Sky UK Says, BT Pension Pot is No Obstacle to Openreach Separation

A new report from pensions law firm Sackers, which was commissioned by Sky (Sky Broadband), has concluded that there is “no bar from a pensions perspective” to stop Ofcom from delivering functional and legal separation of Openreach from BT.

Openreach was established by the regulator in 2006, with the aim being for it to take responsibility for maintaining and upgrading BT’s national UK telecoms and broadband network, albeit on a “functionally separate” basis. But Ofcom’s recent Strategic Review found that the organisation “still has an incentive to make decisions in the interests of BT, rather than BT’s competitors, which can lead to competition problems.”

The review thus pledged to tackle this by delivering a number of key changes, such as requiring Openreach to give rivals better access to its cable ducts and poles (full details), a much more independent governance structure (this remains a key sticking point), tougher minimum service requirements and better information sharing.

In the end Ofcom stopped short of recommending that Openreach be fully split from BT’s control, although they have continued to keep that option on the table just in case the incumbent refuses to reach a voluntary agreement. Naturally this outcome did not please BT’s arch rivals (e.g. Sky, TalkTalk and Vodafone) and they have thus continued to campaign feverishly (here).

One of the biggest stumbling blocks in any split might of course be BT’s Pension Scheme, which remains the largest private sector occupational pension scheme in the UK. As at 30th June 2015, BT Pension Scheme Trustee Limited, the sole Trustee of the BT Pension Scheme, reported that net assets were £43.084 billion compared with liabilities of £53 billion.

However the new Sackers report believes that it is “technically possible” to manage the legal issues relating to Openreach employees’ defined benefit pension liabilities, held currently in the BT Pension Scheme. This is important because some 301,500 pensioners are associated with BT’s scheme (around 164,000 of those are retired former employees).

Sackers Statement

“The most straightforward and least intrusive way to achieve functional and legal separation from a pension perspective would be to permit the newly formed Openreach subsidiary to join the BT Pension Scheme as a participating employer. This is the premise supporting options 1 and 2 set out in our report. Under both of those options, the participation of Openreach in BTPS would be restricted to only those Openreach employees who currently participate in BTPS.

Under option 11 Openreach would assume responsibility for making contributions to cover future service pension costs only with past service liabilities remaining with British Telecommunications plc. Under option 22, in addition to paying future service pension costs, Openreach would take on the contractual responsibility for paying a share of deficit contributions in respect of the past service liabilities of its employees who have pension benefits in the BT Pension Scheme.

Our report identifies other possible options for dealing with BT Pension Scheme liabilities attributable to current and former employees in the Openreach business. For the benefit of those with limited experience of pension matters, it is worth noting that all the options described, whilst technical in nature, are quite ordinary in a UK pension law context.”

The report notes that all of the options would also be made “significantly easier to implement” if the Government were to amend the Crown Guarantee to cover the pension liabilities of Openreach under the BT Pension Scheme. Apparently doing this “would not increase” the total liabilities which are currently the subject of that guarantee.

The Crown Guarantee only applies in the “unlikely event” of a winding up of BT plc and in that circumstance covers BT plc’s obligations to make contributions (including deficit payments) to BT Pension Scheme in respect of all BT plc employees past and present, whether they joined the scheme pre or post privatisation.

A BT Spokesperson told ISPreview.co.uk:

“Sky cannot simply wish away inconvenient truths. The kind of governance changes they have suggested for Openreach would have a material negative impact on the pension position.

We at BT are clear about this, and our view is supported by authoritative, independent analyses by KPMG, PwC and Freshfields. Sackers have raised the importance of the employer covenant and the critical impact this will have, but unlike KPMG and PwC, they are not employer covenant advisors.”

Sky would of course argue differently and they say the Sackers report shows that pensions are not a major hurdle. Ultimately Ofcom will have the final say and the regulator has previously promised to publish its final statement during the summer, which means that we should get the result within the next month or two.

Much will no doubt depend upon whether BT has done enough to satisfy Ofcom’s concern and, if not, whether the regulator has the stomach to proceed with full separation. Given the current impact of Brexit upon BT’s business and share price, one wonders whether that too might play into the operator’s corner.