Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The deficit of BT’s giant pension scheme, one of the largest in the UK, has more than halved, boosting the chances of a future refund of payments.
BT announced on Tuesday that the funding shortfall in its retirement scheme, which has 263,000 members, had fallen to £3.7bn, down from £7.98bn three years ago.
The sharp fall in the deficit was in line with wider funding improvements for thousands of corporate defined benefit (DB) plans in the UK, which promise members a pension for life.
Higher interest rates have had the effect of lowering the estimated cost of DB pension promises, or liabilities.
Announcing the results of its formal 2023 valuation, the telecoms group said the value of the scheme’s assets and liabilities had fallen since its last formal funding check in 2020 because of higher long-term interest rate expectations and the impact of £7.6bn in benefit payments to members.
The scheme’s assets fell from £57.3bn to £37.2bn between June 2020 and June 2023, while liabilities decreased more steeply from £65.3bn to £40.9bn over the same period.
The FTSE 100 company said hedging had helped protect its funding position against the impact of changes in interest rates and inflation. BT has also paid £4.36bn of deficit contributions since its last funding valuation in 2020.
The group said the £3.7bn deficit was “on track” to be eliminated by June 2030 through annual contributions and payment from a previously agreed asset-backed funding arrangement.
As part of the 2023 valuation, BT agreed to continue annual contributions of £600mn towards the scheme’s deficit until March 2030, with a final payment of £490mn before May 2030.
BT Group has also agreed to make payments of £180mn a year under the asset-backed funding arrangement.
Simon Lowth, BT’s group chief financial officer, said: “The agreement (funding) allows us to deliver on our strategic initiatives such as investing in our networks and transforming our business.”
Ben Barringer, technology analyst at Quilter Cheviot, said the DB pension deficit had “hung over the stock for a considerable amount of time”. He added that the decision to keep the payments unchanged “removes an unknown and allows the business to move on and tackle the deficit, which can only be a good thing going forward”.
The group added that a “stabiliser mechanism” put in place in 2020 by BT to protect the group against overfunding of its retirement plan — a risk as interest rates rise — means the group might be eligible for future refunds of contributions.
“The amendments agreed to the existing stabiliser mechanism provide a greater certainty that BTPS will achieve full funding and increase the likelihood of a future refund to BT Group,” said the group in a statement.
James Barford, head of telecoms research at Enders Analysis, said BT shareholders were now “exposed to much less risk than they once were”. He added that this was because the funding deficit was “much less volatile than it used to be, as the pension trustees have hedged most of the fund assets to match future payout obligations, and also much lower due to BT’s ongoing payments reducing the deficit”.