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"Could all work out in favour of the fund but then again it might not. The point is, the risk has gone up and you have to pay to mitigate that risk with various forms of (expensive) insurance!"
Well we'll know by next March/April. Pension funds are well hedged against events like the current pandemic, so a lot will depend on how they allocate their current cash holdings. I would hope the pension fund uses the cash in a sensible way. The recent fall in the deficit, is a positive in my view and suggests that the pension trustees will invest cash holdings sensibly going forward. I would hope they'd be looking at ways to wipe out the deficit completely.
Alas there are huge risks associated with inflation linked bonds also right now for pension funds.
https://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3530
Take a look at the yields. Matching income streams to future liabilities is going to be very problematic whilst preserving capital in the fund.
Could all work out in favour of the fund but then again it might not. The point is, the risk has gone up and you have to pay to mitigate that risk with various forms of (expensive) insurance!
"Anything structured in 2017 re the pension fund is simply no longer valid. Going forward, contributions are going to need to go up massively as both long and short dated gov. bond yields have evaporated. This is a serious problem."
Your statement doesn't stand up against the 2019 pension Report & Accounts
100% of the Government Bonds are in Index linked Gilts, tied to RPI, so the return on these will depend on Inflation. The pension scheme was hedged to a certain extent against Black Swan events, so that may also explain the cut in the deficit.
"Investment grade corporate bonds
Over the course of the year, the Scheme’s investment
grade corporate bond allocation gradually became
more liability “cash flow” focused, increasingly aligning
maturities and interest payments with pension liabilities.
At 30 June 2019 approximately 43% of the Scheme’s
exposure to investment grade corporate bonds was
allocated to UK corporate bonds and the remaining
57% was invested globally.
Government bonds
100% of the Government bonds allocation was
invested in index-linked gilts at 30 June 2019"
Thanks fleccy. Haven’t had the time to put that info out for any scaremongers.
I don't see the pension deficit increasing in the current environment. Interest rates are staying low for the foreseeable future.
Breakdown of asset allocation as of 30th June 2019:
Equities 22%
Government bonds and cash 29%
Investment grade credit 27%
Other growth assets 13%
Property 9%
Total 100%
Nearly 60% of the fund were invested in Government/Corporate Bonds and cash, which might explain the decrease in the deficit in view of the pandemic. With 22% invested in Equities, it's hard to tell the effect of those assets without knowing what they are. The report says:
"Equities
At 30 June 2019, approximately 87% of the Scheme’s
equity allocation was invested in publicly listed securities
whilst the other 13% was invested in private equities.
Furthermore, the Scheme hedged part of its total equity
exposure through a derivatives strategy.
Public equities
Approximately 37% of the listed equities exposure was
allocated to a blend of “factor-weighted” mandates
providing exposure to quality, low beta companies,
companies which are assessed as offering good value
based on profitability and other balance sheet metrics
and mid and small cap companies. The quality, low beta
and value mandates are passively managed. The other
63% of the listed equities exposure is allocated to active
managers whose objectives are to outperform their
respective listed equity benchmarks.
Private equities
The majority of the Scheme’s private equity allocation
is managed by Hermes GPE LLP with a global strategy
deployed through a combination of private equity funds
and co-investments. The private equity allocation is
expected to outperform the MSCI World Index by
3% per annum by taking advantage of illiquidity and
complexity premia."
https://www.btpensions.net/assets/uploads/documents/BTPSM-0039-RA-2019-INTERACTIVE-v1b-281119.pdf
Anything structured in 2017 re the pension fund is simply no longer valid. Going forward, contributions are going to need to go up massively as both long and short dated gov. bond yields have evaporated. This is a serious problem.
Youliveyoulearn......"I'm afraid investors are still living in dreamland with regards to the current issues with large pension fund deficits. There is only bad news ahead and the risks in managing such deficits have risen exponentially."
BT have addressed the pension deficit with the 2017 agreement in place with BT agreeing to make large contributions over the next 9 years, with £400k already paid this year, and should be in good hands.
I will take my chances with BT that looks cheap to me. I'm sure that we will all look back and say did BT really drop to 98p. When the majority of the Fibre is built, the BT share price will recover to a sensible valuation. JMO of cause.
The thing is, BT gave staff the pension, the staff did not demand it. BT has caused its own problem in this area by effectively taking payment holidays. At least, unlike many others, BT is doing the right thing by its pensioners.
I'm afraid investors are still living in dreamland with regards to the current issues with large pension fund deficits. There is only bad news ahead and the risks in managing such deficits have risen exponentially.
"Typical Sunday journalism that couldn't even get their pension deficit figures correct."
I think the article was designed to scare BT stock holders. The fact that they used sentences like, "If the company were to collapse, the pension scheme would own a chunk of an infrastructure asset", shows the true intent of the article in my opinion. The truth is that BT are one the least risky investments there are.
BT Stated:
"Next phase of transformation:
annualised gross cost savings of £1 billion pa by March 2023
£2 billion pa by March 2025 to be realised through reductions in total labour costs and spend with external suppliers"
https://www.bt.com/bt-plc/assets/documents/investors/investment-overview/investor-meeting-pack.pdf
"Can’t see it, why take a share of BT that they don’t have to, if the trustees wanted that they could invest in BT shares. And the one thing not mentioned is the Elephant in the room, the scheme has Crown protection. If BT went bust the government has to pay the pensioners."
Exactly NDN, BT pensioners don't have to do anything with their pension being guaranteed if ever the worst came to the worst, by the UK government. Typical Sunday journalism that couldn't even get their pension deficit figures correct.
Thank you Nige. What a load of tosh. Firstly it would not be a good move for the trustees to acepct the sort of offer that is mentioned. The trustees are there to ensure that the best interests of the schemes members are put first, not those of the employer. If they accepted this sort of deal then what next time, 10% of the value of the vans when they are sold.
Can’t see it, why take a share of BT that they don’t have to, if the trustees wanted that they could invest in BT shares. And the one thing not mentioned is the Elephant in the room, the scheme has Crown protection. If BT went bust the government has to pay the pensioners.
I suspect when the review is over, the only thing that may change is the amount BT will pay each year as a top up, which may well be lower than at present.
The sort of journalism Boris would write.
There you go NDN, full article.......
BT is expected to offer pensioners a stake in the network as security should the telecoms operator suffer financial trouble
BT is opening talks to pledge a stake in its network to its pension scheme, as it seeks to head off demands for higher cash payments to plug its multibillion-pound funding deficit.
The former state telecoms operator has begun a triennial valuation with the trustees of Britain’s biggest private sector pension scheme, which has about 90,000 active and deferred members, and supports about 200,000 pensioners and their families.
Led in the talks by chief financial officer Simon Lowth, BT is expected to offer pensioners a stake in the network as security that their retirements will be funded should BT suffer financial trouble. If the company were to collapse, the pension scheme would own a chunk of an infrastructure asset that has been valued by bankers at £20bn.
Talks are at an early stage and may not result in a deal, City sources said.
BT and the trustees discussed such a move in 2017. Ultimately the company opted to borrow £2bn in the bond market to bring down the £11.3bn pension deficit. At the time the scheme’s assets were worth £49.3bn, compared with liabilities of £60.6bn. BT also agreed to make annual top-up payments of £900m until 2030.
By pledging a stake in its infrastructure BT would hope to avoid taking on more debt or a bigger drain on its cash. It has scrapped its dividend to cope with coronavirus and fund 20?million new full-fibre broadband lines by the mid-2020s.
The massive cost of the upgrade and the slump in BT’s share price to the lowest level in more than a decade has stoked speculation that it could bring an outside investor into Openreach, its legally separated network division.
At only £10.5bn, the whole company is valued at half the price tag applied to its infrastructure. Any potential move is unlikely to be seriously considered until pension discussions are completed next year, however.
Analysts at Redburn have forecast a deficit of £10bn, down slightly despite the impact of the pandemic on asset values and rock-bottom interest rates. BT declined to comment.
The possible reason for the drop in the pension deficit is that Pension schemes are heavily invested in Bonds and were before the Pandemic struck. Due to the Pandemic, Bond yields have dropped which means that the market price of the Bonds have gone up, hence reducing BT's Pension deficit.
"A bond's yield is based on the bond's coupon payments divided by its market price; as bond prices increase, bond yields fall. Falling interest interest rates make bond prices rise and bond yields fall. Conversely, rising interest rates cause bond prices to fall, and bond yields to rise."
I've posted this link previously, but in view of the Telegraph article I think it's worth posting again.
"BT’s total pension deficit stood at £1.1bn at 31 March 2020, down from £7.2bn the year before, as liabilities dropped from £59.4bn to £53.3bn, according to its full year results."
https://www.pensionsage.com/pa/BT-deficit-slashed-by-61bn-after-liabilities-decline.php
I've read the article and it seems to based around Redburn's Forecast of a £10 Billion deficit, but makes no mention of the recent deficit reduction. It doesn't mention Openreach, but mentions an infrastructure asset.
" If the company were to collapse, the pension scheme would own a chunk of an infrastructure asset that has been valued by bankers at £20bn."
Now Openreach is really an operations and service provider and doesn't own the infrastructure, BT does. The recently speculated £20 Billion valuation for Openreach must be what the article's referring to, which isn't infrastructure. The article is speculative and inconsistent with previous reported facts, so i will place it in my ignore bin.
Unable to read the article, so will just say this. There is currently the 3 year review of the pension scheme going on. This is normally complete by early next year with agreements in place to fund any deficit that may exist. If the plan modified in 2017 is working then no change in what is in place until 2030. If as suspected the deficit is less than planed for then the new plan could see BT paying less in than planed. I see no reason to think that in a few months it has moved from around £1b to around £10b considering how the scheme is invested and received a payment from BT earlier this year. Even if that were so as things improve over the coming year or so that would greatly reduce back to the level of the plan in 2017 around £7b deficit.
Could well be the usual story of journalists putting a spin on things, them am good at that...
Hummm .... interesting, is this a ploy to call out Drahi ... either put up or shut up !
https://www.telegraph.co.uk/business/2020/08/08/bt-pension-scheme-may-take-stake-network/
"Analysts at Redburn have forecast a deficit of £10bn, down slightly despite the impact of the pandemic on asset values and rock-bottom interest rates. BT declined to comment."
At the last pension update the deficit stood at £1.1bln. Although, warned that the deficit is expected to increase. I cannot see it increasing to £10bln.