British Telecom (BT) has decided to take radical and swift action over its £4bn final salary scheme pension deficit, by committing to an annual £525million cash injection over the next three years, following the publication of its latest results.

As a result, BT's dividend has been cut from 15.8p to 6.5p. It is thought that if the pension scheme had been in a healthier state, then the dividend would have reached 13p a share. The company has reported an annual loss of £134 million.

By taking this decision, it appears that BT has followed the advice of the Pensions Regulator (TPR), who in February this year advised that recovery plans be put before dividend payments to shareholders. BT remains in talks with trustees of the scheme and TPR, regarding its results of the actuarial valuation, which is near completion.

Jonathan Camfield, a partner at Lane Clark & Peacock, said that he believes TPR has had a hand in the move: "This seems a case of early action by the Pensions Regulator, anticipating a potential challenge, rather than waiting for the trustees and company to strike a deal and then vetting the outcome. This is an example of the Regulator moving to be a "player" rather than simply a "referee" in this challenging financial environment.

"The cut in BT's dividend might also throw some light on the Regulator's thinking on how to balance the competing needs of trustees and shareholders at a time when cash is scarce. There has been some debate as to whether the Regulator's formal guidance in this area might mean that existing dividends must be sacrificed if a deficit is very large and free cash is limited."

According to Laith Khalaf, a pensions analyst at Hargreaves Lansdown, BT will not be the only company needing to find cash to plug its pension deficit in the near future and that announcing the decision now was a shrewd one, given that the financial markets expect to hear of dividend cuts.

In a potential move that would anger unions, Hargreaves Lansdown said there is the possibility of cutting costs further by closing the final salary scheme and moving members to a defined contribution pension plan. However, the firm suggested that changes in retirement age from 60 to 65, pensions based on career average salary rather than final salary, and increased member contributions from six per cent to 8.5 per cent could help reduce the likelihood of this radical change.

Due to the "unacceptable performance" of BT's Global Services arm, the communications giant has also lined up some 15,000 job cuts following its losses.

- Pensions Age May 2009

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