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I have commented on this before, although without knowing the full detail. My understanding is the BT fund takes out longevity insurance which offsets costs associated with any fluctuations in mortality rates.
Based on the above, the BT pension fund will not benefit from pensioners dying early or lose out from them living longer.
The problem is not with BT. It's a macro issue. All the stock markets have lost any forward momentum over the last few months (particularly the last few weeks). Technical analysis may even point to a US stock market crash in the next few months with the continual tightening of lending, huge bond positions being held by the big banks and hopes of stimulus receding. The price of gold has dropped back (deflation?).
Although BT would not deserve to be pulled down in such a scenario, it would probably happen.
Thanks for posting.
Https://www.thetimes.co.uk/article/fears-about-pensions-and-ofcom-will-deter-takeover-bid-for-bt-rg97rrcxr
The chief executive of BT has suggested that uncertainty over regulation and its pension deficit would help protect the telecoms group from any takeover threat and that it could not just be picked up “on the cheap”.
This statement is very concerning for investors. Is he implying they have no control over future cashflow in terms of prices they may be able to charge, unpredictable debt levels etc.
Can anyone with a subscription to the Times post the above article in its entirety? It would be much appreciated.
Thank you.
https://www.bbc.co.uk/news/technology-54797917
perhaps someone with a firm grasp on such things can give an opinion?
Thanks in advance.
The pension fund deficit can get an awful lot worse. I think this is part of the reason the shares are valued so low.
"With pensions, you want to know how quickly the pensioners die off, or mortality rate.
In normal times, you look at the ages of the already retired, and future annuitants,
and come up with a cashflow plan. Note that COVID-19 tends to accelerate the deaths.
A good thing if you want to reduce the pension deficit."
Unfortunately I think COVID will have little impact on reducing the deficit. These days DB schemes take out Longevity insurance which aims to minimise any fluctuations in mortality rates (the pension fund gets payouts from the insurance if members live longer or pays the insurer if members don't live as long ). Remember the fund is trying to fix as many variables as it can to cost out future liabilities accurately.
"International Accounting Standards (IASs) dictates that you have to work out your figure the same way as everybody else."
I don't think this is correct. My understanding is the discount rate used to calculate the pension fund liabilities is based off of AA corporate bonds which leaves a lot of scope for which figures are used as the yields on AA bonds vary significantly.
Fortunately BT uses a very conservative figure vs other DB schemes and is more likely to be true picture of what is going on.
Generally speaking all DB schemes are a ticking time bomb right now and I feel one should be wary investing in any company associated with them. Rest assured these will be making the wrong kind of headlines over the next few years.
It's not about a trading philosophy Fleccy, it's about recognising losses.
Do you think a pension fund should value its assets based on purchase prices seeing as plenty of its liabilities fall way into the future?
Ay any point in time, regardless of the price of BT, you are making an investment decision. You don't have to buy or sell shares to make an investment decision. You have implied you would hang on to BT now based on the CURRENT PRICE. That is a totally separate investment decision to the one you made when you acquired shares at 5 times the price with a whole different set of variables to consider. Thus, the current price is totally relevant. Through bad luck or poor judgment that was an unfortunate call but you can't hide from it by pretending it doesn't count.
Eventually you'll get a call right with BT but the missed opportunuty cost with the way the markets have run in the meantime means your investment decision to just sit on a pile of BT shares has been incredibly poor.
"The price only comes into effect when you sell, if you do not sell then until you do the price has no relevance as to weather you profit or loss."
This is the stuff of madness.
With broadband access for all now being considered essential, any thoughts on where this could lead?
https://www.bbc.co.uk/news/business-54593185
yes but the other 3 main articles on the actuary website page are far more relevant for a balanced view point.
I think the pension fund deficit of a billion odd announced at the end of march came with a few caveats which were alluded to in the announcement.
I assume when you a produce a report with complex valuations etc. there will be a lag between prices used for the report and actual prices as at the end of March. Transparency would be tricky. Certainly, the commercial property element of the portfolio would have been overvalued based on a lack of data due to lack of transactions.
Bearing in mind the volatility in the markets around March (check out the volatility index) I would view 1 BN with extreme caution. Personally, I think a deficit of above 5 BN is now highly likely. I base this on what has been reported around other pension funds in terms of current valuations and is not backed up by any hard data on BT.
Also, I'm of the opinion bond yields are only going lower which will increase the deficit and enhances the problems EMMJANE has outlined. Try getting an annuity paying a reasonable sum. How much money do you think you will need!!?
All this obsession with company fundamentals right now are a waste of time. Share prices are being driven by the macro economic picture.
The market understandably refuses to believe every CEO coming out and proclaiming billions of pounds in cost savings over the next few years bearing in mind the situation we're in right now. Revenues are also likely to fall and the pension deficit has almost certainly soared once more.
BT appears to be heavily reliant on governement subsidy for their FTTP role out plan at a time when the government has an awful lot of priorities with their money. Saying that, I do think the government will invest in the FTTP rollout but will want a hefty return on their investment. It will be done on their terms as BT need the cash and they won't have a choice to go it alone.
The long term outlook for 5G seems positive and BT appear to be well placed to capitalise.
In my opinion, it's a long term buy. Short term buy, sell, buy, sell..........!!!!
Tony 2119 what you are describing is essentially a different product. I agree there will be take up of this product allbeit gradually.
What I am saying is like for like right now, BT is too expensive against its competitors and has managed to get away with higher margins. Possibly their customer service is better (although surveys may suggest otherwise) but I believe this margin is unlikely to continue in the short to mid term as there will be plenty of customers with less disposable income.
"However what is not priced in bt that I think has major effect, is there is signs of service and goods inflation, but wage inflation will be subdued going fwd due to mass unemployment increase."
I recently negotiated a 20% reduction in price on my BT broadband package as did my father in law plus BT are still relatively more expensive vs other providers. I think there will be a squeeze on revenues over the next year or two.
There will be no bid forthcoming anytime soon.
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.