BT’s pension scheme acts as “no bar” to the telecommunications company restructuring to make its Openreach business a separate legal entity, according to a report by Sackers.

The report, commissioned by Sky, is a continuation of a long-running dispute between BT and its internet competitors - Sky, TalkTalk and Vodafone.
However, in response, a spokesperson for BT said Sky cannot simply “wish away inconvenient truths”.

“The kind of governance changes they have suggested for Openreach would have a material negative impact on the pension position. We at BT are clear about this, and our view is supported by authoritative, independent analyses by KPMG, PwC and Freshfields.

“Sackers have raised the importance of the employer covenant and the critical impact this will have, but unlike KPMG and PwC, they are not employer covenant advisors.”

Established in 2006, Openreach is the part of BT’s business that controls the network that runs from the local exchange to people’s homes and businesses. BT allows other communication providers to use this network and has over 560 communication providers using its network.

However, several of BT’s biggest competitors who use the network have called on BT to make Openreach separate from its main business as they say it gives BT the upper hand in the market and causes under-investment. There has also been concerns from the communication’s regulator Ofcom on the performance of Openreach.

In February this year Ofcom published its Strategic Review of Digital Communications which stated Openreach must “open up its network of telegraph poles and underground tunnels to allow others to build their own, advanced fibre networks, connected directly to homes and offices. This will help create more choice, while reducing the country’s reliance on Openreach”.

It went on to say that Opeanreach needs to change, taking its own decisions on budget, investment and strategy, in consultation with the wider industry. Therefore Ofcom suggests that BT should consider ‘functional and legal’ separation.

Despite this, BT has remained steadfast in its position that restructuring the business in such a way would put its 300,000 pensioners at risk. In its most recent results to the year end 30 June 2015 it revealed its deficit has increased by £3bn to almost £10bn.

Sackers said BT has listed three obstacles from a pensions perspective which prevent it from separating Openreach from its main business. These include the pension benefits of employees in the Openreach business, who remain entitled to DB pensions under the BT Pension Scheme.

Furthermore, the existence of the ‘Crown Guarantee’ which relates to BT plc’s DB pension liabilities; and the impact that creating Openreach as a wholly-owned subsidiary would have on the financial employer covenant afforded to BT Pension Scheme.

However, the report by Sackers has concluded that there should be no obstacles from a pensions perspective.

“We have concluded that there is no bar from a pensions perspective to achieving functional and legal separation of Openreach in this way i.e. it is technically possible to manage the legal issues relating to Openreach employees’ DB pension liabilities held currently in the BT Pension Scheme,” the report said.

Sacker has suggested that the most straightforward and least intrusive way to achieve functional and legal separation from a pension perspective would be to permit the newly formed Openreach subsidiary to join the BT Pension Scheme as a participating employer.

“This is the premise supporting options 1 and 2 set out in our report. Under both of those options, the participation of Openreach in BTPS would be restricted to only those Openreach employees who currently participate in the BT Pension Scheme. Under option 11 Openreach would assume responsibility for making contributions to cover future service pension costs only with past service liabilities remaining with British Telecommunications plc. Under option 22, in addition to paying future service pension costs, Openreach would take on the contractual responsibility for paying a share of deficit contributions in respect of the past service liabilities of its employees who have pension benefits in the BT Pension Scheme,” it explained.

However, it said that these options would be significantly easier to implement if, on the functional and legal separation of Openreach, the government were to amend the Crown Guarantee to cover the pension liabilities of Openreach under the BT Pension Scheme.

“The Crown Guarantee only applies in the unlikely event of a winding up of BT plc and in that circumstance covers BT plc’s obligations to make contributions (including deficit payments) to BT Pension Scheme in respect of all BT plc employees past and present, whether they joined the scheme pre or post privatisation,” the report said.

“It is important to recognise that amending the Crown Guarantee to ensure that the pension liabilities relating to Openreach in the BT Pension Scheme remain covered, would not increase the total liabilities which are currently the subject of that guarantee because at present, the Crown Guarantee already covers BT Pension Scheme liabilities for all the employees working in the Openreach business employed by BT plc, for both their past and, notably, their future service.

“On the creation of Openreach as a separate legal entity, those employees would be transferred into Openreach with the likelihood that their pension liabilities, either in whole or in part, will become the responsibility of Openreach and it would be those liabilities which would be the subject of the Crown Guarantee extension.”

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