UK - The Pensions Regulator has agreed to a recovery plan for British Airways’ (BA) two pension schemes in a move that makes a merger between the airline and Spanish carrier Iberia evermore likely.

In June, BA settled on a recovery plan that will address the £3.7bn funding shortfalls in both the New Airways Pension Scheme (NAPS) and the Airways Pension Scheme (APS) while keeping them open.

A spokesperson for BA confirmed that once Iberia was seen as satisfied with the agreement, the merger would be put to shareholders in the hope of the new entity trading by the end of the year.

Under the deal, BA will continue paying annual contributions of £330m.

It has also agreed to increase payments in line with inflation, which it predicts will be 3%.

Additionally, the 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 cash balance exceeds £1.8bn.

The company will continue paying into APS until 2023 and cease payment into NAPS three years later.

The airline recently completed a £1.3 buy-in with Rothesay Life in a deal that covers roughly one-fifth of all APS’s liabilities.

In other news, Towers Watson has warned that under proposals put forward by the Treasury last week, final salary scheme members could lose £30,000 in annual pensions.

The drop would be the result of proposals to cut workers lifetime allowance from £1.8m to £1.5m and the annual allowance from £225,000 to £30,000-45,000.

Mick Calvert, a senior consultant at the company, said: “By freezing the annual allowance, the government will increase tax revenues by dragging more people into the net.

“It still plans to do this for a period, but the real value of the allowance may not be eroded as quickly as feared if there is some degree of indexation in the future,” he said.

He noted the possibility that HM Treasury might introduce indexation for annual allowances in the future due to the money raised through additional taxes.

The consultancy believes this would happen no earlier than 2015.

Towers Watson added that any changes would pose problems when trying to reconciliate them  with transitional protection introduced in 2006, when the lifetime allowance was first introduced.

Calvert said those at risk of losing out most were high earners in defined contribution schemes that suffered under the recent stock market downturn.

He added: “Under the old rules, they could have restored their pension savings tax-efficiently by making higher contributions.

“That may no longer be an option.”

And finally, the last two weeks of June have hit UK pension funds hard, with drops in global equity markets and low corporate bond yields wiping out the previous six months’ gains, Mercer said.
According to Mercer’s latest Pension Risk Update, in mid-June, pension scheme deficits for FTSE 350 companies stood at around £60bn - a “substantial improvement on the previous quarter” - due to rising equity markets and corporate bond yields, and falling inflation expectations.

After 16 June, however, the situation “altered dramatically”.

The consultant said the aggregate FTSE 350 pension deficit stood at around £85bn at the end of June, roughly equal to that of the previous month.  

Deborah Cooper, head of the Retirement Research Group, said pension schemes, with less income available from corporate bonds, suddenly had to find other means of covering existing liabilities.

“Overall, these factors balanced out the gains made in previous months by around £25bn,” she said.

“The ‘saving grace’ for defined benefit pension schemes was a fall in the expected future level of inflation.”