BT aims to eliminate its £3.4bn pension deficit within two years

BT is looking to eliminate its pension deficit by the end of 2008 despite the funding gap rising to £3.4bn from £2.1bn as a result of higher life expectancy rates.

BT will pump £2.8bn into its pension fund over the next decade, including an £840m payment before April to cover its liabilities over the next three years. It has committed to pay £280m a year into the fund between 2009 and 2015 but has adopted a new arrangement with its trustees that factors in the performance of the fund that could reduce those payments.

Hanif Lalani, BT's finance director, said that BT's pension scheme had assets of £36bn at the end of September and that those assets had grown between 6 and 7 per cent over the course of 2006, which in effect halves the funding deficit.

"This outcome gives certainty to BT pensioners and clarity to BT shareholders. If you look at where we are today, I hope to get to the next triennial review and not even have a deficit," Mr Lalani said.

From 2009 BT can reduce its deficit contributions if the scheme's assets grow above 3.2 per cent a year between triennial valuations. Conversely it has agreed to increase its funding if growth falls below that level. Mr Lalani said that its assets have grown at an average 7.2 per cent over the past 20 years. The company has factored in returns of only 2.5 per cent a year to its funding valuation to reflect its more cautious methodology.

BT operates the largest pension scheme in the country, covering around 360,000 members. John Ralfe, an independent pension consultant, has criticised BT for underestimating the life expectancy of its scheme members but Mr Lalani rejected such concerns, saying the company adjusts its mortality assumptions every year based on up-to-date data.

The telecoms company's previous funding deficit was valued at £2.1bn. BT said that its pension scheme would have been in surplus if it had used its previous funding valuation method.

Mr Lalani said that the company's Crown Guarantee agreement had not been taken into account in determining its funding requirements. The agreement stipulates that if BT were to become insolvent the Government would cover pension liabilities for members who joined the pension scheme before privatisation in 1984 .

BT is currently locked in talks with the Department of Trade & Industry over the scope of the agreement but Mr Lalani emphasised that the outcome of the talks would not affect its funding valuation as no potential benefits of the agreement had been factored into its assumptions.

The higher deficit and additional funding will not affect BT's profits or its credit rating although its net debt will rise as a result of its up-front payments. Mr Lalani said that the company would reduce its scheme's exposure to equities over the next few months and move into assets like commodities, property and private equity.

Big pension deficits

BAE Systems £5.3bn

RBS £3.7bn

BT Group £3.4bn

Lloyds TSB £3.3bn

Unilever £2.9bn

Barclays £2.7bn

British Airways £2.1bn

Companies with the largest liabilities:

BT Group £34.4bn

Royal Dutch Shell £32.2bn

RBS £21.1bn

BP £20.5bn

Barclays £19.1bn

BAE Systems £17.8bn

Figures as of 1 January 2006

compiled by Lane Clark & Peacock