Efforts by the world’s central banks to push down long-term lending rates has many benefits, but also some nasty side effects. Just ask telecoms company BT.
From its second quarter results statement, published on Thursday morning:
The IAS 19 net pension position at 30 September 2009 was a deficit of £6.8bn net of tax (£9.4bn gross of tax), compared with a net deficit of £2.9bn at 31 March 2009 (£4.0bn gross of tax).
The market value of the BT Pension Scheme assets has increased by £3.3bn since 31 March 2009 to £32.6bn at 30 September 2009. However, the value of the liabilities has increased to £41.9bn as a result of movements in bond yields and inflation expectations.
The liability calculation is based on the AA bond yield of 5.45% (31 March 2009: 6.85%) and future inflation expectations of 3.1% (31 March 2009: 2.9%). This does not reflect a change in the underlying pension obligations, but rather a change in market rates for AA bonds and inflation expectations.
Ouch.
Surprisingly, the markets doesn’t seem bothered by this large increase, even though the deficit is now equivalent to around 60 per cent of BT’s market value.
Instead, investors are focusing on a positive revision to 2010 guidance, in particular on free cash flow. Which is just as well because BT, which has yet to announce the triennial review of its giant pension fund, might just need it.
Related link:
BT seeks to cuts costs by extra £500m – FT