Pensions blow for BT as Ofcom blocks price rises

BT's attempt to raise prices to help it plug a £7.5bn black hole in its pension scheme was blocked by the communications watchdog yesterday.

Ofcom refused to alter how it takes BT's pension costs into account when setting charges for the landlines and broadband services the company sells to rivals. The broadband providers British Sky Broadcasting (BSkyB) and Talk Talk had asked Ofcom to block BT's move to raise its wholesale prices.

The regulator currently takes BT's ongoing pension payouts into account but excludes any payments to reduce the deficit. Yesterday, it said it had "not received compelling evidence" from stakeholders which would justify any change in approach. "Therefore, in this second consultation, Ofcom proposes that the current approach to the treatment of BT's pension costs be maintained," the watchdog added.

One BT insider called the decision "neutral" for the company, adding that a more positive result would have recovered "tens of millions of pounds" but would not have had a material impact on the deficit.

Ofcom has been consulting about the issue since December, when it asked stakeholders if there were good reasons for changing how it accounted for BT's pension payments. Ofcom said it believed its current position provided "consumers with regulated prices that most closely match a fully competitive market". The alternative could lead to fluctuations in BT prices linked to changes in the pensions shortfall, it added, "which would not provide certainty for stakeholders and would, potentially, lead to those prices being set at levels which do not accurately reflect the relevant underlying costs".

BT declined to comment on the financial implications of the decision but said: "It is right that Ofcom has considered this matter, as there is regulatory precedent from other industries for BT to be able to recover some proportion of its total pension costs through regulated charges.

"There are a number of elements of this consultation that we will now review in detail and respond to in due course." Ofcom intends to publish a final statement by the end of the year.

BT pumps £525m a year into the fund to pay down the deficit. However, in February it said it had failed to agree with the Pensions Regulator its plan to plug what was then a £9bn "black hole". At the company's annual meeting on Thursday, the chief executive, Ian Livingston, said the deficit had fallen to £7.5bn as equity markets recovered. Negotiations with the Pensions Regulator are continuing.

Ofcom said that during the consultation it studied three possible areas for change which might bring "regulatory certainty and consistency" to BT's pension costs: the deficit repair payments, the cost of capital (the sum BT is allowed to make from investments) and ongoing service costs (essentially payments made to people drawing pensions). It decided not to change any of the three.

As well as the dispute with the Pensions Regulator, BT is awaiting the results of a review of its "Crown protection guarantee" – the amount of state support the pension fund could expect if BT collapsed. The case was heard at the High Court this month.