BT to pay extra pension contributions of £525 million

BT has committed to paying an extra £525 million a year in pension contributions for the next three years, in an effort to close its £4 billion deficit. 

The firm has set two precedents for the city, which are likely to be followed elsewhere. Firstly, in order to afford repayments, BT slashed its shareholder dividend by almost two thirds, to 6.5p for the full year. 

This could be the first of many companies to cut the dividend in order to pay down the pension deficit, after the Pension Regulator said in February that dividends should not take priority over paying off deficits. Some 87% of final salary schemes are in deficit, with a total debt of £205 billion.

Laith Khalaf, a pensions analyst for advisers Hargreaves Lansdown said: “BT will not be the only company that needs to find cash to plug its pension deficit and now is actually a good time to announce a dividend cut because the market expects bad news.”

Secondly, the £525 million repayments fall far short of the £1 billion annual payments that would be required to pay off the deficit within the ten year target set by the regulator (as the £4 deficit is expected to have grown to as much as £11 billion when a review is carried out this summer).

The Pensions Regulator agreed the rate of pay off, given the speed at which the deficit has grown, and is expected to have to be equally pragmatic for other companies in the coming months.

Khalaf added that BT could be part of a third trend if tough times continue. He said: “Firms that still offer final salary pensions will not forget the unwelcome strain on their cash flow throughout the downturn and will be reluctant to see through the next business cycle with these schemes still in tow.”

BT also announced a further 15,000 job losses for 2009/2010 – on top of the 15,000 announced for 22008/2009. That’s more than 20% of its workforce altogether.The crisis was caused after the Global Services division was found to have massively over-estimated profits for the year and the write-down of profits pushed the company £1.28 billion into the red.