Reheat,
Sorry for the delay, Had a very long day yesterday and didn't get back to the first point about the FRS17 deficit.
Significant play has been made in internal presentations to BA staff that £928mil deficit in the 2003 valuation has now risen to a £1.4bn deficit, and the point I was making was these two figures are not comparing like with like.
John Ralfe's paper "Corporate Pensions : The Actuaries' Magic Pencil" RBC Open Forum Notes Vol.3 , published 11 Dec 2003 and viewable on his website
www.johnralfe.com highlighted that if the full NAPS actuaries valuation had been an actuarial valuation to FRS17 criteria the deficit in NAPS would have been £1.6bn in 2003. See page 5 of this report.
BA through their internal intranet website have only just admitted this, despite the fact for the past 2 months presentations to staff have been comparing £928mil in 2003 with £1.4bn now.
From the BA intranet :-
"19th Dec [2005] Response from Robert French - BA Pensions Risk Manager.
To pick upon a few recent comments. The £1.4bn deficit figure is the FRS17 deficit on all BA pension schemes (of which NAPS is by far the majority) as shown in the company accounts for 2004-05. The last actuarial valuation of NAPS in 2003 had a deficit of £928mil. These figures are not comparable. The FRS17 figure gets mentioned a) because that's the measure many of the external communtators use and b) it gets shown in the accounts each year. We believe the 2006 actuarial valuation of NAPS will show an increased deficit, despite by then having received around £270mil of extra deficit payments from BA. Thats because of the significant fall in interest rates and further improvements in life expectancy."
What I and many others would like to know is how the 2006 actuarial valuation figure to be released in the autumn of 2006 compares with the £1.6bn FRS17 figure from the 2003 valuation. Of course the 2003 figures were using older mortality data (1980) than that which the 2006 valuation will have to use, as the PPF requires the use of 1992 data.
NAPS is very sensitive to changes in life expectancy ( I presume this is because many many staff in BA have long lengths of service with BA and have higher pensions on retirement accrued from just BA service) and it has been estimated that a 2 year increase in NAPS life expectancy would increase NAPS liabilities (and therefore currently its deficit) by £500mil. (Source : RBC Open Forum Notes Vol.21 )
If this increase life expectancy was forecastable in 2003 but the acturies chose not to use it then, why not ?
Presumably because they did not HAVE to use it then, and BA's contributions would have been even higher over the 2004-06 period. Interestingly, for the first time in 2002, the contract to appoint a scheme actuary for NAPS was put out to competitive tender with 3 firms, one of whom was the incumbant Watson Wyatt bidding. Watson Wyatt won the three year contract and therefore carried out the 2003 valuation. (Source: In Focus Nov 2004 newsletter )
Speculation I know , but Watson Wyatt would not have wanted to overstate the liabilities and hence the deficit if it didn't have to, and face BA's wrath, with BA having to pay even larger contributions at a difficult time . Incidentally BA also appoint its own independent actuarial advisors, again presumably to challenge Watson Wyatt if they started making too many expensive assumptions that they don't absolutely have to.
BA's timeline for 2006 is something like this.
Having overstated the deficit to staff and tried to scare them into believing BA will fold along with your accrude pension if we don't make massive cuts to your future contractual pension entitlement, BA approach the unions for large pension concessions .
BA hope staff will be too scared/ divided to fight, so unions agree to at least some major reduction in future pension accrual.
BA then approach NAPS trustees with new proposals for staff pension.
Valuation in 2006 carried out using new assumptions for future service which results in lower liabilities and hence lower deficit.
Trustees agree not to force higher contributions from the BA as deficit now much reduced, the Pensions regulator is happy as deficit will be cleared by 2015 using new realistic assumptions, BA's PPF (Pension Protection Fund) payments reduce over time, BA able to reduce pension contributions back to normal sooner, and future dividend payments resume as threat of contribution notice being served on BA by Pensions Regulator withdrawn, and the only losers are
**BA employees in NAPS with future service until retirement.**
Oh and whatever the outcome of the pension talks, the next pay round is due in Sept 2006, so BA tell staff/unions they can't afford inflationary payrise as the outcome of the pension negotiations in spring 2006 with the unions was to expensive.
BA do not want/expect us to fight this. How wrong they are.
Tim Byatt