BT’s rocketing pension deficit is causing alarm among analysts and investors after one merchant bank said the telecoms company would have to pump more cash in to ease the stress.
The firm, Morgan Stanley, said that BT’s pension fund deficit would hit £6 billion when next year’s triennial review takes place.
The situation is cause for concern since the deficit was said to be £4.1 billion at the end of last year with the plunge in value blamed on lower corporate bond yields and higher than predicted inflation.
That figure had ballooned by £1.6 billion – or 64% – since BT declared last September that the pension deficit was £2.5 billion.
City analysts had predicted that that figure would be just over £3 billion and now investors are paying closer attention to the deficit demands being calculated by experts.
£6.5 billion deficit
The figures from Morgan Stanley are backed up by financial research firm Sanford Bernstein, which has calculated that the pension deficit when the review takes place will be around £6.5 billion.
To service that, says the firm, BT will have to make annual payments of £650 million or they could make a one-off contribution of around £2 billion which would cover the next three years.
The issue for analysts is that since 2010, BT has pumped £525 million into its pension fund every year and this comes after a £2 billion cash injection made in March 2012.
At that time, it was one of the biggest one-off payments made by a company to a pension fund and led to BT’s soaring share price.
Investors believed that the company’s pension deficit, which was £9 billion in 2008, had been resolved and that the payment would lead to improved share dividends.
Bond yields blamed
BT’s pension scheme currently has around 300,000 members though the firm closed the final salary scheme in 2001.
The problems with the BT pension scheme are mirrored by other companies and falling bond yields have led to the UK corporate pension deficit rising by £60 billion to £611 billion.
That figure comes from pensions specialist firm Xafinity which says that bond yields dropped by 0.25% in March and added £93 billion to company liabilities.
Hugh Creasy, a director at Xafinity, said: “Companies are finding out that making reviews and forecasts tied to specific dates is difficult as bond markets change so quickly and make the figures out of date.”
He added that the many analysts are predicting that bond yields will increase in coming months but, he says, it is the borrowing costs which look likely to rise and these are the driver for bond yields which may put rises under pressure.
