BT share holders on hook for bigger Pensions Bills

Shareholders in BT Group PLC (BT), the telecoms group, could be lumbered with the full ongoing costs of servicing the company's £34 billion pension scheme - following a regulator's initial ruling that customers cannot be asked to help pay down its £7.6 billion deficit.

Ofcom, the UK's telecoms regulator, put out a statement Friday ruling out the idea that BT might be allowed to put up prices in its "regulated business" - that is, the monopoly it enjoys over the UK's fixed telephone lines - to pay for its pensions costs.

These costs are understood to be only a few tens of millions a year out of the company's revenue, but the key disappointment for shareholders is that any future, unexpected increases in the deficit will have to be bourne by them.

One analyst, who declined to be named, said: "No one was expecting a huge change in regulated prices to come out of this, but BT has effectively lost out on a potential source of insurance."

John Ralfe, the independent pensions consultant who has analysed BT's pensions bills on behalf of its some of its rivals, said: "BT would have been hoping that the Ofcom ruling would be a 'magic bullet' that would mean they could pass on about a third of their deficit to consumers. That is not going to happen now and it is bad news for BT."

BT's final-salary pension scheme is the country's biggest, with a membership of 336,000 and investment assets valued at GBP34.1 billion at the end of 2009. Its liabilities, however, total GBP41.7 billion.

The deficit has been caused by a complex series of factors - including historic underfunding, rising life expectancy, and the company encouraging staff to take early retirements during downsizing in the 1990s.

Poor stock-market performance has hardly helped, though its in-house fund manager Hermes has beaten its targets over the long term, producing returns of 8% over 15 years for the scheme, against 7.4% for its internal benchmark.

Despite the knockback from Ofcom, the company said it was correct to have made its case to the regulator. A spokesman said: "There is regulatory precedent from other industries for BT to be able to recover some proportion of its total pension costs through regulated charges. There are a number of elements of this consultation that we will now review in detail and respond to in due course."

Ofcom's said its statement was a summary of its thinking following an "initial" consultation, with full conclusions expected at the end of this year.

It has left at least one big question unanswered.

This centres on the "cost of capital" measure Ofcom uses to set the regulated prices BT can charge for its services. It has been suggested that Ofcom excludes the ongoing cost of maintaining the pension scheme, as well as the deficit payments, from this measure.

In theory, this could mean Ofcom obliging BT to lower the price of its services and pass on none of the costs of its pension to its customers at all. Firms such as TalkTalk Telecom Group PLC (TALK.LN) and British Sky Broadcasting Group PLC (BSY.LN), who are simultaneous competitors and customers to BT, are particularly keen on this idea - but Ofcom has, for now, decided against action in this area.

Source: eFinancial News, 23rd July 2010

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