BT multi-billion pound pension bill threatens dividend, says ratings agency

Oliver Gill
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BT has one of the largest pension scheme deficits in the UK (Source: Getty)

Telecoms giant BT is facing a £2bn cash bill over the next two years in order to ease the concerns of its pension trustees, a leading ratings agency said today.

With around £1.4bn of pension contributions already pencilled in over the next 24 months, Moody's said BT will need to mount a £600m pre-tax raid on its in-demand cash coffers.

Moody's said BT's pension problem would, in part, sustain high debt levels and could lead to a reduction of its dividend.

The hike in contributions is the product of the ongoing negotiations with trustees as part of BT's triennial pension scheme valuation. The telecom's final salary retirement deficit – one of the largest in the UK – is expected to jump to as much as £14bn, according to reports.

BT is exploring a range of options to manage its unwieldy retirement scheme, in part a product of its heritage as a nationalised firm.

Read more: BT seeks to cut pension payouts in plan to fill the scheme's black hole

'Friendly litigation'

One of the easier wins is understood to be changing the inflationary measure against which pension payouts are linked. BT is planning to make the changes through a court-led "friendly litigation" to change from retail prices index (RPI) to the lower consumer prices index (CPI).

Moody's senior analyst Laura Perez said: “BT’s debt levels will stay high over the next two years as large pension deficits and stalling earnings add to existing regulatory, price and litigation risks, further weakening cash flow generation and delaying its ability to de-lever.

We expect that BT may seek to free up cash and pay down debt by accelerating convergence, reducing dividends or selling non-core assets.

A BT spokesperson said: “We are very pleased that both Moody’s and Fitch have recently reaffirmed our investment grade credit ratings.”

Read more: BT pension deficit slashed by £3bn by new inflation measure

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