Rolls-Royce to cut benefits to tackle pension deficit

Rolls-Royce, the aircraft engine manufacturer, yesterday set itself on a collision course with unions after warning it would cut employee retirement benefits in an attempt to tackle a pension fund deficit which now stands at £1.1bn.

The warning came as Rolls reported a near halving in underlying profits for 2002 to £255m because of the slump in civil aviation but relieved the City by maintaining the dividend and ruling out a rescue rights issue, saying its financial position was "sound".

Sir John Rose, Rolls-Royce's chief executive, said the company was consulting with employees to limit the financial impact of the huge rise in the pension fund deficit from £284m the previous year. He refused to spell out the measures Rolls might take but said it did not intend to inject more than an additional £35m into the main UK fund this year, taking the cash contribution to about £100m.

One of the possible solutions is for scheme members, of which there are 20,000, to increase their contributions, as BAE Systems is seeking to persuade its workforce to do. BAE is now facing the possibility of strike action and union leaders yesterday gave Rolls an equally hostile response.

"We are reluctant for our members to pay the price of past mismanagement of the scheme," said Derek Simpson, the general secretary of Amicus the engineering union. "It is incumbent on the company to make a gesture and guarantee the pension scheme for their workers, after all they are a profitable company and will be in future years."

Sir John said Rolls' performance in 2002, when it suffered a £94m cash outflow and a 37 per cent decline in civil jet engine deliveries, was in line with the guidance it had given the markets after the 11 September terrorist attacks. He forecast profit growth and positive cash flow this year "subject to the continuing uncertainty caused by the situation over Iraq". Deliveries of civil engines are forecast to be flat this year on the 856 produced last year while Sir John said there might be "some modest erosion" in the order book, which stood at £16.2bn at the end of December.

But Rolls sought to reassure the City about its finances, saying it had £2.6bn in committed borrowing facilities while net debt at the end of 2002 stood at £595m, giving the company a gearing of 29 per cent.

The 46 per cent fall in group profits was largely accounted for by a fall in underlying profits in the civil aerospace division from £347m to £150m. Profits from defence and marine rose and the losses in Rolls' energy business fell.

Sir John said Rolls was on course to save £250m through a cost-cutting programme that will see the workforce reduced by 9,200 to 35,000 by the end of the year. But he indicated the group was only receiving a portion of the £250m in launch aid to develop the Trent 900 engine for the new Airbus A380 super jumbo.