BT pension deficit could reduce by £4.4bn as expectations of an interest rate hike mount

BT’s troublesome pension black hole is set to reduce by billions of pounds as expectations of an interest rate rise mount, analysts said today.

Previously, consensus opinion has been that BT’s retirement deficit would swell from £8.7bn to around £11bn.

But in a report by RBC Capital Markets, analysts said BT’s shortfall could halve to £4.4bn.

The FTSE 100 telecoms firm is currently going through a standard three-yearly revaluation of its pension scheme. With the scheme in deficit, the process will include testing negotiations with pension trustees over how BT plans to close the gap.

RBC said that with an increased chance the Bank of England will hike interest rates, BT would be within its rights to increase its discount rate – a critical reference rate linked to bond yields. RBC said its discount rate was “materially lower” than FTSE 100 peers such as Tesco.

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Increasing the discount rate together with changes in life expectancy assumptions could dramatically reduce the pension scheme’s liabilities, RBC calculated.

BT’s pension scheme is one of a number of mouths the telecoms needs to feed with cash, with some investors worried the firm’s prized dividend could be under pressure. Analysts have previously voiced concerns at BT being unwilling to commit to longer-term growth in the firm’s dividend.

The level of cash top-ups would depend on the size of BT’s pension shortfall. Therefore, a reduced deficit could ease negotiations with trustees, allowing it to reduce the amount of cash it pumps into its retirement pot.

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