Pension agreement reached wit

RNS Number : 9942N

British Airways PLC

22 June 2010

 



PENSION AGREEMENT REACHED WITH TRUSTEES

British Airways has reached agreement with the trustees of its New Airways Pension Scheme (NAPS) and Airways Pension Scheme (APS) on a recovery plan to address its pension deficits.  

The airline completed consultation with its trade unions earlier this year and will now submit the full recovery plan to the UK Pensions Regulator by June 30, 2010.

The recovery plan avoids closing the pension schemes. It maintains British Airways' annual contributions at the current level of some £330million, plus agreed annual increases in line with inflation expectations averaging three per cent.  The agreed deficit contributions continue until 2026 for NAPS and 2023 for APS.

British Airways will make additional deficit contributions if its year-end cash balance exceeds £1.8 billion. The schemes will also be provided with £250 million of additional security over the company's assets which would become payable in the event of British Airways' insolvency.

The recovery plan includes a number of usual features that protect the interests of scheme members by preventing the airline from unilaterally reducing the value of the covenant. It also takes account of changes in market conditions since the valuation date of March 31, 2009.  Following discussions with the Pensions Regulator, the opportunity has been taken to use the recovery in asset markets to increase the margin of prudence in the valuation, rather than lower the contribution commitment required.

The airline concluded consultation with its trade unions in March 2010 on the pension changes and a reduction in benefits. Alternatively, NAPS members can pay 4.5 per cent more in additional contributions to maintain their existing benefits. The changes are being made to enable the schemes to remain open to current members. 

British Airways chief financial officer, Keith Williams, said: "This agreement is a significant and positive step forward for British Airways and the pension scheme members.  The trustees understand that the airline is unable to increase its contributions in the current financial climate but we have agreed a recovery plan that avoids closing the pension schemes, gives NAPS members choice over their future pension accruals, and increases the prudence of the assumptions employed in managing the scheme. The Pensions Regulator's initial response to the overall package has been positive and we look forward to receiving their confirmation that they have no objections once they have time to analyse the plan fully".

The merger agreement between British Airways and Iberia enables Iberia to terminate the agreement if the pension recovery plan is not, in Iberia's reasonable opinion, satisfactory because it would be materially detrimental to the economic premises of the proposed merger. All contributions into the British Airways' pension funds will continue to be funded by British Airways and will not be funded by Iberia or the merged holding company International Airlines Group.  Iberia has three months to reach a decision on the pension recovery plan.

ends

June 22, 2010                                                                            54/LG/10

NOTES TO EDITORS

Valuation Assumptions

In December 2009 the trustees and the airline reached an agreement in principle on the valuation of each scheme at March 2009.  For NAPS this was based on a real discount rate of 2.5 per cent and resulted in a deficit of £2.7 billion.  The Pension Regulator sought justification for the underlying assumptions of the valuation on the basis it would typically expect a lower discount rate to be used.  Subsequent discussions covered the changes in the funding position since March 2009 and recognised the unusual market conditions at March 2009.

As a starting point for the NAPS recovery plan, the trustees decided to review the March 2010 asset position, by which time the assets were approximately £2 billion higher than at March 2009.  The asset improvement has been used to increase the margin of prudence allowed for when setting the recovery plan.  This would be equivalent to using a real discount rate at March 2010 of 1.7 per cent.  The trustees have assumed that a small part of the recovery in the scheme comes from assets performing 0.3 per cent higher than this level.  On this basis the trustees and company have agreed deficit contributions running until 2026.

Discount Rates and Prudence

Discount rates are used to value pension liabilities based on the assets held and the level of expected investment return.  A real discount rate of 1.7 per cent implies an investment return of 1.7 per cent higher than the rate of inflation in the long-term i.e. if inflation is 3 per cent then the assets would be expected to return 4.7 per cent per annum.  Funding regulations prescribe that a level of prudence is factored into the assumptions, reflecting the risks associated with the nature of the assets and liabilities, as well as the covenant of the scheme sponsor. 

The APS and NAPS discount rates both take a prudent approach.  If the actual rate of future investment return is in line with a best estimate, rather than the prudent assumption used in setting the recovery plans, then the deficit contributions would be sufficient to repay the deficits by 2018 in the case of APS and 2019 in the case of NAPS.

Scheme Changes

In the NAPS scheme members currently pay 8.5 per cent with a normal retirement age of 60 (Plan 60) and 5.25 per cent for a normal retirement age of 65 (Plan 65), both with a 1/60 accrual rate.  These rates will rise by 3 per cent in October 2010 and a further 1.5 per cent in October 2011. 

Instead members can opt for alternative lower accrual rates, in which case contributions will be:

Plan 60:

1/67 accrual rate            9.25 per cent from Oct 2010, 10.75 per cent from Oct 2011

1/75 accrual rate            7 per cent from Oct 2010, 8.5 per cent from Oct 2011

Plan 65:

1/67 accrual rate            6 per cent from Oct 2010, 7.5 per cent from Oct 2011

1/75 accrual rate            3.75 per cent from Oct 2010, 5.25 per cent from Oct 2011

Contribution rates will be reduced for the lower paid employees.

In the APS scheme, pensionable pay will be frozen until the next valuation.

 

END

 

 

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