British Airways’ long-time pension fund deficit woes are a step towards resolution with an agreement on a recovery plan with its New Airways Pension Scheme (NAPS) and Airways Pension Scheme (APS).

A consultation between the airline and its trade unions was completed earlier this year, and a full recovery plan will be submitted to the Pensions Regulator (TPR) by 30 June 2010.

Closure of the scheme has been avoided with the recovery plan, and it maintains BA’s annual contributions at the current level of £330 million, plus an agreed annual increase in line with inflation expectations (averaging three per cent). The contributions to the deficits will continue until 2026 (NAPS) and 2023 (APS).

Additional deficit contributions will be made by BA if the year-end cash balance exceeds £1.8bn, and the schemes will also be provided with £250 million of additional security over the company’s assets in the case of insolvency.

The airline is prevented from unilaterally reducing the value of the covenant, and changes in market conditions since the valuation date of 31 March 2009 are features of the recovery plan.

The recovery in asset markets has also been used, following discussions with TPR, to increase the margin of prudence used in the valuation, rather than to lower the contribution commitment required.

Keith Williams, chief financial officer at British Airways, said: “This agreement is a significant and positive step forward for British Airways and the pension scheme members. The trustees understand that the airline is unable to increase its contributions in the current financial climate but we have agreed a recovery plan that avoids closing the pension schemes, gives NAPS members choice over their future pension accruals, and increases the prudence of the assumptions employed in managing the scheme. The Pensions Regulator’s initial response to the overall package has been positive and we look forward to receiving their confirmation that they have no objections once they have time to analyse the plan fully.”

Should the pension recovery plan be deemed unsatisfactory and to the material detriment of the economic premises of the proposed merger with Iberia, Iberia may terminate the agreement between themselves and British Airways. Iberia has three months to make a decision on the recovery plan.

David Lane, partner at Lane Clark & Peacock, said: “The recovery in equity markets over the last year which led to a £2bn increase in the pension scheme assets has been crucial to British Airways in reaching agreement with the trustees on the 31 March 2009 actuarial valuations and maintaining the current deficit contributions of £330 million per annum.

“This £2bn increase represents 80 per cent of British Airways’ current market capitalisation and shows clearly just how exposed British Airways is and will continue to be to its pensions liabilities.”

Lane added that despite the agreement, the pensions risks will not disappear overnight, and will impact the company’s performance and prospects for the future, irrespective of the outcome of the merger.

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