BT will take 17 years to plug its pension deficit
Telecoms company BT has agreed to pay off a £9bn deficit in its pension scheme over the next 17 years.
The announcement came as the company revealed that pre-tax profits for the first nine months of the financial year were down by 28% to £756m.
BT said it was generating enough cash to pay off the pension deficit, as well as pay dividends, reduce debt and invest in its business.
But the Pension Regulator says it has "substantial concerns" about the plan.
By mid-morning shares in BT had fallen by 10p, just over 7%, to 122p.
BT's main pension scheme, which was closed to new joiners in 2001, is still the largest in the private sector with 340,000 members - employees, former employees yet to retire, and pensioners.
The company said the assumptions the trustees had used in their latest scheme valuation were particularly cautious, and that a different estimate of future investment returns might have suggested a smaller deficit.
"If the valuation had used a 'median estimate' approach, BT estimate that the deficit would have been about £3bn," the company said.
"[That] reflects how investments might on average be expected to perform over time and the expected impact of the pensions review changes implemented on 1 April 2009."
The company's recovery plan for the scheme, agreed with the trustees of the pension fund, has valued the scheme as of December 2008.
The pension scheme has been in deficit since the 1990s but this ballooned from £3.4bn in 2005 because the company has had to accept that it will be much more expensive to fund pensions in the future.
It is now assuming that pensioners will live for two years more than it had believed was the case at the time of the previous scheme valuation in 2005.
Previously BT had agreed to pay an extra £525m into the scheme in 2009, 2010 and 2011.
Now it has agreed to continue the process for a further 14 years, starting with £583m in 2012 and rising by 3% a year thereafter.
The Pensions Regulator has not said publicly what its concerns are.
BT pointed out that the regulator does not formally approve scheme valuations and the funding deals that flow from them.
But if the regulator is unhappy it can refer the matter to an independent panel, with any continuing disagreement possibly going to a tribunal, and then the Court of Appeal.
The chairman of the BT pension fund trustees, Rod Kent, said he was pleased with the new deal, which was struck just before the deadline of 31 March.
"This agreement secures significant additional support to the benefit of scheme members," he said.
Despite having to make huge deficit contributions, the underlying cost to BT of funding its scheme has been slashed by changes introduced in 2009.
From April last year the 65,000 staff still contributing to the scheme have had their retirement age raised from 60 to 65.
Their pensions now build up at a slower rate than before, and for future accrual the pensions are linked to their "career average" salary rather than their final salary.
The result is that BT and its staff together are now paying in just 13.6% of salaries into the scheme, whereas before BT's own contributions were 19.5% of salaries.
"The negotiated changes to the pension scheme have brought significant savings to BT while securing the long-term future of the pension scheme for our members," said Andy Kerr, deputy general secretary of the Communication Workers Union (CWU).
"It's hard to say whether there would still be a decent pension scheme in the company if those changes had not been made at that time."