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BT and Unions Agree to Tackle Multi-Billion Pensions Black Hole

Monday, March 19th, 2018 (2:00 pm) - Score 1,653

The Communications Workers’ Union (CWU) and BT have reached a deal to close the operator’s defined benefit pension scheme (BTPS), which should avoid the possibility of a UK strike and help to plug the growing pension deficit (£7bn at the last review, with some warning it could hit £14bn).

BT has been seeking to close the BTPS because things like future low investment returns, high inflation, longer life expectancy and regulatory changes (e.g. Ofcom’s Strategic Review and Openreach’s legal separation) have all meant that it was fast becoming more of a financial burden. Various other UK companies are facing similar problems with such schemes.

Last year the CWU warned BT that it would “use all means up to and including industrial action” if the telecoms and broadband giant pushed forward with their plans to close the company’s “gold-plated” defined-benefits pension scheme (here). BT actually closed the BTPS to new entrants in 2001 (i.e. total membership of 300K, with roughly 33K employees still paying-in), although existing members have continued to build up benefits.

However BT and the Prospect union recently agreed to close the BTPS for around 10,000 managers (they were shifted over to the BT Retirement Saving Scheme [BTRSS]). Meanwhile today’s deal with the CWU means that the old BTPS will be completely closed from early summer 2018, which affects the future pension arrangements for around 20,000 non-management employees (aka – team members).

Naturally there’s a catch. The deal requires BT to establish a new “hybrid pension arrangement” over the coming year for team members leaving the BTPS. This new arrangement will combine elements of both defined benefit and defined contribution pension schemes, alongside being designed to support those team members on lower pay scales (i.e. giving them another option for their retirement savings).

Gavin Patterson, BT’s CEO, said:

“I feel it’s critical that we provide fair, flexible and affordable pensions for all our people. I’m committed to helping them save for retirement, so I’m pleased we’ve reached an agreement with our unions.

These changes also bring far more financial certainty for the company in terms of our future pension arrangements. This will help us balance the needs of BT pensioners with the investments we are making to future-proof the UK’s communications networks and improve customer experience.”

Andy Kerr, CWU Deputy General Secretary, said:

“The new hybrid pension is an innovative solution that will share future risk between BT and our members. In the defined contribution scheme, all of our BTRSS members paying core contributions will be getting an increase in company payments – as well as key allowances counting towards pension for the first time. This is clearly a major improvement.”

Apparently any benefits accrued in the BTPS for service prior to 1st June 2018 will remain preserved within the BTPS and subject to revaluation in line with BTPS rules and relevant legislation. BT has also updated their plans and will make additional transition payments to all ex-BTPS team members moving into the BTRSS, as well as providing a higher maximum BT contribution rate of 11% for an “extended temporary period.”

In addition to the enhancements offered to ex-BTPS members, BT has also enhanced their newer BTRSS scheme (35,000 active members) by increasing their standard maximum contribution rate to 10% for all members; plus a few “other improvements.” Separately, BT has agreed a two-year pay deal with the CWU, for team members, which will see a 3% increase both this year and in 2019.

However, the update also revealed that “there are some complex administration-related issues that the Trustee is working to resolve. In the event that these issues impact the timetable we will provide a further update” (no details provided). The new agreement probably isn’t exactly what BT would have liked but they appear to have avoided the threat of a strike, which could have disrupted their broadband and infrastructure work.

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18 Responses
  1. Avatar Steve Jones says:

    “and help to plug the growing pension deficit (£7bn at the last review, with some warning it could hit £14bn).”

    I don’t think that this will do anything about the £7bn, as that’s the valuation based on rights that have already been accrued by existing and deferred pensioners. It seems to be about stopping future liabilities being open-ended. I’m not even sure that it will stop the deficit growing either, as that seems to be more about reducing rates of return and increasing life expectancy rather than costing in future accrued rights (the pension scheme had already been altered several years ago to reduce those benefits by altering the retirement age and basing pensions on career-average, not final salary).

    The problem still arises that I believe there might be 300,000+ pensioners or deferred pensioners out there, many of whom will have had accrued significant benefits dating back long before privatisation.

    1. Avatar GNewton says:

      @Steve Jones: What do you suggest should be done to resolve this problem of its growing pension deficit?

    2. Avatar Steve Jones says:


      What, you mean apart from arranging a suspiciously large number of deaths among BT pensioneres? It’s a legal obligation, and it’s the pension trustees who have the ultimate power to take BT to court to cover any pension shortfall. Given that, the company has to divert a significant amount of extra cash to cover the shortfall every year (and Ofcom won’t, unlike other regulators, allow any of the historical deficit to be taken into account in wholesale charges).

      So what to do? Basically divert some cash that might be used on investment, and some that would go to dividends. The impact of this can be seen in the share price which factors this in.

      The pension fund is reputed to be run well (and independently of BT), and there’s only so much risk that can be taken to boost returns.

      In any event, BT pensions are covered by government guarantee in the act that set up BT in the first place.

    3. Avatar Joe says:

      Gnewton: Higher contribtutions from existing workers or lower payments on their retirement. Bt frankly should have dealt with this properly in 2001. Both sides knew it was unsustainable then

    4. Avatar GNewton says:

      Isn’t BT severely hampered by this pension deficit problem from doing the necessary fibre network investments? It certainly doesn’t help either that BT has already made a number of other wrong investment decisions in the past, resulting in a lack of future proof infrastructures in too many places all over the country. Also, it will have to cope with more fibre network infrastructure competitors, like CityFibre, Gigaclear, and others, in addition to the restrictive regulatory framework imposed upon it by Ofcom. There is no easy way out of it now.

  2. Avatar tula29 says:

    It will never happen, but Defined Benefit pensions should be heavily haircut.

    They are promises made by baby boomers to other baby boomers, promises that the millennial generation will pay their pensions.

    Our Defined Contribution pensions are suffering because the markets are negatively impacted by having to subsidise baby boomer pensions. Yet another way the “Me Generation” will suck the life out of my generation. Another example of them taking out more than they put in, and dismantling the social contract as they age so that they alone benefit from it. My generation can’t have DB pensions because they are too expensive, but has to pay for theirs because, well they were promised.

    1. Avatar Steve Jones says:

      Those pension schemes weren’t set up by baby-boomers. They were based on pre-WW2 government schemes (many of the companies involved are also ex-public sector) and then continued by the wartime and pre-wartime generations. The baby-boomers didn’t even start joining the workforce until the 1960s, and they certainly weren’t in charge. That wouldn’t have happened until the mid/late 80s when the first of the baby-boomers hit their early 40s.

      So no, this was not the product of promises by the baby-boomer generation. It was as a result of promises made to baby-boomers by the generation before, largely from the post-WW II consensus that didn’t really break down until the late mid/late 1970s. That post-WW II period also coincided with a lot of nationalisation, council house building and the setting up of the welfare state.

      So, no. Your history is wrong. The pension scheme that some (not all by a long way) benefit from is the product of an idealistic wartime (and pre-wartime) generation.

    2. Avatar tula29 says:

      Fair point, but it’s still the baby boomer generation that has dismantled it for my generation, and still my generation that will in effect pay for something they will never benefit from.

    3. Avatar Steve Jones says:

      The system of defined benefit pensions isn’t being dismantled so much as naturally falling apart because it’s unsustainable. When those systems were put together, it was based on wildly optimistic assumptions and without any consideration of demographic changes. In 1950, the life expectancy for women was about 70 (lower for men). It’s no approaching 85 for women, and men’s has increased by even more than 15 years. Now that’s a good thing in itself, but no system which was designed around the demographics of the late 1940s is going to work in the 2000s.

      Full time working also started earlier. Typically 15 in 1960 for most people. Now it’s 21-22 for many (driven, I would argue, by an inappropriate tertiary education system).

      Also, some of those baby boomers have been affected to. Anybody born in 1964 (generally considered the end of the baby boomer period) is going to have to wait until they are 67 for a state pension).

      This is that many baby boomers haven’t been part of a lucky generation, but it is generally luck, not design.

  3. Avatar M Mitchell says:

    Well said Steve Johns, I was born in 1951, and joined BT in 1998, and the BTPS a year later, how is it our fault Tula29, I like everyone else paid into the scheme, I also transferred money in from another personal pension I had been paying in to, thinking about my retirement from the age of 17, always need someone to blame these days, and how is it BT find £billions for TV football rights, the viewing base as of 30th September 2017, was 1.8 million, not good, I think a mistake to enter TV, and not keep up the pension, that we all pay into for many years.

    1. Avatar Steve Jones says:

      That point about football rights is misguided to put it mildly. The money for football rights was made as an investment to improve sales and margins. It was intended so that BT Retail would retain customers and remain profitable, so helping to fund the pension deficit.

      As for putting money into the pension scheme, of course you did (and so did the company). It was a prudent thing to do. However, assuming you survive well into your 80s, or beyond, then you will take out far more from the system than you ever put in (even when taking into account the investment gains). When the actuaries made the calculations, then it was never made on that basis.

      Now that doesn’t make you evil, but it does make you lucky. Be thankful. If you were starting work now, you would not have the same opportunity.

      My problem with tula29 is not so much the reality that the (many, but not all) baby boomers have, in some respects, done well, but that it was somehow intentional rather than a result of demographic changes.

      In the meantime, count your blessings. You may have been more prudent than a lot of your contemporaries, but it’s still a bit of luck.

      I should add I was born in 1955, so am of that generation. But I also recall that it was a different world, with many in full-time work at 15 and only a small minority went to university. “The past is a foreign country – they do things differently there.”

    2. Avatar tula29 says:

      Oh I don’t think it’s intentional. It’s not personal. I don’t blame any individual for wanting the best outcome for themselves, that’s only natural.

      But the fact remains that there is an overall intergenerational wealth transfer from my generation to the boomer generation, based on promises made to boomers before my generation were born.

      In effect, we were born into debt slavery, and the idea of rolling back on a misguided promise that the boomers can take out more than they ever put in is seen by society as more horrific an option than the alternative, that younger people are effectively milked for the benefit of their elders…. I don’t want to be milked thanks.

    3. Avatar Steve Jones says:

      And the “me generation” term isn’t a jibe (“a generation of people characterized by selfish materialism”)?

    4. Avatar Joe says:

      I think you could argue that all the problems with DB schemes were obvious to the BB generation but they bottled addressing the issues at a stage that would have made so many of these problems were less difficult.

    5. Avatar Steve Jones says:


      Some may have had an inkling about it, but that was certainly not the official position. The process for valuing pension schemes and their liabilities was rigidly set down using officially authorised actuarial tables. In the 1980s, it was determined that the considerable majority of pension funds were in surplus. Indeed, they were considered so much in surplus that one chancellor (it might have been Nigel Lawson) has the law changed so that surpluses would be taxed. That was on the basis that companies were believed to be over-funding pension schemes to avoid corporation taxes. This triggered a lot of companies into the so-called “pension holidays”, a feature of the late 1980s.

      Of course, there’s a very good case that those setting the actuarial tables were wildly optimistic. A lot of this could also be seen on the collapse in returns on endowment policies. Remember all those endowment-backed mortgages which failed to cover the amount owed? That was when most people became really aware.

      So I don’t think many people realised this was an issue, even well into the 1990s. Certainly the average person in the street would have had no idea. It took the collapse of several schemes (after the collapse of the parent companies) to raise the alarm bells.

    6. Avatar Steve Jones says:

      I’ve just checked, and it was in the The Finance Act 1986 that pension fund surpluses of more than 5% were taxed (and that’s still the case). That was under Nigel Lawson.

      However, I also forgot to give Gordon Brown some credit for undermining pension fund investments. In 1997 he abolished pension fund tax relief on dividends. That cost pension funds almost £5bn a year at the time and, by some estimates, a cumulative sum of £120bn or so since it was introduced.

  4. Avatar Insider says:

    If you believe people should be taxed on inheritance (for being lucky), or taxed on high income (for being successful), should you also believe people on defined benefit pensions should take a hair cut?

    It’s the same principle, so if one is a socialist one should also be willing to give up one’s own defined benefit pension.

    1. Avatar 125us says:

      Are you proposing a windfall tax on pension schemes? How does that reduce any shortfall? The scheme needs just as much money, except that now some of the money goes to the government instead of the pensioner.

      Assuming you didn’t mean that, taking a haircut would let companies off the hook. That’s not traditionally a socialist manoeuvre- reducing the benefits of pensioners so that a business can retain more money.

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