BT Group PLC (LSE:BT.A) has been warned it might have to put more money into its pension fund to plug a gap caused by the chaos that followed in the wake of Liz Truss’s mini-budget.
In a letter seen by the FT, the management of the BT pension fund (BTPSM) said that it might have to raise its financial buffers to cope with any future market turbulence.
“We have become more cautious in how we manage the scheme’s liquidity and have increased the collateral buffer to which we operate,” BTPSM wrote in the letter. This will position the scheme to better weather any further volatility in the gilt market but will also reduce the expected returns from our assets.”
“The scheme does need to achieve a certain level of investment return to achieve its 2034 funding targets and if expected returns fall below this level then the scheme may need more support from BT in future valuations than previously anticipated,” the fund managers added.
Like many of its peers, BT’s pension scheme fell foul of the slump in gilt-backed derivatives known as liquidity-driven investments (LDL) when prices tumbled following Truss’s September mini-budget.
To meet the deficits on the LDLs caused by the slide in the value of UK government bonds, pension funds such as BT's sold UK gilts to meet the obligations, sparking fears of a vicious downward spiral or 'doom loop'.
In the letter, BT’s trustees said the fund had faced “significant collateral calls during this period”, forcing managers to first sell off all of its holdings in UK government bonds and even shares in companies held by the scheme.
BT’s pension fund is one of the largest final salary or defined benefit schemes in the UK, with around 270,000 members and pays out £2.5bn every year.
The fund has a shortfall currently of £4.4bn and a plan in place to clear this by 2034, but because of the turmoil around the LDL market that is now in question, said the trustees.
“If expected returns fall below this level then the scheme may need more support from BT in future valuations than previously anticipated,” BTPSM has concluded.
Having to put more money into the fund could not come at a worse time for BT, which is already facing significant financial pressure with its fibre rollout costing £5bn a year and its recently restored dividend costing £760mln.
BT shares were down 2.7% today at 113.8p.