UK - The Pensions Regulator (TPR) has “substantial concerns” about a funding agreement agreed between BT and trustees of the £34bn (€38.6bn) BT Pension Scheme (BTPS), and could impose technical provisions or a recovery plan on the company and scheme if its concerns are not addressed.

This would be a last resort for the regulator, however BT today admitted TPR’s initial view on the funding agreement with trustees is “they have substantial concerns with certain features of the agreement. BT and the trustee will continue to work with TPR to help them complete their detailed review”.

In a statement, BT and the trustees confirmed the funding deficit of the scheme had almost tripled from £3.4bn at the end of 2005 to £9bn at 31 December 2008.

To try and address the shortfal,l BT has proposed a 17-year recovery plan which includes deficit payments of £525m for the first three years - starting in December 2009 - before increasing to £583m in the fourth year and rising by 3% per annum for each following year. This is in comparison to its previous 10-year recovery plan comprising deficit payments of £280m a year between 2005 and 2008.

The trustees will now submit the plan to TPR for their formal review, as the regulator has been kept informed of developing discussions but had not been able to review the full details of the agreement. Yet BT said TPR has “substantial concerns” about the deal. 

A spokeswoman for TPR stated: “We are aware of today’s announcement from BT, and this is a correct reflection of the current position. We look forward to working with BT, the pension trustees and their advisers to enable us to complete our detailed review.”

Although there is no specified time limits for the review to be completed, if TPR’s concerns are not addressed and an agreement reached then the matter could be referred to its Determination Panel, which gives TPR powers to impose technical provisions and recovery plans onto a scheme and the employer.

However, TPR emphasised “this would only happen if absolutely necessary. We expect to work with both trustees and the sponsor to find a solution we can all be content with and this is our usual course of action”.

Additional details of the legal agreement between BT and the trustees revealed if payments to shareholders in the three years to 31 December 2011 exceed the total employer pension contributions over this period - expected to be £2.4bn - then BT will make matching contributions to the scheme.

Other proposals for additional security are that the scheme will receive one-third of net cash proceeds of more than £1bn generated by sales or acquisitions in any 12-month period between now and the next valuation in 2011. BT also confirmed future creditors “will not be granted superior security to the scheme in excess of a £1.5bn threshold”.

Despite the significant deficit figure, BT said the value of scheme assets had increased by around 10% in 2009 from £31bn to £34bn. It also argued it had adopted a prudent approach regarding estimated investment performance and the expected impact of pension changes in April last year. It claimed if it had adopted a “median estimate” approach the deficit would have been approximately £3bn, so the current figure of £9bn includes “a margin for prudence of £6bn or 15% of scheme liabilities”.

Rod Kent, chairman of BTPS trustee, said: “This agreement secures significant additional support to the benefit of scheme members, underpinned by a strong sponsor. The valuation was performed at a time of particularly difficult conditions in the global financial markets. In arriving at this agreement, the trustee has spent exhaustive effort over the last 18 months in detailed analysis supported by leading independent expert advisers.”

Meanwhile Ian Livingstone, chief executive of BT, claimed: “This is a prudent valuation and a recovery plan which reaffirms BT’s commitment to meeting its pension obligations. The scheme is well-managed and asset values have grown strongly since the valuation date.”

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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