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

Thursday, July 7th, 2016 (9:20 am) - Score 1,352

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.

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By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
Leave a Comment
12 Responses
  1. TheFacts says:

    What do Pensions r Us say about the situation?

  2. dragoneast says:

    You can find a lawyer for anything. We win, every time. On the other side of the coin, you can do anything if you try (and often, spend) hard enough.

    Is it that time of the month again?

    Sky bet.

  3. Jonny says:

    Sky are sounding increasingly like Brexit campaigners where the separation of Openreach is concerned.

    What do you want? “A separate Openreach!”
    How will that improve the service you can deliver your customers? “We aren’t sure!”

    1. MikeW says:

      Not forgetting that we’re seeing the same as that Faragesque promise that a loss by 48:52 would guarantee continued fighting. Sky just won’t stop…

      Of course, if Ofcom decided the other way, then BT wouldn’t stop either. In the end, it wouldn’t be Ofcom having the final say: It’d then go through appeals to the CMA, the courts and eventually the supreme court.

    2. FibreFred says:

      I think its Ofcom recommend CMA have the say, but then recommending would mean Ofcom admitting internal failure.

  4. Lee says:

    Time they changed their tune and actually got in with improving their own network rather than trying to sabotage Openreach.

    Nothing new, they just want tomorrow’s technology delivered yesterday ad last weeks prices.

  5. Ignition says:

    Sky can get knotted.

    If they can afford to spend the amounts of money they do on football rights they can afford to invest in broadband.

    If they want full control over the networks they can build their own.

    They just want to make money from other people’s investments at no risk to themselves.

  6. FibreFred says:

    Good god are they STILL going on about it?

    Move on sky what next will they be out with the bremainers protesting on the streets?

    Stop crying, how sour are those grapes jeez, build or buy but please shut up

  7. wirelesspacman says:

    “build or buy but please shut up”

    I suspect you may be hoping for a bit much there Fred! 🙂

  8. Evan Crissall says:

    Growing trouble at BT Group Pension Fund, according to the Financial Times (“BT pension deficit balloons by nearly £3bn”; June 17).

    “A funding update this week showed the [BT] group’s pension deficit had widened from £7bn in 2014 to £9.9bn by the end of June 2015.

    “Over the period, the value of the scheme’s assets had grown from £40bn to £43bn, but its liabilities, or the cost of future pension promises, had risen from £47bn to £53bn.”

    —-

    At some point, this vast pension fund deficit is going to impact investment in BT’s network; if it isn’t already.

    What of the Crown Guarantee – that government promise at privatisation to backstop the deficit?

    Does the Guarantee take precedence over the provisions of the Pension Protection Fund (PPF)? If and when the PPF swings into action, the taxpayer assumes full liability, minus a 10% haircut, for the deficit – if the pension scheme becomes insolvent. That could happen whether or not BT Group is viable.

    Clearly it would be a highly embarrassing situation for BT Group; one to be assiduously avoided. Hence BT agreeing to a plan which will see [increased] “contributions of £8bn paid to plug the deficit over a 15-year period.”

    Though there’s a triennial review of the pension deficit in 2017, when BT may be called upon to increase its contributions even further.

    Which could spell bad news for future investment in the Group’s infrastructure. The Group’s reserves are already tied up in dividend payments (currently 3.3% yield), and the heavy costs of servicing its pension fund deficit.

    Not really a pretty sight. Is this another BHS scandal in the making?

    1. Tim Rossiter says:

      The PPF would only assume liability if BT became insolvent. And the PPF is NOT government supported, it is funded by other pension schemes i.e. other companies.

      Incidentally – back around 2000( I think) BT split and sold its original mobile operation ( BT Cellnet) – they had to split out the cellnet pensions then. So it can be done.

  9. Evan Crissall says:

    Thanks for that Tim. Which takes precedence? The Crown Guarantee or the Pension Protection Fund? That will determine whether the taxpayer takes the hit, if the scheme does go bust.

    Either way, it’s bad news for BT, if the company is liable in perpetuity for its Pension obligations; including legacy liabilities from pre-privatisation.

    With no government aid, how else can BT Group reduce that £10bn pension deficit, except by slashing its R&D budget, and axing future investment in infrastructure?

    What a mess. Dwarfing the £2.1bn Nortel pension scandal. This-is-Money warns today that the “UK’s pensions black hole balloons [£90bn] in a MONTH” and BT Group, on its own, has added £10bn to that.

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