A BT Openreach separation could tip the telecoms giant's pension scheme into insolvency leaving a £10bn black hole, its pension trustees fear.
Trustees voiced concerns in a redacted note responding to Ofcom’s proposals to legally separate the company that runs Britain’s telecoms infrastructure from the wider BT group.
Because, according to the trustees’ note, a third of BT’s profits are generated by Openreach, the faith it has in the group to plug a pension deficit in the years to come would be “materially compromised” if it were spun off.
Although BT could take steps to mitigate concerns, the trustees concluded: “None of these approaches, alone or in combination, would mitigate fully the increased risk to the scheme resulting from the Ofcom Proposal”.
Analysts at Haitong Research said the trustee response had huge implications on Ofcom plans. “Restitution to the BT Pension Scheme for legally separating Openreach would render Openreach Co insolvent,” wrote John Karidas.
The precise level of the pension deficit was redacted in the trustee response, but Karidas highlighted the scheme’s last published deficit was £10bn in June 2015.
Openreach cannot be legally separated, and so whatever Ofcom chooses to do now on this issue is irrelevant to BT investors.
Openreach is the division of BT Group that develops and maintains the UK’s main telecoms network used by providers such as Sky, TalkTalk, Vodafone and BT’s retail business. BT's rivals have long been calling for Openreach to be spun off due to competition concerns.
At the end of November, regulator Ofcom revealed plans to go to the European Commission to force through a legal separation of Openreach.
“Our plans to legally separate Openreach from BT are achievable, proportionate and carefully considered,” a spokesperson for Ofcom said.
“Crucially, they would allow BT to continue to meet all its pension obligations. Our expert advisors have also identified a range of measures to reduce the impact of legal separation on BT’s pension costs.”
However, the conflicting sentiment from advisers to the Ofcom was a moot point according to Karidas.
The key point is that the trustee, not a hired expert… has the legal and fiduciary duty to look after a 300,000 member pension scheme with £53bn of liabilities and a £10bn deficit.
So, Ofcom has hired experts but the trustee is the final arbiter.
Read more: Ofcom tells Openreach sharing is caring
Both BT and the BT Pension Scheme Trustees had not responded to requests for comment at the time of writing.