News about the world: Reform slashes BT pension deficit

Thursday, November 4, 2010

Reform slashes BT pension deficit

BT recently announced how it intended to tackle its pension scheme deficit

A reform in the inflation-proofing of pensions is set to reduce the deficit of the UK's largest private sector scheme by billions of pounds.

BT said that £2.9bn would be knocked off the scheme's deficit because of a shift in the measure of inflation used in pension calculations.

The deficit, which recently stood at £9bn, will be cut by using the Consumer Prices Index to uprate payments.

A recent survey said there was little public understanding of the change.

State and public pension schemes are swapping from the Retail Prices Index (RPI) to the slower growing Consumer Prices Index (CPI) as the inflation measure applied when calculating the annual rise of pensions in payment.

The government also wants private sector pension schemes to do the same.

BT, which has a pension scheme membership of 331,000, said that it could automatically alter sections of the scheme, which affect 80% of the membership, to use CPI rather than RPI.

It said the move would reduce the deficit from £7.9bn to £5.2bn.

In February, the company agreed to pay off the deficit in the scheme over 17 years.

Previously BT had agreed to pay an extra £525m into the scheme in 2009, 2010 and 2011, as part of an earlier deficit recovery plan. It agreed in February to continue for a further 14 years, starting with £583m in 2012 and rising by 3% a year thereafter.

BT said that the inflation switch would have "no impact" on these plans, and that it would only mean that the deficit would be paid off quicker than previously thought.

The Pensions Regulator, which said it had "substantial concerns" about the recovery plan, is still reviewing BT's proposals to tackle the pension scheme deficit.

BT is one of the first private sector businesses to outline the effect of the inflation measure swap, which will also affect everyone with state or public sector pensions.

It marks a significant change in pensions policy, but a recent survey for pension consultants Aon Hewitt suggests only a minority of adults appreciate how much this will devalue their pensions.

CPI generally rises each year by about 0.7 percentage points less than RPI.

Thus pensions are likely to grow more slowly in future than would otherwise have been the case.

Although the government wants all private sector pension schemes make the change, many will be prevented from doing so because the use of RPI is written into their rules.

This article is from the BBC News website. � British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.