Page last updated at 16:00 GMT, Tuesday, 16 March 2010

British Airways unions agree to pension cuts

BA plane taking off
The plan will be the second in three years to cut the scheme's benefits

Trade unions at British Airways have agreed to a plan to help the company cut the £3.7bn deficit in its two final-salary pension schemes.

Balpa, the GMB and Unite unions have agreed that future pension entitlement in the bigger of the two schemes will build up at a reduced rate.

Alternatively, staff will pay in an extra 4.5% of salary to maintain their current benefits.

The deal is separate to the dispute over staffing involving cabin crew.

It is the second time in three years that members of the larger New Airways Pension Scheme (NAPS) have been asked to agree a cut in the value of their scheme to help cut its funding costs.

The latest plan will be presented to the pension scheme's trustees for their formal agreement which has to signed by 30 June 2010.

"The proposals are intended to avoid the closure of the pension schemes and maintain British Airways' contributions at the current level of £330m per annum," said BA.

"There will be a mechanism to help offset the impact of contribution increases on lower paid employees," the company said.

Big deficits

BA has two final-salary pension schemes. The Airways Pension Scheme (APS) closed in 1984 and is made mainly up of pensioners.

For the the few remaining members of staff in the APS any pay increases in the next three years will not count towards their pension entitlements.

However, the NAPS scheme, which closed to new joiners in 2003, still has 30,000 staff in it.

The proposed changes will be the equivalent of the members paying in an extra £37m a year.

In December last year, BA revealed that a formal valuation of the schemes, as of 31 March 2009, showed that the NAPS scheme had seen its deficit balloon to £2.7bn.

Meanwhile the smaller and older APS scheme had also fallen into deficit, to the tune of £1bn.

The extra cost of plugging that widening gap, as part of a formal recovery plan required under pensions law, might have led to a huge rise in pension costs for BA.

A failure to come to a deal over the deficits might also scupper BA's proposed merger with its Spanish rival Iberia, first outlined last November.

Working longer

A valuation of the NAPS scheme at the time of the previous valuation in 2006 revealed a deficit then of £2.1bn.

At the time, BA agreed to make a one-off £800m payment into it and raised its annual contributions to £280m.

Then in April 2007 the scheme was made much less generous for staff still contributing.

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

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

Although those changes helped to knock £400m off the size of the then deficit, it has not stopped it growing again due to poor investment returns and continued increases in pensioners' longevity.

Under the latest plan, someone whose target retirement age is 60 will see their contributions rise from 8.5% of salary to 13% if they still wish to accrue pension at a rate of 1/60th per year.

Someone planning to retire at 65 will see their contributions go up from 5.25% to 9.75% if they wish to keep their current accrual rate.

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