Haitong Research Warns Openreach “cannot be legally separated” from BT

At the end of last month Ofcom confirmed that they’d force Openreach into “legal separation” from the BT Group (here), which they view as necessary to improve competition / fairness in the UK telecoms and broadband market. But a Haitong Research study warns that Pensions remain a roadblock.

The regulator had been hoping to gain a voluntary agreement from BT on the future of Openreach, but so far the operator has refused to budge on two or three key points. BT is bitterly opposed to Openreach becoming a “legally separate company” (no CEO likes to lose full control over part of their business, even if the BT board would still have a say) and they’re particularly concerned about the related risks / costs of moving staff and pension liabilities to the “new” company.

In keeping with that Ofcom noted that most stakeholders who responded to their consultation felt as if BT had “overstated” the impact on their pension scheme. Similarly an earlier Sky UK (Sky Broadband) commissioned report from pensions law firm Sackers found “no bar [to separation] from a pensions perspective” (here).

However a BT spokesperson disagreed with Sky’s position and warned that “the kind of governance changes they have suggested for Openreach would have a material negative impact on the pension position.”

A team working for Haitong Research has now examined the submissions from trustees of the BT Pension Scheme (BTPS), which were sent to Ofcom as part of their related Strategic Review. The conclusion they’ve reached suggests that Openreach “cannot be legally separated” from BT, even if the operator wanted to do it.

Apparently the BTPS had liabilities of £53bn and a £10bn deficit in June 2015. As a result Haitong Research said that the pension scheme’s trustee’s position must weight above those of other stakeholders. Ofcom similarly admits that the BTPS situation is the single biggest hindrance to pushing through their proposals.

According to the client note (Proactive Investors), legally separating Openreach would render Openreach Co insolvent and hurt BT’s ability to support the BTPS (Covenant)

Statement from Haitong Research’s Client Note

“Because of this, the Trustee’s categorical position is that Ofcom’s proposal to legally separate Openreach is unviable and thus also a big threat to Britain’s digital economy. So even if BT wanted to assent to Ofcom’s wishes, it cannot.”

Naturally Ofcom disagrees with this assessment and their canned statement to the media states that legal separation is still “achievable, proportionate and carefully considered“. The regulator added that under their plan BT would still be able to meet “all” of their pension obligations and Ofcom’s “expert advisors” have proposed a “range of measures to reduce the impact of legal separation on BT’s pension costs.”

However Ofcom may be forgetting that their “expert advisors” do not carry the same weight as an actual trustee, particularly one that has a “legal and fiduciary duty to look after a 300,000 member pension scheme” and its significant financial liabilities.

Ofcom is already preparing to notify the European Commission of their decision to press forward with legal separation, which will take place early in the New Year. But the regulator’s battle may yet be far from won.