The Pensions Regulator is “working” with Ofcom to understand what impact there will be on the BT pension scheme over Ofcom's decision to force BT to split from Openreach.
A TPR spokesperson said: “We are working with Ofcom, BT and the scheme trustees to understand what impact, if any, Ofcom’s proposals will have on the BT pension scheme.”
In November 2016, Ofcom announced that it was going ahead with a formal notification to require the legal separation of Openreach from BT after BT failed to offer voluntary proposals that addressed the regulator’s concerns.
Established in 2006, Openreach is the part of BT’s business that controls the network that runs from the local exchange to people’s homes and businesses. BT allows other communication providers to use this network and has over 560 communication providers using its network.
However, pressure had been mounting from other big communications providers such as Sky, Vodafone and TalkTalk following accusations that the current system does not allow for a competitive market.
In August last year, Ofcom said it would not enforce the legal separation of Openreach from BT, in part due to concerns over the BT pension scheme. In response to an Ofcom consultation on the subject, BT said the proposed model would trigger substantial costs, and highlighted the impact of Ofcom’s proposals on the BT Pension Scheme trustees.
The trustees of the scheme echoed this concern, as did the unions who represent most BT employees. However, Ofcom said most stakeholders who responded to the consultation took the view that the concerns raised by BT, the unions and Trustees relating to the BT Pension Scheme have been overstated.
The BT Pension Scheme is the largest private sector pension scheme in the UK, with more than 300,000 members, of whom 37,000 are active employees and still accruing benefits. It is estimated the scheme has a deficit of around £11.5bn although the next triennial valuation confirming this will take place in 2018.
At present, BT’s liabilities to the pension scheme are guaranteed by the government (the Crown Guarantee) as a result of legislation enacted on the privatisation of BT plc in 1984. The Crown Guarantee is only applicable in the event that BT plc is wound up. In this case the Guarantee would mean the UK Government assumes BT plc’s liabilities to the BT Pension Scheme.
As part of its proposals to separate BT from Openreach, Ofcom said it remains committed to the interests of the BT pensioners and has suggested several ways forward. These include leaving the scheme in its entirety with BT, with Openreach becoming a participating employer. However, this approach would depend on the Crown Guarantee and a legally separate Openreach would require new legislation for this to continue.
“Although our model gives the Openreach Board a greater degree of independence to make strategic investment decisions, ultimate economic control of Openreach remains with BT Group. This means that the BT Pension Scheme should be able to have the same access to Openreach’s cash flows and assets in the new model is it has now. As we develop the detailed governance protocols for Openreach our aim will be to ensure that this is the case in practice,” Ofcom said.
An Ofcom spokesperson today added: “Our plans for Openreach would mean BT continues to have access to the cash it generates. Our expert advisors have identified measures to reduce any effects on the pension. Separately, we’ve engaged at an early stage with The Pensions Regulator and other government bodies to explain our plans, which we are now preparing to take to the European Commission.”
Commenting on the situation, Lincoln Pensions managing director Alex Hutton-Mills said: “In trying to come to some solution in appeasing the two regulators, the comments from Ofcom regarding early engagement with The Pensions Regulator are particularly welcome. They suggest a lower likelihood of both “regulatory arbitrage” and unintended consequences for the stakeholders in question, including the BT pension scheme members, BT customers and BT shareholders.
“In a world of increasing regulation, situations where the interests of The Pensions Regulator conflict with other industry regulators are increasingly commonplace. For example, banks with UK pensions schemes have been required by the PRA to grapple with ‘ring-fencing’ and ‘living will’ arrangements with the aim of protecting depositors. TPR meanwhile focusses on protecting pension scheme members with ‘one eye’ on sustaining the growth of sponsors.
“One must ask what is the appropriate level of cooperation and interaction between the relevant regulators given the risk that stakeholders (particularly pension scheme members) fall between the cracks?
“A lack of (or tardy) communication between industry regulators and TPR can have unintended consequences if industry regulatory requirements result in a weakening of the covenant – e.g. if price increases are imposed on customers to fund higher deficit contributions to the pension scheme. The holy grail is clearly trying to find a solution that works for all though compromise is a more likely outcome.”
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