BT's mammoth pension scheme deficit is threatening to derail Ofcom's plans to make its broadband infrastructure arm Openreach more independent from the telecoms giant.
A consultation on the future of Openreach is due to close on Tuesday after attracting over 75,000 responses. Investors and analysts are deeply concerned that separating it from BT could cause significant issues for the group when it comes to negotiating the future of BT's £7.6bn pension scheme deficit.
A triennial valuation of the pension scheme – which has the largest deficit in the FTSE 100 – is due next year.
This process will see pension trustees enter into complex negotiations with the company over the level of contributions that they see are necessary to make good scheme deficits.
An important element of such negotiations will be the strength of the company covenant – the ability of the company to generate sufficient profits in the future to plug pension gaps.
The extent to which Openreach – and its revenue generating activities – is a separate entity from the rest of the BT group will therefore impact the trustees' interpretation of what profits BT can generate.
If Openreach is more detached from BT, trustees are less likely to include it in their assessment of the covenant strength of the group. This could, in turn, lead to trustees placing greater requirements on the wider group to make good the deficit of the pension scheme, which could increase cost and decrease financial performance.