [per annum]."
According to the note, BT's annual report said that each 25bps reduction in the discount rate increased the IAS19 deficit by £1.4bn. The note therefore assumes that the impact on the actuarial deficit would be of the same order.
"The real rate used by IAS19 has halved from 3.0% to 1.5% in just under two years, and the deficit has risen by £5.7bn over that period, excluding the £2bn payment into the fund in early 2012," it went on.
The 1.5% fall in discount rate should have led to an expected £8.4bn increase in the deficit, so the £2.7bn difference is the effect of investment performance less benefits paid, said the note. From this, Morgan Stanley calculated the annualised investment performance to be 8.8% over the past 21 months.
"This level of investment return has benefited from the recent bull market in both equities and bonds," it said.
"The key issue for the fund is that reinvestment in bonds is becoming less profitable, with minimal or sub-zero real yields in investment grade assets. Reinvestment risk is high."