Update re BA pensions:
Lex live: Pensions / BA
Published: March 23 2006 13:27 | Last updated: March 23 2006 13:27
Many UK companies have topped up pension schemes in the past year. British Airways’ effort on Thursday is the most aggressive, and a landmark that suggests the new Pensions Regulator is beginning to bite. In essence it suggests that pension fund trustees will demand pension schemes are funded in cash on a “marked to market” FRS17/IAS19 basis. Previously, many companies happily published such valuations in their accounts, but continued to use far more generous actuarial valuations for assessing the actual cash payments into their schemes.
Before Thursday’s announcement, British Airways’ main scheme had a funding deficit of £1bn, as calculated by Watson Wyatt in 2003. The latest FRS17 deficit, which does not immediately book future equity returns, was £2bn. Under the new agreement, BA will pay £500m of cash into the scheme and employees will agree to stingier terms that will cut the gross liability by £450m. Any revision to longevity assumptions from the upcoming actuarial review will be shared by the company and employees.
Essentially, then, £950m will go into a scheme that the actuaries said was £1bn in deficit. Problem solved? No. BA has said it will also make annual deficiency payments of around £120m. These appear in its profit and loss statement as the notional interest cost of the FRS17/IAS19 deficit. Other companies with big deficits, such as BAE Systems, and BT, argue that this cost is just that – “notional”. BA, is pretty much alone in actually backing up the P&L charge with cash. It is by implication suggesting that the FRS17/IAS19 deficit is real.
What is the conclusion? One is that many historic actuarial valuations, some conducted by Watson Wyatt, continue to be proved ludicrously optimistic. Second, it is that the Pensions Regulator is changing behaviour. The remaining companies that ignore large FRS17/IAS19 deficits, such as BAE and BT, are looking increasingly isolated.