BT may be forced to stump up more cash to support its £47bn pensions scheme after the government’s disastrous mini-budget, which prompted a market meltdown and forced pension fund managers to tighten hedging strategies.
The fund’s managers, who run one of the largest corporate pensions schemes in the UK with about 269,000 members, told MPs that they had become “more cautious” and increased the amount of collateral they held, in order to avoid another fire sale of assets.
However, the BT pension scheme management said efforts to bolster financial buffers and reduce risk could ultimately require BT to put up more cash to support its retirees.
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“We have become more cautious in how we manage the scheme’s liquidity and have increased the collateral buffer to which we operate. This will position the scheme to better weather any further volatility in the gilt market but will also reduce the expected returns from our assets,” the fund’s managers said in a letter to the work and pensions committee.
“However, the scheme does need to achieve a certain level of investment return to achieve its 2034 funding targets and if expected returns fall below this level then the scheme may need more support from BT in future valuations than previously anticipated,” they said.
The BT scheme, which pays out £2.5bn to retirees each year, has a £4.4bn deficit and plans to become self-sufficient by 2034.
However, like most defined benefit schemes across the UK – which guarantee a set pension on retirement no matter how well or badly investments have performed – it relied heavily on liability driven investment (LDI) hedging arrangements, which involved holding government bonds as collateral.
When the value of government bonds dropped dramatically after the disastrous Liz Truss-Kwazi Kwarteng mini-budget, pension trustees were forced to sell their holdings at speed to raise cash. This drove down the value of bonds further, causing a “doom loop”.
Within days, the Bank of England had to step in with a £65bn emergency bond-buying programme to prevent a large number of LDI funds from going bust.
BT’s pension scheme said the “unprecedented” volatility meant it faced “significant collateral calls during this period”, forcing managers to first put forward all of its holdings in UK government bonds, before moving on to company shares that it held on behalf of the scheme.
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Packaging firm DS Smith revealed on Thursday it had already been forced to ensure that £100m was available for its defined benefit scheme after the market turmoil in order to meet emergency margin calls, but said this was repaid within days.
Margin calls occurred in cases where collateral provided by the pensions funds fell below levels required by their hedging contracts. It meant they had to come up with money quickly, including by selling bonds and shares, to make up the difference.
The managers of BT’s scheme said there was no worsening of the scheme’s overall funding position, given that the value of assets and liabilities both fell during this period. However, without the Bank of England’s interventions, managers admitted BT’s pension fund “would have found it increasingly challenging to meet further collateral calls”.
BT’s pension scheme has managed to nearly plug half its deficit since 2020, when the shortfall stood at £8bn. And despite the turmoil caused by LDI strategies, BT said its 2020 deficit may have topped £15bn had it not applied those hedging arrangements. That would have required BT to pay “significant additional contributions to repair the deficit”.
