At deVere Group we believe that a large company pension will fail at some stage in the not too distant future. The implications of this to it’s employee’s past and present are of course massive!

Incredibly the Government has been undermining personal pensions with its constant changes at exactly the time they are needed to replace failing company pensions. At deVere Group we are constantly evaluating company pensions on behalf of our clients. Look at these figures by our pensions experts looking at BT and backed by an article in the FT.

BT declared a pension deficit of £3,973m on 31^st March 2009.

By March 2010 this deficit had swelled to £7,864m and BT decided that action needed to be taken to reduce the deficit so they closed the scheme to future accrual (pension increases based on salary and length of service) and also changed pension increases from RPI to CPI which saved them a whopping £3,500m and also made an additional contribution of £1,000m. This resulted in a deficit of £1,830m at the end of March 2011.

During 2012 BT made the largest additional pension contribution of any UK company totaling £1,912m however, the deficit had increased to £2,400m by March 2012.

By the end of 2012 the deficit stood at £6,100m and more worrying BT has now used virtually all of the tools at its disposal to reduce the deficit such as closing to future accrual and reducing increases to pensions from RPI to CPI. The only changes BT could now make would be by increasing retirement ages and not increasing pensions on an annual basis. Both of these would be extremely unpopular and would almost certainly lead to industrial action. In addition the Company is not in a position to continually pump billions of additional capital into the scheme.

As reinforced in the below article, BT is having to put a third of its free cash flow into the scheme and that is also unlikely to stem the flow. The scheme has 42% of its assets (which are valued at £38 billion) in bonds, including the majority in UK Gilts which are currently paying very little return and don’t look set to improve in the near term.

Time is certainly running out for the BT scheme and it remains to be seen how the Government would be able to handle the collapse of the largest private occupational pension scheme in the UK. Certainly the Pension Protection Fund would struggle to accept a scheme of BT’s size into its protection. BT has 89,000 current employees so any impact on the company as a result of its pension debts could have severe ramifications for the UK economy as a whole.

Nigel Green deVere Group

Blog written 27th February