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Financial Times: BP to take pensions holiday

By Ed Crooks and Norma Cohen
Published: January 22 2008 02:00 | Last updated: January 22 2008 02:00

BP is to take a break from contributing to its UK pension funds for at least a year, in a move that will save it about £250m in 2008.

Its decision came as PwC, the advisory firm, calculated that market movements – falling interest rates and equities – had turned an aggregate £10bn surplus in FTSE-350 pension schemes into a £25bn deficit, following the share price falls on Monday.

BP’s move follows a similar decision by Royal Dutch Shell, which announced in October that it was taking a contributions holiday for the Shell UK pension fund, into which it paid £67m last year.

As of last September, BP’s UK funds had total assets of about £15.8bn, and liabilities of £11.7bn. Its main UK fund was 136 per cent funded, it said, and it was entitled to take a contribution holiday in any year in which the ratio of assets to liabilities exceeded 115 per cent.

BP’s UK fund is more heavily invested in equities than is common in the UK, with about 75 per cent of the fund in shares, against a typical figure of 60 per cent, and so had a run of good performance up to last year.

Charles Cowling of Pension Capital Strategies, a firm of actuaries, said it was “not unreasonable” for BP to be taking a contributions holiday in those circumstances.

“I have seen other companies, as soon as they go into surplus, they stop contributions,” he said.

BP has been under pressure in recent weeks, with analysts cutting their forecasts of fourth-quarter profits after talking to the company’s investor relations department, and its shares have fallen 15 per cent this year.

Factors such as squeezed refining margins and higher contributions of oil to the governments of countries where BP operates under production sharing contracts are expected to hit the results, due on February 5.

The pensions holiday will save BP about $500m in pre-tax profits, which were forecast by Credit Suisse this month to be $32.5bn this year.

The position will be reviewed again in a year’s time and the holiday continued if assets are again more than 115 per cent of liabilities.

PwC said the swing of corporate pension funds back into deficit reflected an easing in yields on AA-rated corporate bonds as well as the fall in stock markets.

Marc Hommel, a pensions partner at PwC, said the data showed that “it is dangerous for employers and pension trustees to make decisions about pensions financing risk management based on valuations taken on a particular day”.

Since the last valuation of BP’s UK funds at the end of September 2007, the FTSE 100 share index has lost 13 per cent.

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