Pension deficit deal boosts shares in BT

Shares in the former state telecoms monopoly leapt to a four-year high after it said it has agreed with the BT Pension Scheme’s trustee that it would start clearing the deficit immediately with a top-up payment of £2bn by the end of this month.

The group, which had previously relied on cost cuts and improved efficiency to drive cash generation, said it would then be able to make lower annual contributions for the next nine years of £325m, compared with its previous goal of clearing the deficit over 17 years.

Analysts said the new deficit estimate was also less than expected.

“This is a very rational thing to do and helps to materially de-risk the company and give more dividend flexibility in the future,” said Macquarie analyst Guy Peddy.

BT, which has been dogged in recent years by the pension deficit and the restrictions it placed on its dividend, said a new triennial valuation at the end of June put the deficit at less than half the size of the £9bn shortfall when the scheme was evaluated in 2008.

Chief executive Ian Livingston said: “This agreement under which the company makes an immediate contribution to the scheme of almost half of the deficit reflects BT’s financial strength.”

He went on: “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.”

The new deficit settlement compared with a previous payment plan which ran over 17 years and started off with an annual payment of £525m, which would then rise to £856m in 2025.

But with BT expected to generate £2.4bn of cash in this financial year – more than triple the figure three years ago – it is in a better position to tackle the burden.

And by pumping money into the scheme this month, BT will benefit from tax relief at a higher rate before a reduction in corporation tax in April.

The valuation of the scheme, which has benefited from better investment returns since 2008, still requires the backing of the pensions regulator.

“Our sum-of-parts valuation for BT had assumed a net-of-tax pension deficit of around £5.1bn,” Oriel Securities said. “This will now have to fall. The difference is around a 25 pence per share boost to our estimate of BT’s fair value.”

Analysts also noted a condition that BT would have to pay more money into the scheme if its shareholder returns between March 2012 and June 2015 exceeded the pension deficit payments.

With shareholder returns for that period forecast at around £2.5bn, and the deficit payments planned at £2.98bn, analysts noted that there was plenty of headroom for BT to raise the dividend.

BT shares scaled to a four-year high of 235.3p yesterday, the day’s biggest rise by a European blue-chip stock.

Deutsche Bank said: “With regard to dividends, the company remains circumspect with regard to a potential raise but acknowledged that resolution of a new top-up plan was a pre-condition to addressing potentially increased shareholder remuneration.”