BT to pay £2bn into pension scheme to halve deficit

BT says it will pay £2bn into its pension fund to help cover the scheme's deficit.

It is one of the biggest one-off payments yet made by a company into a pension fund.

The payment is part of a nine year plan to bolster the scheme, which at the last valuation in June had a deficit of £4.1bn.

Supporting the pension fund has dragged down BT's performance. Back in 2008, the fund had a deficit of £9bn.

Under the latest plan, BT will make nine further annual payments of £325m.

BT's pension fund is the second largest private sector scheme in the country behind Royal Dutch Shell's scheme. It has 330,000 members.

"This agreement, under which the company makes an immediate contribution to the scheme of almost half of the deficit, reflects BT's financial strength and re-affirms our commitment to the scheme," said chief executive Ian Livingston.

"BT's long-term sustainable cash generation has improved significantly since the 2008 valuation and we remain focussed on improving BT's financial strength, investing in our future and enhancing shareholder returns."

'More conservative'

BT's pension fund is reviewed every three years. There has been a dramatic improvement since 2008 when the fund had a deficit of £9bn.

At the end of 2010, BT said the deficit would be reduced by £2.9bn because of a change in the inflation measure used to calculate pension increases.

But it has been the success of the scheme's investments that has played the biggest part in reducing the deficit.

The pension fund has almost £37bn worth of assets. Since 2008 they have provided returns of 10.1% a year.

Laith Khalaf, of financial advisers Hargreaves Lansdown, said the timing between the valuations was "fortuitous" as it covered a period of recovery in the markets.

A fall in gilt yields at the end of 2011 would have pushed up liabilities, making the picture less positive for BT, he said.

However, the reduced deficit has allowed BT to release funds to make the latest big one-off payment.

BT says it has become more conservative in the way that it values the scheme.

It is allowing for longer life expectancies, a higher rate of inflation and is less optimistic about the returns it can expect on investments.

The company says that builds in £6.6bn of "prudence".

'Promises'

Tom McPhail, of Hargreaves Lansdown, said that this move by BT was unlikely to have a wider effect on the pension landscape.

"I do not think that this is, in any way, going to reverse the trend of companies closing down their final salary pension schemes," he said.

"But it is good news to see a company making the cash available to at least deliver on the promises that it has made in the past."

He said that, in general, individuals were still likely to have to take on more investment risk themselves with pensions.

BT has also been making healthy profits. In its most recent quarter - the three months to the end of December - BT made £652m, up almost 50% on the same period during the previous year.

BT has also been investing in improving its broadband internet infrastructure.

The company said it had expanded the availability of its fibre-optic broadband to seven million homes in the most recent quarter.