British Airways in deep trouble – pension scheme cannot close, what will the Regulator do?

by Dr. Ros Altmann

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British Airways May be Unable To Shut Its Pension Scheme

Staff May Be Protected By a 1948 Redeployment Agreement

What Will Pensions Regulator Do?

Will BA be The First Major Company To be Bankrupted By Its Pension?

Will The Government Step In?

• Commentators have been puzzled by the fact that British Airways has not closed its pension scheme to existing members
• In the case of BA, it may be that the company is unable to do so because staff are covered by a 1948 Redeployment Agreement which means the company cannot cut pay (or pensions). This Agreement does not seem to widely known about. (See links below)
• This could explain why the Regulator has not insisted that the pension schemes should be closed to further accruals.
• With such enormous deficits (latest estimate is £3.7bn) and a sponsor making substantial losses whose market capitalisation is far less than the deficit (BA market cap well below £3billion) the Regulator would normally wish to protect the position of the Pension Protection Fund and seek to stop liabilities rising further.
• However, the Regulator has not done so. It seems that if the Regulator does insist on ending future accruals, it would potentially violate the staff’s conditions of employment. This would almost certainly lead to a major Court challenge and is likely to escalate industrial action, which itself poses a risk to the future of BA.
• The company and the Regulator are in deep trouble. Indeed, if this really is the situation, it is difficult to see a resolution to the pension deficit situation. That would mean either that the Regulator has to turn a blind eye and pretend that some recovery plan can be put in place to deliver full funding over time (hard to imagine a credible plan without significantly optimistic assumptions) or else the scheme will bankrupt the company.
• BA is making huge losses, its merger with Iberia depends on a satisfactory outcome to negotiations about funding the pension deficit. Willie Walsh is throwing down the gauntlet to the Pensions Regulator. Unless he gets clearance for a recovery plan to make up the pensions deficit over a very long time, using optimistic assumptions, the future of the company is in severe jeopardy. He probably knows this, but having already achieved the return of £300million assets that were earmarked for the pension scheme earlier this year, he may believe that the Regulator will again allow him time to move forward and hope things work out ok.
• This situation raises huge questions, initially of course for BA, but also for all pension schemes.
• Will the Regulator allow the BA scheme to stay open, increasing liabilities each week, while the financial position of the sponsor is so dire? If it were a smaller company, this would not be allowed. At the very least the Regulator would insist in closure to new accruals, but if this avenue is not straight forward, the situation is more difficult. The Regulator has a range of options, none of which looks palatable.

1. It can insist on closing to new accruals, changing the investment policy, changing the trustees and other measures.
2. If it does insist on closing to new accruals, in order to protect the PPF from potentially having to take over a worse BA deficit in future, this could lead to such damaging industrial action that the company itself will be at risk – and it could also lead to a major court challenge due to the terms and conditions of staff being violated. Both of these situations could put the future of BA in jeopardy.
3. It can insist on a recovery plan following its normal practice. Unless it makes special exceptions for BA, it would not normally allow a weak company with such a large deficit to stretch out its recovery plans over many decades, but it is clear that BA cannot make up the deficit within a ten or 15 year horizon.
4. If it insists on a credible recovery plan and does not allow the Iberia deal to go ahead unless the new merged company takes over responsibility for the BA pension scheme (which is what should normally happen under the 2004 Pensions Act legislation) then the Iberia deal will not go ahead, putting the future of BA in jeopardy.
5. If it does not insist on the scheme closing and allows the trustees and company to agree a recovery plan that is barely credible – perhaps stretching out over many decades, or based on heroic assumptions, this runs the risk of undermining the 2004 legislation and other companies may follow suit.

So either the Regulator risks bankrupting BA, or it risks setting a dangerous precedent that it is really a soft touch and will not insist on strong measures for weak companies in big deficit. That itself risks the future of the PPF, because weak schemes may continue to rack up more liabilities, with no realistic hope of the parent company making up the money and eventually too many schemes will enter the PPF without enough assets. Also, the longer a scheme stays out of the PPF, the larger its liabilities will be, because more and more members will enter the 100% protection bracket as they reach retirement age. Again, that means that allowing schemes to stay open, or avoiding PPF entry, will increase PPF costs in future, which will be a drain on all other pension schemes.

Pensions are another big casualty of our banking crisis and measures such as Quantitative Easing, which have brought bond yields down to artificially low levels, have increased pension liabilities so much that many companies can no longer afford to keep their schemes going. Already this year, around 30 companies have closed their pension schemes to new accruals. This trend will not stop and next year will see more schemes closing as huge deficits are revealed.

Will the Government step in to rescue BA? It has taken over the pension schemes of Northern Rock, Bradford and Bingley, RBS and Lloyds and underwritten them 100%. No PPF reductions for the members. Might it have to do the same for BA?

The Government, at the very least, will surely need to underpin the PPF itself, to provide more security to members whose companies cannot afford to make up the huge deficits. So far, the Government has failed to take a comprehensive view of the problems of our final salary schemes and allowed the situation to worsen. These pension problems are real and just pretending that they are going to go away will not work.

ENDS
17 December 2009
Dr. Ros Altmann
07799 404747

NOTES:

The following links may be of interest to confirm the existence of the 1948 Redeployment Agreement

Article by Socialist Party
Letter from Unite to BA October 2009 saying the Redeployment Agreement has not been altered