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Pension promises sent a wrecking ball through the finances of many long-established companies. The liabilities of UK telecoms company BT’s fund are more than three times its £12bn market value. But a costly and drawn-out renovation job has repaired the worst of the damage.
The BT fund’s triennial valuation on Tuesday showed the scheme was on track to be fully funded by 2030. The deficit has more than halved to £3.7bn in the three years to June 2023. This was down to contributions. Hedging limited the benefit from the interest rate rises. The fall in liabilities of just over a third in the three years to 2023 was matched by a similar decline in the valuation of assets.
Neither this figure, nor the company’s pledge to go on pouring £600mn a year into the scheme, surprised the market. That predictability means one less distraction for incoming chief executive Allison Kirkby. She is due to take over from Philip Jansen by the end of January.
Risks remain. The pension fund has cut its equity holdings by three-quarters, but holds £11bn — or 30 per cent of the total — in other “growth” assets including private equity and property. Investors might fret about looming writedowns in private markets.
Moreover, other measures of the deficit are more alarming. Reducing the discount rate to just 50 basis points above the risk-free rate — in line with the pension regulator’s new guidelines for mature schemes — would put the deficit at £6bn, according to pensions expert John Ralfe. An even bigger number — just over £9bn — would apply if BT paid an insurer to take on liabilities.
Such factors should weigh heavily in the calculations of French telecoms tycoon Patrick Drahi who has built up an equity exposure of 24.5 per cent. An agreement not to bid for BT expires on November 24.
James Ratzer of New Street Research argues a leveraged buyout that more than doubled net debt-to-ebitda to 4.25 times could be perceived as a 55 per cent weakening of the covenant. The pension fund trustees might require a hefty top-up payment to compensate. The arcane world of pension valuations could be set to move into the spotlight.
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