David Prosser: BT to reverse the pension charges

Outlook Not a bad day for Ian Livingston, CEO at BT. His elevation to the top job at the telecoms giant in June 2008 was something of a hospital pass: within months he had to issue a shock profits warning after a disastrous performance from BT's Global Services division, and a series of other problems also loomed large. But yesterday's trading update, however, suggests Mr Livingston's hard-nosed approach is beginning to have an impact.

Costs have been stripped out, particularly at Global Services, and BT feels able to raise its forecasts on cost savings, revenues and dividend payments. Unlike other former State monopolies one might mention, it has even managed to come to a crucial agreement with staff unions, persuading the CWU its members should work more flexible hours.

And yet. The one thing Mr Livingston is powerless to control is BT's whacking pension deficit, which at £9.3bn is now running at more than three-quarters of the company's total market capitalisation. There is nothing to be done about the legacy costs of the plan, or new accounting rules that require BT to reflect the deficit in more detail in its accounts.

Here's the good news, however. BT's pension deficit has soared because bond yields – the yardstick for calculating future liabilities – have fallen sharply as the world's central banks have forced down long-term interest rates. When that trend reverses, as one day it will, BT will be a beneficiary. For Mr Livingston, the pension scheme will always remain something of a millstone, but in years to come, it may be less burdensome than the latest figures suggest.

Also in BT's favour is the idea currently being floated by Ofcom that it might soon be able to factor in pension costs when billing rivals such as Cable & Wireless and Carphone Warehouse for using its networks. Charges are regulated to prevent BT using its control of Britain's telecoms infrastructure to stifle competition, but it does seem perverse that no account of the payments BT must make towards reducing its pension deficit is currently taken when these fees are set. Every other privatised utility, as well as the Royal Mail, is now free of this restriction.

Like British Airways and the Post Office, BT has to work within the constraints of a pension problem not of its own making, or at least not of its own making during its history in the private sector. Analysts have even begun to talk of these businesses as pension funds that happen to have companies attached.

What BT may yet prove, however, is that getting the job done at these companies, assuming they retain sufficient scale, may enable them to rise above the pension problem – and even to compete with their less encumbered competitors.