BT Group has been told it cannot increase regulated wholesale prices to plug its pension deficit.

Communications regulator Ofcom confirmed on 15 December its decision not to change the way it treats BT’s pension costs when setting regulated wholesale charges for telecoms services, including broadband and landlines.

This follows an initial consultation published in December 2009 and a further consultation in July 2010.

Ofcom sets the prices that Openreach, BT’s wholesale access division, can charge other communications providers to deliver services to consumers.

BT’s pension deficit contributions have increased in recent years and Ofcom has considered whether there are good reasons for changing the way that it currently treats BT’s pension costs. At present Ofcom allows for ongoing pension service costs, as reported in BT’s statutory accounts, but excludes payments made by BT in respect of any pension fund deficit.

After considering the evidence, including responses from stakeholders, Ofcom has decided to maintain its current approach.

The pension guidelines that Ofcom has published will also help ensure that the treatment of BT’s pension costs is consistent with setting regulated charges efficiently.

Ofcom has set out three decisions in relation to BT’s pension costs:

  • No allowance for deficit repair payments. These are cash amounts which BT pays at present to reduce the deficit in the company’s defined benefit (DB) pension fund. Neither deficit repair payments, nor pension “holidays” (periods where employers are able to reduce or suspend their contributions into pension schemes), are currently taken into account when Ofcom sets BT’s regulated charges. Ofcom has decided not to change this.
  • No change to ongoing service costs. These are the costs of pension benefits earned by employees for service in the current period. Ofcom currently includes reported service costs from BT’s statutory accounts in its regulated charges. Ofcom has decided to continue with the current approach as it provides the best estimate of these costs.
  • Treatment of the cost of capital remains unchanged. The cost of capital is an element of the return BT is allowed to make on its investments and assets as periodically determined by Ofcom in order to set charge controls. There is a potential connection between the existence of a DB pension scheme (such as that operated by BT) and the estimated cost of capital. However, Ofcom considers that there is insufficient justification and evidence to support the need to make an adjustment at this point.

    • In October 2010 the High Court rules the government will take responsibility for BT’s pension scheme in the event the telecommunications firm goes bust.

    In November 2010, BT reduced its pension deficit by £2.9bn by applying the government’s decision that the consumer prices index (CPI) rather than retail prices index (RPI) will be used as the basis for determining the rate of inflation for the statutory revaluation and indexation of occupational pension rights.

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