Why BT’s pension line is out of order

May 29, 2009

REUTERS— Neil Collins is a Reuters columnist. The views expressed are his own —

It is a quarter of a century since the ground-breaking privatisation of BT. Unfortunately, it may not be many more years before a reluctant government is forced to take the company back into state ownership.

The new BT annual report, 169 pages of it, gives only a few hints of the scale of the problem facing what John Ralfe recently described as “a badly run hedge fund that happens to own a phone network”.

Ralfe is an independent consultant and something of a maverick in the arcane world of pension deficits, but he has a point. The directors claim that BT will make enough to grow the (reduced) dividend, invest in the business and support the pension scheme, all at once. It’s far from clear how.

The real horrors are in note 29 to the accounts. The BT Pension Scheme was closed to new entrants eight years ago, but it is still a millstone around the company’s neck, with an estimated present value of its liabilities at 33 billion pounds.

This is marginally down from the 2008 figure. Unfortunately, the value of the fund available to meet the liabilities has slumped from 37 billion to 29 billion pounds, as the managers scrambled to rebalance the fund away from equities in a falling market.

Ralfe reckons the true position is much worse, because BT’s retired engineers are going to live longer, and the rate at which future liabilities are discounted is “wishful thinking”. On his sums, the deficit is 11 billion pounds — half as much again as BT’s current market value.

BT is sheltering behind the 2008 actuarial valuation, which is not yet complete, and its new agreement with the Pensions Regulator. It will pay 525 million pounds a year into the BTPS for the next three years.

If Ralfe is only half right, this is nothing like enough. About the only escape would be a rip-roaring bull market in shares, but given that equities are now only 31 percent of the portfolio, even that may not be enough. Since this company is as vital as a bank to the fabric of Britain’s economy, the state could be forced to step in.

The BT board has been slow to grasp just how life-threatening the pension liability could become. In the last three years, the company has spent 2.2 billion pounds buying in its shares (it’s stopped now) while paying out 3.5 billion pounds in dividends. Even the “rebased” prospective dividend will cost over half a billion pounds.

All this overshadows the huge progress BT has made as a business in the last quarter-century. It really is quite a good operator, and from the customer’s viewpoint, the privatisation has been a great success. Such a shame, then, that the legacy of promises so casually given under state ownership now threatens to overwhelm it.

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