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Pension deficits return to haunt blue-chips


By Tim Sharp | 00:01:00 | 06 December 2009

As the economic downturn seems to be receding we can stop worrying about whether a company is at risk of going under from the weight of its debts; it’s time to return to our previous concern about whether its pension deficit might do the same job.

Pension deficits among FTSE 100 companies after the third quarter of the year were about £100 billion, double the previous year. In the FTSE 250 the gap has risen from £6 billion to £12 billion, even though only around 20 offer defined benefit schemes to a large portion of the workforce. Some 27 companies in the FTSE 250 have pension liabilities greater than their market capitalisation.

The financial crisis hasn’t helped. A study by consultants Lane Clark & Peacock found a massive turnaround in corporate pension accounts. Royal Dutch Shell’s scheme saw a surplus of £6.8 billion turned into a deficit of £5.6 billion. RBS’s scheme went from a £115 million surplus to a £2 billion deficit in 12 months.

The state of their pension schemes, and how regulators respond to them, could have a big impact on the fortunes of some of corporate Britain’s biggest names.

BT’s recent financial results revealed that the deficit of its final-salary pension scheme, closed to future accrual since April, has more than doubled in the past six months from £4 billion to £9.3 billion.

This was higher than many analysts expected and equivalent to more than three-quarters of the company’s total market capitalisation.

BT said this was just one measure of its pension deficit. It’s a lot to do with plummeting bond yields and central banks have yanked down interest rates. This could reverse over time and the equities-rich strategy the scheme is pursuing could also benefit as markets recover. It has a deal with trustees to pump £525 million annually into the scheme for the next three years.

However, since then, the Pensions Regulator has decided to take a close look at the scheme as part of its three-yearly valuation process. This has left analysts uncertain. Some think BT’s shares could rise if it manages to execute the plan. Others are still wary regulators could demand still more cash is put into the scheme.

David Norgrove, chairman of the regulator, describes the body as ‘a referee, not a judge’. But with the Pension Protection Fund posting a £1.2 billion deficit for the year to March, and potentially taking on more schemes as the recession weighs on sponsor companies, the pressure is there for the regulator to act in its defence.

BT’s rivals could also be affected by its pension issues. Ofcom is consulting on whether deficit payments should be factored in when wholesale regulated charges are calculated. This means the likes of Cable and Wireless could end up footing some of the bill.

In the case of BA, long mocked as a pension scheme with an airline attached, its fund has a deficit of £3 billion, equivalent to twice its market cap.

Trustees appear to be working with the company to help it through the economic downturn, recently surrendering bank guarantees worth £330 million, due if the company went bust.

Now BA wants to merge with Spanish airline Iberia. For the next five years, nothing changes as it continues as a separate company. But it has stayed quiet on whether the pension deficit will go with it when the full merger occurs.

Tim Sharp is City Editor of The Herald, Glasgow and

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