BT agrees insurance deal against pension longevity costs

Friday 04 July 2014 13.09
BT has the largest private sector defined pension plan in Britain
BT has the largest private sector defined pension plan in Britain

The trustees of BT Group's pension scheme have taken out insurance against the costs associated with members living longer than expected, in the biggest such deal of its kind in Britain. 

BT, a former state telecoms group, has 320,000 members in its scheme.

This makes it the UK's largest private sector defined-benefit pension plan, which requires annual top ups from the parent company. 

The trustees said today they had created their own insurance company with the Prudential Insurance Co of America that would cover 25% of the scheme's total exposure to people living longer, or £16 billion of the scheme's liabilities. 

The chairman of the Trustees, Paul Spencer, said in a statement that the deal was ground breaking in terms of size and structure. 

The risk that some pension schemes would be unable to meet their obligations to pensioners has become particularly acute as people live longer.

The International Monetary Fund estimates that for each extra year of life expectancy, current liabilities in a typical defined benefit pension scheme increase by 3-4%. That means companies may have to find billions of extra pounds and carry the risk of making a mistake in their calculations on their balance sheet. 

But a so-called longevity swap - such as BT's deal - helps to insure against that risk. 

Under these schemes, a pension fund makes regular payments to a third party, typically an insurer, reinsurer or investment bank, based on agreed expected mortality rates among the scheme's policy holders. 

The third party then agrees to take on the risk that those figures were underestimated and is liable to pay out to policyholders based on actual mortality rates. 

British companies have led the way in setting up such deals. Insurer Aviva in March this year agreed to transfer therisk of members of its staff pension scheme living longer than expected to three reinsurers. 

Deals done since the first one by engineering contractor Babcock in May 2009 total nearly £32 billion. That figure has grown by half as much again as a result of the BT deal, data from consultants Aon Hewitt showed. 

And more deals are expected. 

BT said at the end of March its pension scheme had liabilities of £46.7 billion and assets of £40 billion. 

The company said the deal would not affect how much it pays into the scheme, although that is likely to increase when the latest review is completed, which is expected to be next year. 

BT currently pays annual deficit payments of £325m and analysts believe this could increase to nearer £500m following the next review. 

Keywords: bt, pension scheme