BT is considering closing its defined-benefit pension scheme, the latest former state-owned business to close – or move to close – so-called “gold-plated” retirement plans for existing employees.
It comes as the telecoms group prepares to enter negotiations with pension trustees about the future funding of the scheme from next month.
It follows a similar, but more advanced, proposal by the recently privatised Royal Mail Group, where plans to shut its defined-benefit pension scheme to existing workers next year has resulted in threats of strike action.
A BT spokesman said it would be inappropriate to comment on the details of its forthcoming pension review, but added: “We are starting discussions with the trustee of the BT pension scheme about the triennial valuation.
“We don’t expect this process to be completed until the first half of 2018 at the very earliest.”
If BT opts to close the scheme to current workers in favour of a cheaper arrangement it is likely to prove highly controversial, as such a move would dramatically reducethe total renumeration packages that employees have signed up to. The Communications Workers Union, which represents Royal Mail as well as BT employees, has already threatened to hold a ballot for industrial action among members at the postal service.
A defined-benefit pension is typically considered the most sought-after retirement plan available to employees, and pays an annual income based on a calculation based on years of service and either a career average or final salary.
Businesses have increasingly argued such “gold-plated” schemes are unaffordable. BT’s £50bn pensions scheme was found to have aa deficit of about £7bn at the last formal review in 2014. However, very low interest rates and an ageing membership means that deficit may have risen to as much as £14bn.
Companies first attempted to cut the costs of providing defined-benefit schemes by closing the plans to new members – with BTdoing so in 2001.
More recently, companies have begun to try to limit the benefits payable to those already enrolled in the schemes and are still accruing benefits as current employees. These cuts can be achieved by closing the fund to contributions, essentially freezing the final salaries of middle to junior staff who may have been expecting their retirement income to be calculated on a more senior position.
Apart from Royal Mail and BT, other large companies such as the Post Office and Marks & Spencer have also announced they would close their defined benefits schemes for future accruals.
If BT decides to impose a cap on benefits for existing members, it would affect about 33,000 employees paying into the scheme out of a total of about 300,00 members.
In its latest annual annual report, published last week, the telecoms group told shareholders: “We have a large funding obligation to our defined benefit (DB) pension schemes. The largest of these, the BT pension scheme (BTPS), represents over 97% of our pension obligations. The BTPS faces similar risks to other UK DB schemes: things like future low investment returns, high inflation, longer life expectancy and regulatory changes may all mean the BTPS becomes more of a financial burden.”
The report continued: “If there’s an increase in the pension deficit at the next valuation date, we may have to increase deficit payments into the scheme. Higher deficit payments could mean less money available to invest, pay out as dividends or repay debt as it matures, which could in turn affect our share price and credit rating.
“We’re considering a number of options for funding the deficit after the next valuation, as of 30 June 2017. These options include considering whether there are alternative approaches to only making cash payments, including arrangements that would give the BTPS a prior claim over certain BT assets.”
