BT To Pump £5 Billion Into Pensions

Published in Company Comment on 23 March 2012

The telecoms giant directs a flood of cash into its pension 'black hole' and its shares rise 5%.

When it comes to company pensions, you don't get much bigger than that operated by telecoms Goliath BT Group (LSE: BT-A).

Big BT

Of course, BT is a big British business. It operates in more than 170 countries, employs nearly 93,000 people and reported revenue exceeding £20 billion and pre-tax profit of more than £1.7 billion for the year ending 31 March 2011.

BT was privatised in November 1984, so it has been a London-listed company for over 27 years. Prior to this, it was owned by the state and was one of Britain's biggest employers, with a workforce of 235,000.

BT's big 'black hole'

Partly as a result of its public-sector legacy, BT operates one of the largest pension schemes in Britain, with liabilities of £40.8 billion and assets of £36.7 billion. The difference between the two (£4.1 billion) is the deficit or 'black hole' at the heart of BT's pension scheme.

In common with other corporations, BT reviews its final-salary pension scheme every three years with the pension trustee. These two parties today announced that they have agreed the latest triennial valuation as at 30 June 2011.

In December 2008, during the global financial crash, BT's pension deficit was £9 billion. With the rebound in asset prices since, the deficit has tumbled to £4.1 billion.

In order to make good this shortfall, BT today agreed to pay a lump sum of £2 billion into the scheme before 31 March 2012. This balloon payment will be funded by BT's cash pile of £1.5 billion and further borrowing. It will be followed by nine yearly payments of £325 million from March 2013 to March 2021.

Thus, BT has agreed to pump £4.925 billion into its pension scheme over the next decade. That is one immense pension contribution!

BT shares jump

BT shareholders seemed to welcome the news that it is to pay off almost half of its pension deficit in one fell swoop. As I write, BT shares trade at 230.5p, up 4.7%, valuing the group at almost £18 billion. Earlier this morning, BT's share price briefly topped 235p, which was a 12-month high.

By accelerating its pension payments, BT stands to gain from changes to corporation tax. Payments made this tax year attract tax relief at 26%. However, as corporation tax comes down, this tax relief falls to 24% in 2012-13, 23% in 2013-14 and 22% in 2014-15. Hence, by paying more upfront, BT gets a bigger kickback from HM Treasury.

Ian Livingston, BT's chief executive, said today: "BT's long-term sustainable cash generation has improved significantly since the 2008 valuation and we remain focused on improving BT's financial strength, investing in our future and enhancing shareholder returns."

BT = Buy Today?

At 230.5p, BT shares trade on a forward price-to-earnings ratio of 9.6 and offer a dividend yield of 3.9%, covered a healthy 2.7 times. Given BT's bounce-back over the past three years, these fundamentals look decidedly modest.

Hence, for investors, I suspect that BT is short for 'Buy Today'!

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jasonjarvisgbr 23 Mar 2012 , 12:44pm

I have very mixed thoughts on BT. One hand, unablle to capitalise on its omnipotence and crap at R&D - on the other hand, crippled by the clowns at ofcom and burdened with Public Sector quality pensions.

Interestingly though , wasn't there some knd of annoucement about Post Office pension liabilities being taken on by the Treasury the other day ?

TMFBoing 23 Mar 2012 , 12:55pm

It really does boggle the mind that BT has a market cap of £18bn and manages a pension fund of £40bn - it's often been said that it's really a pension fund manager with a telecoms business as a sideline ;-)


CunningCliff 23 Mar 2012 , 1:05pm

A bit like what became of the old Marconi, Alan!


theRealGrinch 23 Mar 2012 , 1:40pm
sonrisa1 23 Mar 2012 , 6:27pm

I hold shares in BT & HAVE FOR MANY YEARS, but sold many at high prices where they will never reach again,unfortunately, I like them but management was bad in the past, paying so much for 3G, was so obviously totally beyond comprehension to me.

What happened to Marconi was far far worse, the top Management should have strung up or at least banned, even worse than the banks if that was possible.

sonrisa1 23 Mar 2012 , 6:30pm

I certainly felt that ofcom were very much to blame in purposely undermining BTto help other telecoms.!!

eccyman 25 Mar 2012 , 9:02pm

Agree with sonrisa1.

Ofcom are as bent as refs at Manchester Utd games and seem to have it in for BT.

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