BT agrees £2bn asset-backed funding arrangement to plug deficit

The deficit repair plan, announced on Thursday as part of BTPS’s triennial valuation, consists of two elements, the first of which being the £2bn secured against EE that will be paid in annual instalments of £180m for the next 13 years.

The second was the balance being met over the existing 10-year period with annual cash contributions reducing from an initial £900m to £600m from July 1 2024.

A “stabiliser” mechanism will be introduced, which reduces “the risk of future trapped surplus and provides more certainty that the BTPS will achieve its path to full funding by clarifying how future increased deficits would be funded”, according to the announcement accompanying the valuation.

Meanwhile, the existing derisking strategy will be maintained in order that future investment returns continue to play a role in eliminating the deficit, “while progressing over time to a low risk cash flow matched investment portfolio”.

The BTPS deficit was found to be £7.98bn, “broadly in line” with the position projected in 2017 when the deficit was £11.3bn.

The valuation attributes this decrease to £4.5bn of deficit contributions coupled with lower assumed future life expectancies, though these have been partly offset by the cost implications of the government’s reform of the retail price index, about which BT has complained in the past.

BT was one of a number of companies with defined benefit schemes to seek judicial review of the reform, which it estimated would affect 82,000 of its 280,000 members, reduce the value of the scheme’s assets by £3.7bn, increase the scheme’s deficit by £1bn, and reduce the value of pensioners’ incomes by £2.8bn.

Payments agreed with the trustee as part of the deficit repair plan may be “switched off” if the deficit is eliminated earlier than expected.

Some £2.7bn of deficit repair contributions will be paid over the next three years consisting of annual payments of £900m by March 31 2022, £800m by the same date in 2023, and £500m in June 2023, in addition to the £500m paid in March this year.

From July 2023, there will be annual payments of £600m either to BTPS or to a new co-investment vehicle, which would enable funds not needed by BTPS in 2024 to be returned to BT, reducing the risk of a “trapped surplus”, and would allow for assets to be invested as if they were part of the overall BTPS investment strategy.

The plan also allows for potential additional payments of up to £200m a year, if required, “to meet any increase in the deficit above £1bn that arises at a future annual review”.

“The payments will stop once the deficit at a future annual update has improved such that the remaining deficit repair plan is sufficient to meet the deficit. This provides more certainty to BT over the incremental cash impact in the event of any additional deficit,” the announcement stated.

The valuation also saw an agreement reached to protect the BTPS trustee “in the event of certain future corporate actions and taking into account BT's obligations under pensions regulations”.

Simon Lowth, chief financial officer at BT, said: "I'm pleased to announce that we've concluded our triennial funding review with the trustee, delivering a good outcome for BT and for all members of the BTPS with reduced risk for both sides.

“This agreement keeps us on track for zero funding deficit by 2030, whilst ensuring we have the financial capacity to drive our value-enhancing investment opportunities, including in our FTTP [fibre to the premises] and 5G rollouts and modernisation programme."

Otto Thoresen, chairman of the BTPS trustee, said: "Good progress has been made since the last full valuation in 2017. The deficit reduction plan is on track with the scheme set to be fully funded by 2030."

"Throughout the valuation process, we've worked closely with BT developing and agreeing a solution which allows BT to invest whilst providing the scheme with upfront funding and additional funding if the deficit increases," he said.

"The agreement, together with the ongoing derisking of the investment strategy, provides an enduring solution giving us greater confidence that we will achieve our objectives."