-- Neil Collins is a Reuters columnist. The opinions expressed are his own --
By Neil Collins
LONDON, July 15 (Reuters) - 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 electricity).
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 the least.
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 too. For previous columns, Reuters customers can click on [COLLINS/] (Editing by Martin Langfield )