BA to keep final-salary pension scheme despite £1.4bn deficit

British Airways has decided not to follow the lead of Rentokil Initial and solve its huge pension deficit by closing its final-salary scheme to existing members.

The BA scheme has a deficit of £1.4bn on an FRS17 basis, making it the biggest in the FTSE 100 relative to market capitalisation. But shutting the scheme entirely would force the airline to crystallise the deficit on a fully funded basis, costing it an estimated £3bn.

This would put a huge additional burden on BA's finances at a time when it could soon be facing major investment decisions, including an order for new long-haul aircraft potentially worth up to £10bn.

Willie Walsh, BA's chief executive, appeared to rule out closure of the final-salary scheme yesterday, saying: "It does not feel like the right solution for us." In BA News last week Mr Walsh pledged that while BA was determined to solve the deficit "once and for all" it would not be at the expense of investment in the business.

BA will put initial proposals for tackling the deficit to employees and pension fund trustees next month at the same time as Mr Walsh unveils his much-anticipated business plan for the airline.

The scheme has 34,500 active members and contribution rates of 5.25 per cent for ground staff and 6.5 per cent for flying crew. BA doubled its annual contributions to £225m in 2003. Options range from forcing staff to increase their contributions to moving from a final salary to an average-salary arrangement and increasing retirement ages.

New retirement age legislation from Brussels, which is due to take effect in October, could raise the pensionable age of BA flight crew from 55 at present to 60, but non-flying staff already have to work until they are 63 or 65. Mr Walsh said an increase in contributions alone would not be sufficient.

He was speaking as BA announced plans to cut costs in its loss-making UK regional operation by 10 per cent or £35m a year. The operation will change its name from CitiExpress to BA Connect and will move to single-class cabins on all 50 of the aircraft and one-way fares starting at £25 to compete with the no-frills carriers.

David Evans, the managing director of CitiExpress, said there would be no compulsory redundancies but staff numbers would be reduced from 2,250 through natural wastage, which is running at 10 per cent.

The operation, which is set to lose about £20m this year, has two years in which to break into profit, otherwise it will be sold or closed down.