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.