BT pension deal cuts longevity risk

BT’s staff pension scheme, which is the largest corporate final salary scheme in the UK, has recently struck a deal to protect itself against members living for longer than expected.

The scheme has set up its own insurance company and then re-insured its longevity risk with a US-based insurer.

In the biggest deal of its kind, the arrangement covered 25% of the scheme’s exposure to increased life expectancy.

This amounted to £16bn of the scheme’s liabilities.

Staff, and ex-staff, who are members of the scheme will not see their contributions or pension payments affected. The deal is designed to improve the strength of the scheme.

According to figures published in June 2013, BT’s pension scheme has 320,000 members; £40bn in assets and makes £2bn in pension payments every year.

The final-salary scheme is closed to new members, and is immersed in a nine-year plan to bolster its state. BT’s performance as a company has been dragged down in the past owing to the need to support the pension fund.

The BT pension scheme said that the longevity insurance policy would provide long-term protection and income to the scheme if its members lived longer than currently expected.

The fact that the BT pension scheme set up its own insurance company, then had the longevity risk re-insured, means that it does not pay fees to an intermediary, as would often be the case. The insurance deal has been signed with The Prudential Insurance Company of America.

BT’s share price rose in early trading after the move was announced but fell back later.