UK: Fund in the news
British Airways (BA) completed a £1.3bn (€1.58bn) pension buy-in transaction with Rothesay Life, the insurance entity of Goldman Sachs, in the summer, which will approximately cover 20% of the pensioner liabilities of its Airways Pension Scheme (APS).
This came after the company announced a combined deficit of £3.7bn for its two defined benefit (DB) pension funds, the APS and the New Airways Pension Scheme (NAPS), in December 2009, of which £1bn is attributable to the APS. The calculations are based on a single discount rate of 4.6% per annum for the APS and 6.1% for the NAPS, while the life expectancy assumptions use medium cohort improvement factors with a floor of 1.25% per annum.
In the buy-in, the trustees purchased insurance from Rothesay but will retain ownership of the assets backing the transaction.
In June, BA settled on a recovery plan that will address the funding shortfalls, while keeping both funds open. Under the deal, the company will continue to pay annual contributions of £330m. BA also agreed to increase payments in line with inflation, which it predicts to be 3%. In addition, the pension schemes will be provided with £250m in securities to be paid if the company becomes insolvent. Further payments toward the deficit are also proposed if BA's annual year-end cash balance exceeds £31.8bn. Agreed deficit contributions continue until 2023 for the APS and until 2026 for the NAPS.
In August, The Pensions Regulator (TPR) agreed to the recovery plan, which has put the merger with Spanish carrier Iberia firmly on the map. The signing of a merger agreement is expected to be presented to shareholders in late autumn and be completed by the end of the year.
The BT Pension Scheme (BTPS) has indicated it would fight a decision by the UK's communications regulator Ofcom barring it from increasing wholesale prices to close its £7.6bn (€9.2bn) deficit.
BTPS reported a 13% reduction in its deficit by the end of March 2010 following returns of 12.2%in 2009. Its deficit has fallen steadily since the end of 2008 when trustees reported a £9bn shortfall.
BT's pension trustees also launched a court action in the summer to determine the extent of the company's Crown guarantee.
When BT was privatised in 1984, the government agreed that the Crown would assume responsibility for a proportion of BT's liabilities. The court action should clarify the extent of the Crown's responsibility, including whether the guarantee should apply to BT workers employed after privatisation. The outcome - which is expected some time in autumn - could see the government forced to subsidise BT's pension deficit.
BT also made the first of 17 funding payments - £525m for the first three years before increasing to £538m in the fourth year and rising by 3% per annum for each following year - in December 2009 to close the shortfall. Its most recent triennial valuation concluded that £2.5bn in additional funding was needed to compensate for members' increasing lifespans.
However, the Pensions Regulator expressed substantial concerns about BT's funding proposals earlier this year. And in February, rating agency Standard & Poor's (S&P) downgraded BT Group's long-term credit rating from BBB to BBB- and its short-term credit rating from A2 to A3 amid concerns about its pensions deficit.
In July, the trustee of the Royal Mail Pension Plan reached an agreement with Royal Mail on funding to tackle the scheme's £8.4bn (€10.2bn) deficit. It is now subject to a formal review by the UK Pensions Regulator (TPR).