BAE 'quietly positive' on 2009 despite £500m needed to top up pension deficit

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The Independent Online

BAE Systems, the defence group, will have to pay an extra £500m into its pensions pot this year because stock market falls have added more than £2.2bn to the schemes' deficit.

Some £200m is expected to go into the UK scheme, and $250m (£174m) into that in the US, on top of standard payments along similar lines to the £399m paid in last year, the company said yesterday. A further £132m will be paid into the schemes bought with various acquisitions this year.

Ian King, the chief executive of BAE, said: "There is some short-term funding needed but it is not on a scale to impact the business of the group in delivering its long-term strategy."

Apart from its pensions exposure, the defence industry is largely insulated from the ructions in the world's financial markets. BAE's financial results for 2008, also published yesterday, showed sales up 18 per cent to £18.5bn. Earnings before interest, tax and amortisation were up 31 per cent to £1.9bn. And operating cashflow of £26bn left a net cash balance of £39m. The dividend is to go up by 13.3 per cent to 14.5p.

Expectations for 2009 also remain optimistic. Despite the scaling back of supply of mine-resistant vehicles for the US military in Iraq – a big winner this year – increasing delivery of Typhoon fighter jets will more than compensate, according to Mr King. The group has a £46.5bn order book, a fifth higher than at the end of 2007, buoyed by a number of major multi-year contracts including US land vehicles deals and the UK Future Aircraft Carrier contract. "We are quietly positive about our performance for 2009," Mr King said.

With net investments of £1bn in 2008, including Detica in the UK and MTC Technologies in the US, BAE is set to stay on its acquisitive course. Key areas for both organic and inorganic expansion are the security, support and unmanned air systems businesses. "Our shareholders are keen to continue the acquisition strategy," Mr King said.

The biggest threat to BAE's 2009 performance is a reduction in defence spending. In the US, budgets may shrink after almost a decade of growth, although the President's commitment to increasing troop numbers in Af-ghanistan may hold steady.

In the UK, the industry is waiting for the follow-up to the 2005 Defence Industrial Strategy, and experts do not rule out delayed or cancelled programmes given the existing defence budget deficit.