BTPS agreement transcript – 23 March 2012
1
Hosted By:
Ian Livingston (IL)
IL
Good morning to all of you, thank you very much for coming on the
call at short notice. My apologies, this is a little complicated and
detailed, but that is the nature of pensions, so what I’ll do, is just try
and run through the headlines for about five minutes, of our
announcement today, and give you a chance to ask questions
thereafter.
So the first thing to say is we have agreed with the Trustee, our
approach to the funding valuation and recovery plan. This has yielded
a provisional deficit of £4.1bn as at the 30th of June, and I’ll talk in a
second as to why we’ve used the 30th of June as the date. We’ve
agreed a ten year recovery plan, but very critically, almost half of the
£4.1bn has been paid off this month, so £2bn will go in up front, and
that will be funded from about a billion and a half of existing cash
resources we had and some recent borrowings we’ve done, so in
total we’ve already got £2bn available, and that will be followed then
by, at the 31st of March every year, a payment of £325m, and that will
last for nine years. So there’s £2bn up front, plus nine years of
£325m.
Now the reason we used the June date is, first of all, that enabled us
to largely complete and agree with the Trustee, the valuation prior to
the end of our financial year, and allowed us to make this very large
lump sum payment, which was something, if we were to do it, we very
much wish to do it before the end of the financial year. We’re also
going to be using this June date going forward for future valuations.
The reason for that is, it means we do our results at the end of May,
the Trustees can use fresh information on the covenant of the
company in June and we can hopefully get resolution of the valuation
before the end of that financial year, and that again, helps us in
deciding about the payment streams and making sure the payments
come in an earlier tax year.
The other advantage of using June is there’s so much uncertainty in
December regarding quantitative easing, and not just in the UK, but
also in the Eurozone, and it’s caused a real dislocation of the gilts
market and I think very little guidance or view as to how one treats
that, and so by using the June date, we were able to at least take out
some of that dislocation, although frankly, June was still affected by
quantitative easing.
The agreement we have made with the Trustees is provisional, but
basically the reason we said that is that actually he just has to finish
his procedures in order to be able to sign off, and we expect him to do
that next month, or May, and we’re not expecting any material
variation as a result of that, but he just has to have the final
stratifications in so he can sign off on the plan.
In terms of the numbers, compared to December 2008 valuation, the
assets are up about £5bn, the deficit has come down from £9bn to
£4.1bn, even though we’ve actually used a lower real discount rate,
BTPS agreement transcript – 23 March 2012
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so discount rate used this time was 2% compared to 2.5%. We’ve
also assumed a higher RPI inflation rate of 3.2%. CPI is soon to be
2.3%, 1% lower. A couple of other comments to make about that, just
first of all in that point between RPI and CPI differential. The Office of
Budget Responsibility projections are 1.3%-1.5% differential but
prudently we’ve used 1%. Our median view, you know we quote that
at results just to give you an idea, BT’s median view, if you take the
expected return of the assets and the expected outcome of the
various liabilities, was at June, and we gave you that number for a
£2.5bn surplus as at June, so that means basically we’ve about
£6.6bn of prudence in the number, so there is quite a lot of prudence,
but there should be of course, because it’s a number for the Trustees.
And as of June, to remind you, the IAS19 deficit was actually a
£2.4bn deficit. So you’ve got a £4.1bn deficit from the Trustees.
IAS19 at the same time was £2.4 gross and our median view of the
deficit at that time was a £2.5bn surplus.
Outside the numbers themselves, we’ve included a number of
protections for the scheme which are pretty similar to what we agreed
last time round. I’ll just highlight the dividend one, which is basically
between the beginning of this month and June 2015, we’ve agreed
that our dividends will be limited by the total amount we pay into the
scheme. However, when I use the phrase limited, be very clear, if we
want to pay more than that, we just have to pay a one per one with
the scheme. So basically if we pay any more than we pay into the
scheme over that period, in terms of the special deficit contributions,
we will pay on a one per one basis, additional monies into the
scheme. So it’s a protection in that respect. The other ones that relate
to the disposal and acquisitions, things you would expect in any case,
the Trustees do have the right to be consulted on, continuation of the
negative pledge and a number of other detailed things, but they are
set out in the notes we’ve attached to the press release. In fact the
notes we’ve attached to the press release are details we’ve tried to go
through and give you, I think, quite a lot of information.
So in summary, first of all, we’re pleased we’ve reached an
agreement. The Trustees have worked very hard to do this quickly
and really in order to clarify the position as early as possible and
allow us to make a decision about how we’re going to fund this before
the end of the current financial year. The fact that we can put in £2bn,
very, very largely from cash we already had, does reflect the
significant improvement in cash generation in our business and it’s
something we’ve said repeatedly, the fact that we have a much better
covenant, and the fact we’re generating well in excess of £2bn of pre
cash flow as supposed to £700 odd million when we did the last
valuation, gives a lot more flexibility and allows us to address this
issue, and so half of the payment, basically half of the deficit has
gone in now.
And as a business, we remain focused on the same things. It still
remains very important us to improve our financial strength, we’re still
targeting BBB+ as our credit rating. We shall continue to invest in the
future, and we’ll talk to you in May on how we’re progressing on that,
and we continue to look forward to enhancing shareholder returns.
BTPS agreement transcript – 23 March 2012
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We’re a prudent company that’s doing well and we continue to seek
to do that, and we’re delighted to be able to support the pension
scheme and show that commitment.
Q&A
Nick Lyall
UBS
Firstly on the Regulatory ruling, I think you mentioned a couple of
things there, but when’s your expectation of timing? And what makes
you confident the Regulator also takes the same view on quantitative
easing and June versus December that you do? Have you had chats
already with him?
And the second thing is, given the revised timing of the releasing the
review, does that mean you can revise the dividend policy earlier or
later? When would you expect to come back to that? Could it be as
early as the full year results?
IL
Taking the second one first, well certainly if you do it earlier, we did
say it was a condition that we had to fulfil. It’s something we’ll look at,
I can’t guarantee we would do it by the full year results, you know, we
will talk to the shareholders and see what’s appropriate, but certainly
it was a necessary condition to looking at what we were going to do
about dividends. I do stress, as we said before, that we will continue
to be conservative, that’s a policy that shareholders can certainly look
forward to, increased returns as we go forward. And you know, and it
does allow us to talk to shareholders and to understand what their
views and preferences are, and we’ll get that feedback.
On the position with the Regulator, we have discussed the process
with the Regulator. The Regulator, however, has not received this
valuation. They will not receive this valuation until it is finalised, and
as I said, expected to be April/May, probably May, and we submit it in
line with the timetable set out in the Pensions Act, will be submitted
by the Trustees, which is within ten days. The Regulator has seen
the statements we’ve made regarding the Regulator, and is
comfortable with that, and really the critical thing is the Regulator will
review the scheme. He will also, however, want to be informed on
the position regarding the Crown Guarantee case, and that will inform
the Regulator with regard to the next steps that they want to take on
the valuation of the scheme. So I can’t really comment as to what the
Regulator’s view might be. You know, clearly as a scheme, it’s got a
much quicker payback than last time round. BT has a much better
covenant. We’ve talked about the level of prudence contained within
it, and I think everyone recognises there is an impact of quantitative
easing.
You know, NAPF has certainly come up with some
comments, and I think even the Pension Regulator will make a
statement in April about the impact of quantitative easing, so I don’t
think anyone denies that quantitative easing has happened and it’s
caused dislocation. How you treat it, we’ll have to see, because he’s
not made the statement yet. But so, we’ll submit it and let him decide
from there, but the Regulator has said he would want to be informed
by the final outcome of the Crown Guarantee case, and that could be
some time still.
BTPS agreement transcript – 23 March 2012
Nick Delfas
Morgan Stanley
IL
4
I’ve got a feeling my questions are more or less exactly the same, but
I’ll ask them slightly differently. If I look at the covenant that you’ve
given on the maximum dividend, I know you couldn’t go further with
that with matching payments, you could obviously, in theory, increase
your dividend to as much as say 14p or 15p by FY14. But I mean
what can you tell us today about your intentions around the
dividends? That’s obviously a very, very large increase which
probably is not to be expected. And secondly, is there a figure you
can give us on what the number would have been at December 2011
as opposed to June?
Okay. Again, taking the second one first, no, because I think the
issue is, what adjustment would you have made for what clearly an
even greater dislocation at December than it would have been in
June, how would you have recognised that? Even since December,
we’ve seen quite a bounce back in the gilt market, the yields have
gone up quite a bit since December, so it’s very difficult to know what
you would have adjusted. And one point I should make that I didn’t
say in the thing is…our recovery plan, unlike the last recovery plan
we did, has no assumption about investment outperformance, which
is another area of prudence we put in the scheme. And that’s another
factor, I think if you are looking at December; you probably have a
different view on that sort of factor. So the answer is no, because we
actually wouldn’t know what sort of adjustment to make and I think
various commentators across the spectrum have said this is a very
confusing situation regarding the quantitative easing and impact, and
it’s a sort of, not just once in a generation, it’s once in multiple
generations, this impact.
And the first question Nick was about the dividend. No I can’t really
say very much. I think be careful about the £2.975bn over the three
years you can pay, it’s not a target. It’s a ceiling we can go through,
but it’s a ceiling, and we can also do so, trip that combination of
distributions, share buy backs and dividends and also there’s a card
out for buy backs related to to any employee share plan. But you
know, we’ll do exactly as we said before Nick, which is, we want to
carry on paying down debt. We want our shareholders to be able to
look forward to increasing dividends that they can take to the bank.
You know, that they are very clear about it and they can look forward
to progressive dividends and continue to run the company
conservatively. Beyond that, we need to speak to them and see what
they think, and judge up both value of returns and also methodology.
And I’ll just say in advance to anyone else who wants to ask me that,
I won’t be able to say a thing more.
Maurice Patrick
Barclays Capital
Just in terms of life expectancy and longevity, you’ve talked about
there being additional improvements; I wondered if you could quantify
what sort of level that was? I think it was about £1.4bn on deficit for
every year added, so some thoughts on what you’ve done there. And
just on the re-financing schedule, I think your re-financing schedule is
sufficiently pushed back, but even with the £2bn upfront, there’ll be no
BTPS agreement transcript – 23 March 2012
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implication from that, just so you could confirm that, that would be
great, thank you.
IL
Mike Williams
Exane
I think the effect on…and I’m looking at my colleagues here, of the
greater life expectancy, we assumed is about £0.5bn on the scheme.
We’ll give the details at the final valuation as to how it’s calculated, so
it costs about £0.5bn. And in terms of re-financing, that was your
second question, we’ve got very substantial unutilised facilities and
we’ll just decide as to how we decide to fund this. Of course we’re
generating lots of cash, and we’ll get a tax credit next year, we’re
putting that to reflect the pension payment. So we are already using
our existing cash resources and we will get a tax credit. So I think it
whilst we do have some repayments, I think next year, in the debt, it’s
extraordinarily managed when we still have substantial excess
liquidity.
I think most of my questions have been asked already, but just one
perhaps point of detail Ian, if you can, I should know the answer to
this, but if you look at the payment schedule, the recovery plan, it has
you paying in essentially £5bn over the period, now I know it’s kind of
academic because the rules all get reset at the time of the next
review, but could you just remind me how that relationship works
between the £5bn associated with the payment plan and the £4bn or
£4.1bn deficit that the headline number implies?
IL
Yes, it’s the present value, Mike. It’s a £4.1bn PV that that relates to,
because you discount by the nominal discount rate assumed, which is
5.3%, I think it is, -ish, give or take, so it’s just the PV of that.
MW
Okay, so it’s the discount rate unwinding essentially, as you move
forward?
IL
Yes, and the reason why last time round it was a different thing, was
because we had a deficit outperformance assumed, so actually the
repayment plan is even more conservative that the last one.
Simon Weeden
Citi
Firstly, can you give us an idea of what the risk percentile is that has
been used on this valuation? You’ve given us a median estimate in
addition to the published number, but you haven’t told us what the
risk percentile is yet, as far as I can tell.
And the second part of the question is given that the deficit is down
and will be down substantially by the end of this month, and as you
rightly pointed out, BT has a much better covenant, clearly over time,
one would assume that from a position of a very severe deficit,
pensioners will get the preference, there comes a point where the
shareholders will get the preference because the pension scheme is
dealt with. Why is this not the time for that to happen, given a better
covenant, why is it necessary for you to sign up to quite such a
severe constraint on the dividend distributions at this stage?
BTPS agreement transcript – 23 March 2012
IL
6
Well I think one always has to find the balance in these things, and
speaking as a company, we would have probably done something
different, but the Trustees have to quite rightly protect the members,
and they’ve done a very good job in protecting the downside for them,
and it’s important, they want to see a strong sponsor. This is not an
absolute constraint of course, we can pay more in, we just would pay
more to them, but I think they wouldn’t see it as a very severe
constraint anyway, but they would see it as being prudent.
In terms of the percentile, it’s broadly where it was the last time. Now
that may surprise you, given the 68th/69th percentile, the reason for
that is, firstly the calculation itself is even more prudent really,
because it doesn’t really reflect the much stronger covenant we’ve got
today. But also, given it is uncertain times, and a lot of volatility, that
sort of offsets some of the debt. If the markets calm down a bit, I think
people might feel slightly different on that, but this £4.1bn represents,
and I’ll be frank and say that if it was up to the company, we would
have thought it was a lower amount of deficit, reflects a very prudent
position from the Trustee, in our view, and one that also given the
volatility, didn’t really recognise the very strong position of the
company. So that’s why it is where it is. But it is a good thing that
we’ve been able to say, Okay, we’ll do half of it upfront and try and
really make life, somewhat simpler going forward, and give a bit more
certainty, and that’s what we tried to do.
SW
Can I just follow up with another quick one on that, which is not a
question I think that would have been appropriate a couple of years
ago, but given the strength of the median surplus, what happens if
this deficit moves into surplus over the next few years? What can you
do to recover a surplus in this scheme?
IL
Well there’s a number of things you can do, but first of all you could
stop paying in normal contributions. And we pay roughly £250m a
year in normal contributions, so you’ve got quite a lot of growth in that
respect. You could take views about completely de-risking or
whatever, if that came to it, and there’s even some other things you
could look at doing, but it would be a problem that I’ll be delighted to
discuss with you in a few years’ time when we see the markets
bouncing back and gilts being at sensible levels, but we’re not quite
there at this point. But there is actually a number of things you could
do to effectively eat into a surplus.
Paul Sidney
Credit Suisse
Firstly, in terms of the credit rating agencies, I guess it may be a little
bit early to get any reaction from them, but just in terms of how they
were thinking about the deficit, how will this potentially change things
in your view?
And just secondly, just so I’ve got this right, should we think about the
£6.6bn buffer being slightly more than it was three years ago? Is that
kind of a trade off with the Trustees for moving the date to June and
also sweetening it with the £2bn pre-payment? Was it a constructive
discussion in putting all those things together? Because obviously,
BTPS agreement transcript – 23 March 2012
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intuition would have said that the buffer should inarguably be lower.
Is that a right way to think about it?
IL
We always try and have constructive discussions with everyone, so I
think it’s not so much a trade off as such, but the £6.6bn is even more
prudent, and you would have thought, given the strength of the
covenant improving, that maybe that wouldn’t be necessary. But I
think two things, one is, it shows the company’s commitment and the
fact that the Trustees want to make sure that they are doing
absolutely the right thing, but I think also, it just reflects volatility in the
market from a Trustee point of view. So if you had asked me did I
think it needs to have that degree of prudence, I would say to you no.
If you ask the Trustees, they would say yes, and they have to seek to
protect the downside and I think they would. Some of their concerns
would just be about the volatility of the market, and that’s fair enough
for them.
In terms of the rating agencies, in our view there’s no reason to think
it’s negative. But we will have to see what they will say. I mean,
clearly it’s a bit of a trade-off between it comes out of one pot into
another, but any certainty, I think usually helps rating agencies, but
I’m not expecting some massive movement either way on this one.
Guy Peddy
Macquarie
Just a couple of small technical questions. On the £2bn that you are
paying very soon, can you just tell us what tax rate you’re assuming
the equivalent tax shield will be on that payment?
Secondly, is the reason you’re no longer assuming any
outperformance on the trust going forward, is that reflective of the fact
that at December the asset value was close to another billion lower?
And thirdly, just a pure technical point, and apologies if this sounds
obvious, but is your dividend ceiling based on the cash flows of
dividends or the announcements of dividends or cash returns?
IL
It’s on the actual payment of the dividend, and can I just say Guy, I
like it when someone says, ‘I’ve got three technical questions’, it
always makes me feel particularly good. But of course I can answer
all of those three. So, on the cash flow. In terms of tax, we expect to
get 26% tax relief on that, so we’ll get a repayment next year, relating
to that amount. And the reason there’s no outperformance, it’s just
another bit of prudence in the calculation, and I think the Trustees can
feel that they’ve done a good job. And of course if you get
outperformance, we’ll see at the next valuation, it will come through in
the valuation itself. So, it’s one of these things where the actuality of
what happens is rather more important than the theory of it, because
if you have an outperformance, what we have tried to do is set out a
schedule of, for given amounts of deficit, what actually should
happen, and to give greater clarity. But if we outperform and the
deficit’s lower, then that’s great. I mean, the return we’ve achieved
since the last review is significantly higher than we assumed at the
last review, and that’s not generally considered to have been an
absolutely wonderful time for the market. So I can’t guarantee that
BTPS agreement transcript – 23 March 2012
8
they almost doubled, but we achieved over and above what we
expected last time round, we come through again, but any
outperformance that’s come through.
Madeleine King
Credit Suisse
I just noticed in your press release, you’ve mentioned that you plan to
fund this payment with cash resources and recent borrowing. I
wondered if you could talk a little bit about what that recent borrowing
is. Is it a drawdown on your revolver or something else?
And also, in response to a previous question, you mentioned that
when we’re talking about bond maturities, you mentioned your
revolver headroom, would it not make more sense to fund those
maturities by issuing in the bond market, and when could we expect a
decision on the revolver versus bond issuance from you?
IL
Steven Malcolm
Arete
IL
We are in a very fortunate position, there are many ways that we can
recreate finance, and we’ll look to generate more cash, we also get
tax repayments and we’ve got a commercial paper programme and
actually that’s where we raised the money, the vast majority of the
£2bn has come from our existing cash resources. We had I think in
excess of £1.5bn before we even looked into it, and we’ve drawn
down some commercial paper, and then we’ll see going forward what
we do. I don’t think particularly we’re looking to draw down bank
funding, we’ve got no particular need to, but we’ve got many options,
and you know we create our own liquidity as well, so we’ve got the
money now, and we’ll see about how, or indeed, if we need to refinance it going forward, and what methodology. So that’s the
situation on that.
Just on the restrictions on shareholder distributions, does that include
buy backs, firstly? And related to that, you’ve obviously got a lot of
options vesting on, I think, 2012 and 2014 on the schemes that were
issued in 2009. When you think about raising the dividend, I know you
aren’t going to say anything sort of more explicit on that, but how do
you think about the potential dilution that comes along with those
options vesting and the cash obligations of a significantly increased
dividend?
Okay. We will weigh everything up right. The way the restriction
works is, it includes buy backs generally, however, not buy backs that
relate to issues for employees. So effectively, you can take out any
buy backs that effectively correct any dilution that comes from
employee share schemes – they are not included within this
limitation, but otherwise, apart from that, basically it looks at
distributions, however we do them. And the way we will look at the
totality of all of this is as a package and speak to shareholders and so
as I said earlier, conservatively, and we want shareholders to very
much take the view that they can take the BT dividend to the bank
and they can also take long term growth to the bank, and that’s really
very important, I think, for us, and is actually the message I hear from
shareholders. But we’ll look at totality of the package and whether,
BTPS agreement transcript – 23 March 2012
9
and talk to shareholders about buy backs and about dilution and see
where that takes us.
Robert Grindle
Deutsche Bank
My questions are two-fold. You mentioned the dislocations at the end
of the year Ian, with regard QE, and I totally understand that side of
things. With regards your assets at the end of the year, were there
any dislocations there either? Because I remember when the Q3
asset number came out, we were all a bit disappointed, given the
markets were actually quite strong in that last quarter.
Then my second question is, the Trustees, of course, need to be
prudent going forward and some of my peers have asked about the
buffer that they’ve put in. Is any of this recent chatter on applying
Solvency II to EC pensions affecting the Pension Trustees at this
stage, or is that still just out there as a story and not an issue for this
debate you’ve had?
IL
Well, we’ve announced what the assets were at the end of
December, on IAS19, so there’s no new news on that, the assets in
December I think were £35.8bn, so about £36bn, so no big thing on
that one. In terms of Solvency II, no, and actually, I think if you look at
the statements being made by the commissioner recently, there
seems to be a lot more clarity in the EU, that straightforward Solvency
II would be an inappropriate introduction into occupational pension
schemes with a sponsor, which are very different from insurance
schemes, and in fact, there was quite a lot of strong opposition to
including anything, but I think the commissioner’s been pretty clear
that actually he never intended a vanilla Solvency II in all of this. But
the Germans, the Dutch, as well as the UK, think a lot of this would
be a very bad idea. So it’s not even so much a chatter, it’s really
gone away, and therefore it’s not impacted the Trustee. What the
Trustee does is, he’s worked to try and do it in accordance with the
Pensions Act, he’s used an independent actuary, he’s used
independent legal advice, he’s used independent reviews of our
covenant, he’s done all the really good work that a Trustee of what is
one of the largest schemes in the UK should do. And reflecting I think
the strength of the company, the payment, they very much welcome
the payment, and I think given uncertain markets, he probably has a
little bit more prudence in the thing than you might have in a very
stable market. So I think that’s fair enough and that’s their position,
and we understand that. We may not take exactly the same view, but
we understand it. So that’s it, and I think that’s actually the last
question. So can I just say to everyone, thank you very much for
being on the call, I appreciate it’s short notice, and if you have any
more questions, I am sure you will phone IR and they will be
delighted, particularly if they are really, really technical ones, they
would like to know. So thanks very much.