Page last updated at 11:52 GMT, Friday, 13 November 2009

BA's pension problems

By Ian Pollock
Personal finance reporter, BBC News

BA plane taking off
A new estimate of BA's pension deficit is being calculated

BA is downplaying the size of the deficit in one of its final-salary pension schemes as a potential deal-breaker for the merger with Iberia.

"It is still a matter to be fully resolved but we don't believe it will be a stumbling block," said a BA spokesman.

"We have taken them [Iberia] through all the issues and they are aware of the details," he added.

Even so, the pension scheme "issue" will not be resolved for some time, so Iberia and BA have agreed a get-out clause for the Spanish airline.

It will be entitled to end the merger deal if the result of negotiations, between BA and its pension scheme trustees, are not "in Iberia's reasonable opinion, satisfactory because it is materially detrimental to the economic premises of the proposed merger".

Deficit widens

Earlier this year, BA persuaded its pension trustees to help its finances by scrapping a previous promise to pay the scheme £100m if the airline went bust.

So what is the company and Iberia worried about?

BA has two final-salary pension schemes, both closed to new joiners.

One is the Airways Pension Scheme (APS), which shut in 1984, and the other is the New Airways Pension Scheme (NAPS), which closed to new joiners in 2003.

BA revealed earlier this month that in the view of its accountants the surplus in the smaller APS scheme had shrunk to just £27m, while the deficit in the bigger NAPS scheme had more than doubled to £2.7bn.

Under current UK pension regulations, employers which have schemes with deficits in them have to agree a plan with their pension trustees to pay off the deficit, typically by making extra payments.

These recovery plans usually aim to pay off a deficit within 10 years at the most.

The Pensions Regulator has made it clear it recognises that the recession requires a more flexible attitude, and that it will not necessarily take a dim view of longer recovery plans.

What is not yet clear though is just how big the BA pension deficit actually is.

The two final-salary schemes are going through their three-yearly full valuation.

This started in March this year and must be completed, with a signed deal with the employer, by June next year.

So sometime in the next few months the schemes' actuaries will come up with their own numbers, taking into account factors such as increased longevity and expected future investment returns.

This could produce different figures from the ones published by the company's accountants.

Then haggling between the company and the trustees will begin about any future increase to contributions.

Past changes

The finances of the two BA final-salary schemes have vexed the company for several years.

The APS scheme's membership is now made up entirely of pensioners while the larger NAPS scheme still has more than 30,000 staff making contributions.

A valuation of the NAPS scheme in 2006 revealed a deficit of £2.1bn, so BA agreed to make a one-off £800m payment into it and raised its annual contributions to £280m.

The other side of the coin was that from April 2007 the scheme was made less generous for staff still contributing.

Pilots, cabin crew and ground staff now have to work until 65 before retiring, or to make higher contributions if they wish to retire at 60 or 55.

For future service, their pensions also build up at a slower rate than before, unless they chose to pay in even more.

All this helped to knock £400m off the size of the BA pension deficit.

But poor investment returns and continued increases in longevity mean that the deficit has increased again.

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