BT pension deficit 'may be £3bn more than estimated'

BT's pension fund deficit could be £3bn higher than stated in the company's accounts because it is under-estimating how long people will live, an independent analysis suggested yesterday.

If an increase in the deficit of that amount were to be fully reflected in BT's share price it would wipe around 8 per cent from the company's stock market valuation, said the pensions consultant John Ralfe.

In a note for RBC Capital Markets, Mr Ralph says that if BT used the same assumptions of longevity as Royal Mail and the Pension Protection Fund, then its deficit would rise from £2.5bn to £5.5bn.

BT and Royal Mail have similar pension schemes with 350,000 members in the former and 400,000 in the latter. They also use the the same retirement age of 60 and the same actuarial adviser, Watson Wyatt.

But Royal Mail expects 60-year-old men and women to live between two and four years longer than BT. While BT assumes a 60-year old man will live to just under 84, Royal Mail puts life expectancy at 86. For women aged 60, BT puts life expectancy at 85.4 but Royal Mail calculates it at 89. The deficit in Royal Mail's pension fund is £5.6bn.

Mr Ralfe said he accepted that it might be "politically convenient" for Royal Mail to use more generous longevity assumptions to push up its deficit, thereby putting pressure on the Government to provide more financial help and the regulator to allow bigger price increases. But he pointed out that the assumptions of life expectancy used by Royal Mail were the same as the benchmark recommended by the PPF.

The latest estimate of BT's pension deficit comes as the telecoms giant prepares to unveil interim profits tomorrow. It is not expected to update the market on the deficit because it is awaiting a three-yearly actuarial review of the scheme.

This has been delayed by a dispute between the company and the Treasury over whether the bulk of its £38bn in pension liabilities is guaranteed by the Government. BT argues that three-quarters of the liabilities should fall to the state because they relate to pension entitlements built up before the company was privatised. The Treasury says the guarantee is much more narrowly defined.

The liabilities affect the levy BT has to pay to the PPF and the contributions it will need to pay off the deficit over a period of time.

A BT spokesman said: "BT's mortality assumptions are calculated by an independent actuary... The assumptions are up to date, make allowance for further improvements, are fully disclosed and are prudent. Clearly it is inappropriate for BT to comment on another scheme's mortality assumptions."