BAE, Britain's biggest defence contractor, yesterday agreed to inject £700m-£800m into its pension fund as part of ground-breaking deal to close the £2.4bn deficit in the scheme.
The agreement with its unions will also mean scheme members having to bear 40 per cent of any future increase in liabilities as a result of employees living longer, either by retiring later or taking benefits at a reduced rate.
BAE's deficit is the second biggest relative to market capitalisation of any FTSE 100 company and it has been working with its employees to plug the hole for more than a year. The deal, which was backed yesterday by its unions, now needs to be put to the trustees of the pension scheme for formal approval.
The breakthrough came on the same day that the Defence Secretary John Reid, in Glasgow for the launch of the first of six Type 45 destroyers for the Royal Navy, hinted that an order for a further two was not far away. BAE shares climbed 4 per cent.
In total, the deficit across all of BAE's pension schemes stands at £4.4bn. A year ago, BAE disclosed that a new actuarial calculation of life expectancy was partly responsible for a £1.2bn increase in the deficit.
Colin Grant, the aerospace and defence analyst at Dresdner Kleinwort Wasserstein, said the agreement could set a precedent for settling the deficits in BAE's three smaller schemes. He calculated that every three years added to the life expectancy of BAE's workers increased its pension liability by £800m.
Mike Turner, BAE's chief executive, said: "In addressing the pension deficit our aim has been to reach a result which is in the best long-term interests of our employees and remains affordable to the company."
British Airways is also grappling with a £1.4bn pension deficit - the biggest of any FTSE 100 company relative to capitalisation - and expects to present proposals towards the end of this month.
The new Type 45 destroyer, HMS Daring, was launched from BAE's Scotstoun yard on the Clyde by the Countess of Wessex. It is the most powerful destroyer ever built in the UK. The MoD is buying six but Mr Reid indicated the order could rise to eight. "If the price is right, we'll have seven and eight," he said.