UK - UK-based telecoms companies could in future be required to indirectly contribute to the BT Group's defined benefit pension fund as Ofcom, the communications regulator, is reviewing the pricing level of charges for BT's wholesale services to other communication companies.

Openreach, an arm of BT Group, was established around four years ago to open up the communications markets to other competitors. Under this arrangement BT provides services such as broadband and line rental products at a set cost to operators such as Sky and Carphone Warehouse.

However, Ofcom is in charge of setting the level of wholesale charges, which are reviewed every four years,. And one of issues flagged in its March consultation was whether other service companies should be required to pay additional charges to help plug the £6.8bn (€7.5bn) pension deficit.

In the final regulatory statement, published in September, Ofcom confirmed its cost calculations "exclude any contribution that BT Wholesale might make in funding the shortfall in the BT Group pension scheme. While this approach is consistent with our historic treatment of pension deficits and surpluses, we consider that this issue is of increasing importance to the companies we regulate. Accordingly, we are currently undertaking a separate review of our treatment."

Ofcom is therefore in the process of planning a separate consultation review concerning the BT pension scheme and assessing whether the deficit should be taken into account when setting the wholesale charges. This could mean that the charges paid by other communication firms could rise to help cover BT's annual £525m deficit payments.

The consultation is expected sometime before the end of the year, according to Ofcom officials, and follows a similar move by Ofgem, the energy regulator. It has issued proposals to encourage energy firms to reduce pension costs and stop them being passed to the consumer. (See earlier IPE article: Energy regulator to encourage longer UK pension funding periods)

Meanwhile, latest figures from BT's second quarter results for 2009/10 showed that the pension deficit on an IAS19 basis had almost doubled on a post-tax basis, from £3.9bn to £6.8bn between March and September.

In a results presentation, Ian Livingston, chief executive of BT, said the underlying value of assets in the BT Pension Scheme had increased over the six months by £3.3bn to £32.6bn. However, liabilities had increased by £8.8bn to £41.9bn, producing a pre-tax deficit of £9.4bn.

Livingstone attributed the deficit increase to a 1.56 percentage point fall in the discount rate used to calculate liabilities following a fall in interest rates, partly caused by the UK's quantitative easing strategy.

However, he noted IAS19 accounting measures are very volatile, as according to that basis BT posted a pre-tax surplus of £900m in September 2008 despite asset values being at a low level, suggesting it is not "representative of the real world situation".

And although there was no update on the triennial actuarial valuation of the scheme, Livingstone told analysts it is "expected to be settled around calendar year Q1 as March 30 is the date that trustees and BT will come to a final agreement. Although we're well in advance of that and we are continuing to talk to the regulator. But we do know the figure that we need to pay which is £525m a year for the next three years".

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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