-- Neil Collins is a Reuters columnist. The opinions expressed
are his own --
By Neil Collins
LONDON, July 15 During the great British
privatisation boom of the 1980s, the cost of meeting pension
promises to the employees looked so vague and far away that in
the excitement, few cared. Well, they do now.
Two of the highest-profile businesses that the state sold
to its citizens are now effectively prisoners of those
promises, and others escaped only because they had their crisis
early (British Gas) or employ relatively few people (water and
For telecoms group BT (BT.L) and flag-carrier British
Airways BAY.L there is no escape. Successive managements of
BT have slashed away at their vast inherited workforce, but
since the departing employees took their index-linked pension
promises with them, the liability remained.
BA has been kept aloft by its duopoly on the New
York-London Heathrow route, defying low-cost airlines,
competitors in Chapter 11 bankruptcy, terrorism and soaring
fuel prices, but it too has been brought low by the dead weight
of pension liabilities.
For both companies, the liabilities are clearly
life-threatening, which is bad enough. What's worse is that
they cannot be calculated accurately.
Small changes in the assumptions about longevity and fund
returns make a big difference to the present value of the
liabilities. For all their wizardry with figures, the actuaries
who do the sums are effectively only guessing. Is BT's discount
rate of 6.85 percent more appropriate than the 6.4 percent
applied by its former conjoined twin, the Royal Mail?
Nobody knows. The rate itself is set by reference to the
returns on investment-grade bonds, but the last year has
demonstrated how dramatically this can swing.
Small wonder that neither BT nor BA can raise new equity on
anything other than rescue recap terms. The larger wonder is
that BT can still contemplate future dividends.
BA's suggestion of a convertible bond is a distraction. An
issue to make a serious dent in its pension deficit is out of
the question and besides, it merely swaps one obligation for
another unless the conversion terms effectively hand the
business to the bondholders.
In both cases, the shares are effectively an option on
something turning up. Under the wacky actuarial maths,
collapsing bond prices (which shrink the pension deficit
because yields rise, allowing future liabilities to be
discounted at a higher rate) allied to a soaraway bull market
might do the trick. Such a combination looks unlikely, to say
BA and BT are merely the most visible price of the promises
made to Britain's state employees; Neil Record tries to
quantify them, and his latest figure, discounted to today's
money, is 1.1 trillion pounds, or just short of 50 percent of
Britain's gross domestic product.
The employees and shareholders of BA and BT are discovering
that the promises made to them cannot be kept. One day soon,
the employees and shareholders in GB plc will find this out
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(Editing by Martin Langfield )