James Moore: BAE's buyback hardly diverts attention from its huge pensions black hole

Outlook BAE Systems has been a byword for bad news in recent years but long-suffering investors were finally given something to smile about. The company's results weren't as bad as had been feared and there was a cherry on top of the cake in the form of an unexpected £1bn share buyback.

Usually when BAE has offered up a surprise it's been a bad one. We've seen bad deals, most recently the failed bid to merge with European aerospace group Eads. We've seen dodgy deals, resulting in investigations by the Serious Fraud Office. Perhaps of most concern to shareholders, however, is the ongoing decline in deals. At least when it comes to profitable new orders.

But from the way the shares performed, you'd think every sheikh in the Middle East had been buying new high-tech kill toys.

On a day when City dealing screens showed a sea of red as the FTSE 100 went into reverse, BAE stood out. Who knows, maybe the buyback will successfully buy off the critics of BAE's management. There's nothing like a short-term bung to keep the City's dogs at bay.

Longer term, however, the buyback raises far more questions than it answers.

The logic of the plan is questionable. Buybacks pay shareholders who want out at the expense of those who remain.

In this case those who remain will still be saddled with a significant risk: BAE's enormous pension liabilities. They stand at £25bn, well over twice the company's market value, while the funding deficit of £4.6bn stands at about 40 per cent of it.

BAE says it has agreed a deficit reduction plan with trustees and the Pensions Regulator and that the buyback will be accompanied by a further influx of cash into the pension scheme. It's also true that an increase in the yields on government bonds will further reduce the size of the deficit, and quite significantly.

Better hope so. Those numbers make the company "stick out like a sore thumb" in the words of John Ralfe, the independent pensions consultant who took the risk out of Boots' pension scheme. There's an awful lot to be taken on trust here.

The Eads proposal caused a furore with an army of critics lining up to argue it would hand Britain's most important defence contractor to a political construct under the de facto control of the French and the German governments. They fretted about the impact that might have on this country's ability to defend itself and on its close relationship with the Americans (also a big customer of BAE).

The black hole in the funding of BAE's enormous pension obligations poses just as great a threat. And yet the blood and thunder from retired military men and other critics is absent.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Buttoned up: Ryan Reynolds with Helen Mirren in ‘Woman in Gold’
filmFor every box-office smash in his Hollywood career, there's always been a misconceived let-down. Now he says it's time for a reboot
News
people
News
Actress Julianne Moore wins the Best Actress in a Leading Role Award for 'Still Alice' during the 87th Annual Academy Awards in Hollywood, California
people
Sport
Ross Barkley
footballPaul Scholes says it's time for the Everton playmaker to step up and seize the England No 10 shirt
News
'We will fix it': mice in the 1970s children’s programme Bagpuss
science
Life and Style
2 Karl Lagerfeld and Choupette
fashion
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Graduate Recruitment Resourcer

£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...

Recruitment Genius: Telesales Executive - OTE £32,000+

£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Day In a Page

War with Isis: Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria's capital

War with Isis

Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria
Scientists develop mechanical spring-loaded leg brace to improve walking

A spring in your step?

Scientists develop mechanical leg brace to help take a load off
Peter Ackroyd on Alfred Hitchcock: How London shaped the director's art and obsessions

Peter Ackroyd on Alfred Hitchcock

Ackroyd has devoted his literary career to chronicling the capital and its characters. He tells John Walsh why he chose the master of suspense as his latest subject
Ryan Reynolds interview: The actor is branching out with Nazi art-theft drama Woman in Gold

Ryan Reynolds branches out in Woman in Gold

For every box-office smash in Ryan Reynolds' Hollywood career, there's always been a misconceived let-down. It's time for a rethink and a reboot, the actor tells James Mottram
Why Robin Williams safeguarded himself against a morbid trend in advertising

Stars safeguard against morbid advertising

As film-makers and advertisers make increasing posthumous use of celebrities' images, some stars are finding new ways of ensuring that they rest in peace
The UK horticulture industry is facing a skills crisis - but Great Dixter aims to change all that

UK horticulture industry facing skills crisis

Great Dixter manor house in East Sussex is encouraging people to work in the industry by offering three scholarships a year to students, as well as generous placements
Hack Circus aims to turn the rule-abiding approach of TED talks on its head

Hack Circus: Technology, art and learning

Hack Circus aims to turn the rule-abiding approach of TED talks on its head. Rhodri Marsden meets mistress of ceremonies Leila Johnston
Sevenoaks is split over much-delayed decision on controversial grammar school annexe

Sevenoaks split over grammar school annexe

If Weald of Kent Grammar School is given the go-ahead for an annexe in leafy Sevenoaks, it will be the first selective state school to open in 50 years
10 best compact cameras

A look through the lens: 10 best compact cameras

If your smartphone won’t quite cut it, it’s time to invest in a new portable gadget
Paul Scholes column: Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now

Paul Scholes column

Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now
Why Michael Carrick is still proving an enigma for England

Why Carrick is still proving an enigma for England

Manchester United's talented midfielder has played international football for almost 14 years yet, frustratingly, has won only 32 caps, says Sam Wallace
Tracey Neville: The netball coach who is just as busy as her brothers, Gary and Phil

Tracey Neville is just as busy as her brothers, Gary and Phil

The former player on how she is finding time to coach both Manchester Thunder in the Superleague and England in this year's World Cup
General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?