UK - BT Pension Scheme, the £31.3bn pension fund of the telecoms giant, would have had enough assets to cover 57% of members' benefits with an insurance company by the end of 2008 had its sponsor collapsed, the latest annual report has revealed.

Full details of the pension fund's activity and performance confirm the pension fund did fall in value from £39.6bn at 31 March 2008 to £31.3bn by the same period in 2009, as a result of a 17.5% loss on investments over the year.

The chairman's statement of the scheme's annual report said its actuary estimated were the company to become insolvent, the scheme could provide 57% of members' benefits without any additional funding from the sponsor.

That said, it again noted BT does have the backup of the Crown Guarantee from when BT was privatised in 1984, which essentially requires the government to pay any shortfall in funding should the telecoms firm no longer exist.

The Trustees' report said it recognised a "demanding" target had been set for the total return over three years on its assets, as it requires that returns "exceed a benchmark return that would theoretically be available if the Scheme assets had been invested according to the strategic asset mix, and the returns in each asset class had been the average return for the 50 largest UK pension funds, as calculated by WM".

Its performance within the last year showed the fund missed the WM benchmark average return of -17.2% by 30 basis points. But the scheme has seen significant changes in its asset allocation over the course of the year, in a bid to tackle market turbulence and losses. And a triennial review is now under way.

Following market developments, the equity holdings target was reduced from 49% to 33%, the fixed interest target allocation rose from 15% to 20%, index-linked investments gained a stronger position and the long-term target was raised from 10% to 15%, while alternatives gained a larger foothold to eventually become worth 20% of assets and property has been cut slightly from 13% to 12%.

The actual holdings by the end of last year were 27.2% in fixed income, 35.1% in equities - including a 22% allocation to overseas equity and private equity - 14.2% in inflation-linked investments, 11.1% in property and 12.4% in alternatives. This is major shift compared with 2007, when equities amount to 45.5%, fixed interest was worth 21.5%, inflation-linked paper was 10% of the fund, while property was worth 15.4% and alternatives were a holding of just 7.6%.

A further breakdown of the alternatives allocation revealed £1.3bn was held in hedge funds - although the fund is going through a transition as assets are partly unwound from the Hermes Absolute Return Fund and replaced with the Hermes-BPK Partners Fund - and £951m was held in commodities while private equity was worth £987m and 3% of assets are now being allocated to dislocated market credit opportunities.

It also has a currency hedge against 50% of its overseas equities and property, confined to US dollars, euros and the yen, although the range of currencies is being widened for the future to also include Austrialian dollars, Brazilian real, Korean won and Swiss francs.

Over the course of the year, BTPS divested £1.71bn net, largely felt in the equities portfolio.

The fund saw net income of £1.33bn at the end of the year, however it had also suffered losses of almost £8.1bn, so with additional admin costs, regulatory charges, contributions and benefits paid, the final sum deficit was £8.3bn.

Contributions of £280m are expected to be paid by the sponsor, BT, for the next seven years, along with additional contributions of £525m, either in cash or partly in specie, over three years.

The BT Pension Scheme had 180,529 pensioners, 96,304 deferred members and 63,621 contributing members by the end of last year.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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