Regulator unhappy with BT plan to fill £9bn pension hole

Objection likely to be that 17-year scheme is too long when firm is not suffering

BT has agreed a 17-year plan to pay off the £9bn black hole in its pension fund – but it could be derailed after concerns over the recovery plan were raised by the regulator.

The telecoms giant yesterday announced it had agreed the valuation of the largest private sector fund and a recovery plan with the trustee of the BT Pension Scheme.

While the Pensions Regulator has not yet reviewed the full details of the agreement, its "initial view is that they have substantial concerns with certain features of the agreement," BT said. John Ralfe, a pensions expert, said: "At this stage, BT has Hamlet without the Prince. Without the regulator's agreement, all bets are off."

The regulator is not expected to take issue with the £9bn valuation of the scheme's deficit as of 31 December 2008 – up from £3.4bn at its last such valuation in 2005 – but with the length of the recovery. Its guidelines normally advise a 10-year plan. "Those recovery plans that take significantly longer than 10 years are normally because the company is in financial distress, and BT isn't in that position," Mr Ralfe said. "The regulator is likely to say this is far too long for a company that isn't suffering and is still paying money to shareholders."

Shares in the group dropped more than 8 per cent to 119p yesterday, as investors were spooked by the continued uncertainty around the scheme. BT revealed that the regulator had "no specified time limits" to carry out the investigation. If the regulator rules against the agreement, it will be referred to an Independent Determination panel, BT said. An appeal to that would be passed to the Pension Regulator Tribunal and then the Court of Appeal.

BT's chief executive Ian Livingston said he was pleased an agreement had been reached with the trustee. "This is a prudent valuation and a recovery plan which reaffirms BT's commitment to meeting its pension obligations. The operational improvements we are making in the business are generating sufficient cash flow to support the pension scheme whilst allowing us to pay dividends, invest in the business and reduce debt," he said, adding: "We will continue to work with the Pensions Regulator during their detailed formal review."

The value of the scheme's assets increased by about a tenth from the end of 2008 to £34bn at the end of last year. BT had agreed to pay £525m a year for three years. The first payment was made in December 2009. This will be extended by a further 14 years, with slightly increased annual payments to plug the gap. Rod Kent, chairman of the scheme's trustees, said the agreement secured "significant additional support to the benefit of scheme members, underpinned by a strong sponsor".

BT announced the news as it released its results for the three months to the end of December. The firm's adjusted earnings before interest, taxation, depreciation and amortisation (Ebitda) rose 11 per cent to £1.4bn in its third financial quarter over the previous year.

Mr Livingston said: "These results show that we are making progress. There is still a lot more to be done but our commitment to improved customer service and cost transformation is starting to deliver results and free up resources to invest in our future."

Revenue at BT fell 4 per cent to £5.1bn, "reflecting the challenging market conditions and the trends seen in previous quarters", according to the company.

An improvement at BT Global Services, the division that dragged the group into the red last year after a disastrous performance, was largely responsible for the Ebitda increase as well as the effects of cost-savings, the company said. Ebitda at Global Services rose from £7m in the third quarter of 2008 to £123m last year.

The retail division was up from £434m to £464m, and BT Wholesale remained flat at £321m. BT Openreach, the division that operates and maintains the countrywide network, dipped 4 per cent to £513m.