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BT’s £47bn pension scheme has warned it may need to call on the telecommunications group for more cash “support” as it tightens its use of leveraged investment strategies.
The 270,000-member scheme, which has a £4bn deficit, said it had become “more cautious” in how it managed liquidity following September’s gilt market crisis. That forced thousands of retirement schemes to sell assets, such as bonds and equities, to meet collateral calls.
Like many defined-benefit plans, the BT scheme used liability-driven investing (LDI) strategies to help mitigate the risks of interest rate and inflation movements on liabilities. Its pension payments run to around £2.5bn a year.
The value of its assets fell by around £11bn as it used cash, and sold gilt and equity holdings, to meet urgent collateral calls on its LDI strategies when gilt yields soared following the Truss government’s bungled “mini” Budget.
In a written submission to MPs investigating the gilt market turmoil, BT Pension Scheme Management (BTPSM) said changes it had made to its LDI strategy in response to the crisis could have consequences for the telecoms group.
“We have become more cautious in how we manage the scheme’s liquidity and have increased the collateral buffer to which we operate,” said BTPSM. “This will position the scheme to better weather any further volatility in the gilt market but will also reduce the expected returns from our assets.”
It added that, should expected returns fall below a certain level, it may need “more support from BT in future valuations than previously anticipated”.
If BTPS did turn to its parent company, it could put the former monopoly in a difficult financial situation at a time when it is already seeking to tighten its belt because of soaring inflation. BT — which employs nearly 100,000 people — recently said it had increased its 2025 target for cost savings by a fifth, from £2.5bn to £3bn, and that it may have to cut its headcount.
“Inflation is pushing us hard,” BT’s chief executive Philip Jansen said during the company’s second-quarter results last month.
BT said in a statement: “We remain on track with our plan to eradicate the BT Pension Scheme funding deficit by 2030, despite the recent volatility in the gilt markets and subsequent impact on the LDI market.”
This year, BT spent £1bn on deficit payments to its pension scheme, and is set to pay another £1bn next year. However, the figure is scheduled to taper off in the following years, down to £180mn by 2032.
In its submission, BTPSM said “the pace of change and the dysfunction in the gilt market had presented significant operational and liquidity challenges”.
However, it had a “robust liquidity process” and ran a “substantial gilts and cash buffer” which is used to meet collateral calls in the first instance. It had also sold equities to generate cash.
In its annual report published in October, BTPS said gilt market volatility reduced the scheme’s assets by £11bn before the Bank of England intervened to shore up the market.
“Whilst the value of the scheme’s assets has fallen over this period, there has been no worsening in our estimated funding position,” said the scheme. “Our hedges have performed as expected.”
BTPSM defended the use of LDI — now subject to marketwide scrutiny from policymakers — saying the strategy was “key” in managing the volatility of its funding position.
It noted that, at the time of the last triennial valuation in 2020, the scheme’s funding deficit had been £8bn.
“We estimate that, in the absence of the LDI hedging programme, the deficit would have been £7.6bn higher (ie £15bn or more) and that would have required BT to pay significant additional contributions to repair the deficit,” said BTPSM.
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