BAE pension bill 'may need to double'

BAE Systems would have to double its pension contributions to £550m a year to meet its ambitious plans for cutting the deficit in the scheme by 60 per cent, one of the country's leading pension experts said yesterday.

John Ralfe, the former head of corporate finance at Boots, calculated that for BAE to reduce the £2.8bn after-tax deficit in the fund by £1.7bn over the next 15 years, as intended, would require an increase in contributions of about £280m a year from their present level of £271m.

BAE has the second highest pension deficit relative to market capitalisation in the FTSE 100 after British Airways, putting it near the top of most ratings agency "pension watch" lists. The pre-tax deficit in the fund at the end of last year stood at £4.3bn, which is equal to 54 per cent of BAE's market value.

There are some 220,000 members covered by seven UK and five US schemes, of whom nearly 100,000 are pensioners. Last year's £271m contribution compares with an operating profit before interest, goodwill, amortisation and impairment of £980m and a pre-tax loss after one-off charges of £232m.

Dick Olver, BAE's chairman, told shareholders at the annual meeting this month that the company was close to striking a deal with its employees to increase company and member contributions. The talks centre around the two pension schemes covering ex-Marconi workers who joined BAE in 1999 following its takeover of the defence electronics company and former Royal Ordnance employees.

Mr Ralfe's calculations are contained in a briefing note for RBC Capital Markets. BAE disputed them, however, saying: "We don't recognise his figures. The start point in the calculations is fundamentally wrong. He has taken an overly simplistic view because he has failed to factor in the increase in contribution rates."