UK - Ofcom, the UK regulator of the communications industry, has questioned the role of pension contribution holidays taken by BT in the 1990s, as part of a consultation to assess whether other telecoms firms should now help plug the BT Pension Scheme deficit.

Ofcom said it has looked at certain pensions ongoing service costs over the years but did not take into account the impact of the pensions deficit on BT and the charges set.

However, the consultation launched today asked whether it should change this principle and require other telecoms suppliers using BT's Openreach wholesale regulated services to contribute to BT's pension costs by paying a further 4% in charges. It argued this might be necessary as the scale of BT's deficit had hit over £9bn (€9.89bn) by the end of September 2009 and subsequent pension payments could affect its costs, especially as the annual benefits paid to members will peak at over £3bn a year between 2030 and 2040.

Ofcom is investigating whether it should adjust the ‘cost of capital' element of its wholesale charge calculations - the return required on investments and assets so Ofcom can set charge controls - to accommodate the impact of the pension fund on BT's risk.

It is also reviewing other regulators' decisions on the now privatised UK markets concerning pensions funding of former public companies. The energy market's regulator Ofgem, for example, has a ‘duty to finance' clause in its terms for wholesale supply buyers while Ofwat, regulating water companies, includes 50% of the deficit repair payments in its cost charge calculations.

As part of its review, Ofcom is also seeking feedback on the impact that taking a pensions contribution holiday - when the scheme had more funds than it needed to meet liabilities - might have had on pensions funding and liabilities, and whether anything else about pensions funding should be considered.

"Like many companies, BT's pension scheme was in funding surplus in the early 1990s. As a result of tax changes, it was not beneficial for the company to maintain a large surplus. Like many companies, BT did not make contributions into the main scheme between 1989 and 1993, although pension liabilities continued to accrue," said Ofcom in its review.

It continued: "At the time of these contribution holidays, Oftel [replaced by Ofcom] set regulated charge controls for BT based on an assessment of its costs, which included labour costs…based on the accounting charge. In other words, BT's regulated charges did not take into account the contributions holiday, and therefore the benefit of lower pensions contributions was enjoyed by the company (and its shareholders) and not by consumers directly."

Ofcom made this specific comment as officials pointed out that any increase in wholesale charges will eventually be passed onto consumers, although it also noted BT shareholders believe they have helped plug the pensions deficit in recent years.

The first stage of the Ofcom consultation will close at 5pm on 9 February 2010 and a second consultation will then be published in spring 2010, while a final statement is targeted by the end of 2010.

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