British Airways PLC agreed to contribute more money to its two defined benefit plans on top of the existing level of about £330 million ($489 million) annually if the company's overall cash balance exceeds £1.8 billion, under an agreement with trustees of the plans, according to company spokeswoman Laura Goodes.
The £8 billion New Airways Pension Scheme and the £6.4 billion British Airways Pension Scheme, both based in London, will receive 100% of any amount over the £1.8 billion year-end cash balance threshold, up to £150 million. Beyond the £150 million mark, the funds will receive 50% of the excess cash to help reduce a £3.7 billion combined pension shortfall.
In addition, employees will be required to each raise their contribution, based on their annual salaries, by an additional 4.5 percentage points if they want to maintain current retirement benefits.
“The trustees understand that the airline is unable to increase its contributions in the current financial climate, but we have agreed a recovery plan that avoids closing the pension schemes, gives NAPS members choice over their future pension accruals, and increases the prudence of the assumptions employed in managing the scheme,” Keith Williams, British Airways CFO, said in a news release.
The agreement is the “one outstanding item” before BA can proceed with a plan to put its proposed merger with Spain's Iberia Lineas Aereas de Espana before shareholders, Ms. Goodes said. The proposal requires approval from both Iberia and the Pensions Regulator, which oversees occupational pensions in the U.K. Iberia has three months to respond, while there is no time limit for the U.K. regulator.
“The Pensions Regulator's initial response to the overall package has been positive and we look forward to receiving their confirmation that they have no objections once they have time to analyze the plan fully Mr. Williams said.
According to David Lane, partner at consultant Lane, Clark & Peacock who's familiar with the agreement, the recovery of the equity market over the past year has added about £2 billion in pension assets for BA and helped the company reach the agreement with the trustees. However, in a prepared statement, he questions whether long-term risks have been substantially reduced.
“This £2 billion increase represents 80% of British Airways' current market capitalization and shows clearly just how exposed British Airways is and will continue to be to its pensions liabilities,” Mr. Lane said in the LC&P statement. “Despite the funding agreement, British Airways' pensions risks are not going to vanish overnight and will significantly impact the company's performance and prospects for many years to come.”