The UK government has won its appeal against a ruling that would have forced it to fund an insurance buyout for the £40bn (€50.5bn) BT Pension Scheme (BTPS) in the event of sponsor insolvency.

The Court of Appeal did, however, dismiss a second argument from the government that it should not be liable for pension scheme members who joined post-privatisation.

BT, a previously state-owned telecommunications provider, was given assurances at privatisation by the government regarding the funding of its defined benefit (DB) pension scheme in the event of insolvency, known as the Crown Guarantee.

However, these assurances were never clearly defined by the government of 1982, leading to confusion over to whom the guarantees were extended, and how much.

In search for clarity, the BTPS, backed by sponsor BT, challenged the legal definition of the Crown Guarantee and the government’s belief that it only covered members of the BTPS at the time of privatisation.

In 2010, the Royal Court of Justice (RCJ) ruled against the government and said it was to cover all BT employed members in the event that the telecommunications provider ceased operation.

The Court also ruled, however, that the government should provide funding calculated on an insurance buyout basis, significantly more expensive than covering actuarial deficits or deficit recovery plans.

Then taking the case to the UK Court of Appeal, the latest ruling diverged away from one RCJ finding and said the government’s guarantee would only extend to continuing deficit recovery payments already in place in scheme rules, over the buyout cost.

This means, should BT become insolvent, the government would de facto become the sponsoring employer to the BTPS, providing deficit recovery payments.

However, the UK government lost its second appeal, as the Court ruled the Crown Guarantee covers all BT employed members of the scheme, irrespective of privatisation.

The legal implications of the ruling are still being considered by all parties, with no clarity over whether the BTPS will be allowed to remain as a standalone entity in the event of BT’s insolvency, or whether it would transfer to the Pension Protection Fund (PPF).

It is understood the PPF is studying the Court’s ruling to ascertain probabilities of the lifeboat fund becoming responsible for the UK’s largest private sector DB scheme.

It is also unclear whether the BTPS’ deficit, which was £5.9bn at the end of March 2013, would be carried onto the government’s balance sheet, given the inherent guarantee.

When contacted by IPE, HM Treasury declined to comment on the case.

Complications regarding BTPS’s relationship with the PPF extend further, as the scheme was previously exempt from paying the expected levy of the fund, implicitly based on the fund technically being public sector with a Crown Guarantee.

However, telecommunication rivals of BT challenged this, and the European Commission ruled the fund could not be exempt from the PPF levy.

On the ruling, BT said it was considering the ruling, including the possibility of an appeal to the Supreme Court, the final court of appeal for the UK.

A spokesman for the BTPS said the trustees would review the judgement and highlighted the possibility that all three parties – scheme, sponsor and government – would appeal the ruling.

“It is important to remember the Crown Guarantee is only relevant in the highly remote circumstances that BT becomes insolvent,” they added.

A spokesman for the Pensions Regulator, whose objectives include protecting the PPF, said: “Subject to any appeals, we will consider the issues and what this may mean for the regulation of the pension scheme.”

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