COLUMN-Shareholders bear privatised pensions pain: Neil Collins
-- Neil Collins is a Reuters columnist. The views expressed are his own --
By Neil Collins
LONDON, Nov 6 (Reuters) - It's a long time since Cable & Wireless (CW.L) and British Airways (BAY.L) were sold off by the UK government, in that helpful confluence of party ideology and the need for money that gave the world privatisation. Yet only now is the true cost of promises made to their employees a generation ago becoming apparent.
On Friday, buried deep in its long, gloomy statement, BA revealed the latest state of its old, closed pension funds.
It's not a pretty sight, with an actuarial deficit of 2.66 billion pounds in one fund -- more than BA's market cap, and even this probably understates the gap. (The other fund is almost in balance). The triennial valuation is under way, and there's not much scope for good news.
The previous day C&W had produced some unconvincing guff about its much-trailed demerger, splitting the cable from the wireless, so to speak. We may struggle to see the point of severing the link, but if the management thinks it's a good idea to cut the tie between the West Indies and Europe, then the legacy pension problem should not be allowed to stop them.
In contrast to BA, C&W's 305 million pound deficit is not life-threatening, although today's C&W is generating almost no cash on its European sales, and Morgan Stanley questions whether the scheme trustees could sanction a break-up under these conditions.
For both companies, the pension deficit has widened dramatically between March and September, despite the dramatic recovery in the stock market.
The consolation is that the new figures may be no more accurate than the old, since they are derived from the actuaries' black arts. Both companies have cut the discount rate, from 6.9 percent (BA) and 6.7 percent (C&W), to 5.4 percent, to reflect the fall in yields on investment-grade bonds.
With the liabilities stretching out decades into the future, the present value is highly sensitive to small changes in this rate. The deficits would collapse should long-term rates rise significantly. Unfortunately, that would be a signal of deteriorating economic conditions, and hardly good news.
Yet that's not really the point. BA is now effectively a pension fund which runs an airline, and BT (BT.L) -- another privatised business -- is a pension fund with a telco attached. The managements of both are severely constrained as a result.
In the public sector, whence these companies came, the bill for pension promises is just coming over the political horizon, and future governments will do everything they can to wriggle out of it. For the long-suffering shareholders in these privatised companies, there is no escape. -- For previous columns, Reuters customers can click on [COLLINS/] (Editing by Martin Langfield)
