Pension scheme deficits agree

RNS Number : 0436E

British Airways PLC

14 December 2009

 



PENSION SCHEME DEFICITS AGREED WITH TRUSTEES

British Airways and the trustees of the Airways Pension Scheme ("APS") and the New Airways Pension Scheme ("NAPS") have reached provisional agreement on the actuarial basis to calculate the deficits in each pension scheme as at March 31, 2009. 

On the basis of this agreement, the deficit in APS would be £1.0 billion and the deficit in NAPS would be £2.7 billion.  

British Airways, working with actuarial advisors Hewitt Associates and KPMG, and the schemes' trustees, advised by Watson Wyatt, have taken extensive independent advice in arriving at this agreement. This includes a thorough assessment of the company's credit status, which is a standard requirement of the funding review, undertaken by PricewaterhouseCoopers ("PwC") on behalf of the trustees.

The airline and trustees will now work together to develop a recovery plan, a process which will involve the company consulting with employees and their trade unions. The regulatory deadline for the valuation process, including agreement on future contributions required and the recovery plan, is June 30, 2010.  

Both the valuation and the recovery plan are subject to review and approval by the Pensions Regulator. The Regulator has had only limited information, and has not had the opportunity to carry out a detailed assessment of the assumptions used. The Regulator's provisional view is that the technical provisions may be materially below a level it feels appropriate. The trustees and BA look forward to working with the Regulator to complete a detailed review.

To avoid concerns about any perceived conflict of interest with his role in the Iberia merger, British Airways has asked Roger Maynard to step down as the chairman of trustees of the boards of APS and NAPS to focus on his Iberia role. A replacement will be appointed shortly. British Airways would like to thank Roger for his outstanding contribution and diligence in his role as chairman of trustees over the last five years.

  NOTES

Pension liabilities extend over very long periods of time. APS and NAPS are expected to pay benefits for over 80 years. As a result pension valuations are highly sensitive to the assumptions used in the valuations.

Funding regulations prescribe that a level of prudence is factored into the assumptions to reflect the risks associated with the nature of the assets and liabilities as well as the covenant of the scheme sponsor.  

In determining the assumptions for the valuation, the trustees and their advisors have considered the covenant of British Airways as determined by PwC, who have supported the trustees on covenant matters for more than four years.

The valuation approach and methodology is consistent with that used for the last triennial valuations in 2006. The detailed reports of these valuations can be found at www.mybapension.com.  

The assumptions agreed between the trustees and British Airways are summarised below and result in the agreed combined deficit of £3.7 billion.  

If the valuation results were compared with a best estimate approach, i.e. looking at how the assets might on average be expected to perform over time, without any allowance for prudence, this would give a combined deficit of approximately £1 billion. This implies the prudence margin is valued at around £2.7 billion, or some 20 per cent of the liabilities on this basis.

If the valuation results were compared with an "all-gilts" approach, i.e. looking at how the assets might be expected to perform over time, without any allowance for investment out-performance above gilts, this would give a combined deficit of approximately £8 billion.

  ASSUMPTIONS AGREED BETWEEN BA AND THE TRUSTEES

Discount rate 

APS - set with a term-dependent discount rate using a full nominal gilt curve, with an addition of 0.5 per cent. This is equivalent to a single discount rate of approximately 4.6 per cent per annum.

NAPS - 6.1 per cent per annum, equivalent to 2.5 per cent compound real return over inflation. This is set by taking a prudent view of the anticipated return on the expected portfolio of assets at different durations relating to the liabilities of the scheme.

Price inflation 

Break-even inflation is derived from the difference between the full index-linked and nominal gilt curves. The equivalent single inflation assumption is approximately 3.1 per cent per annum in APS and 3.5 per cent in NAPS, reflecting the different average durations of the schemes.

Pension increases 

The precise nature of increases differs by type of member and category of membership. The assumptions have been derived directly from the price inflation assumption, with an appropriate allowance for minimum and maximum increases and volatility.

Life expectancy

This is based on a detailed review of the scheme experience and building in an allowance for future improvements using the medium cohort improvement factors with a floor of 1.25 per cent per annum.

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December 14, 2009                                                                                                                       132/LG/09

 

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