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BAE Systems

BAE Systems' shares soar as UK pension funds top-up proves less then expected

It also separately announced that a change to a new accounting standard is not expected to have a material impact on the group’s results for 2018 and beyond

BAE fighter jet
At the end of March, BAE said its UK defined-benefit pension schemes had a combined deficit of £2.1bn

BAE Systems PLC (LON:BA) saw its shares jump today after it reached an agreement to revise the funding arrangements for its UK pension scheme which will see it increase annual contributions by less than some analysst had expected. 

It also separately announced that a change to a new accounting standard is not expected to have a material impact on the group’s results for 2018 and beyond.

READ: BAE heads lower as it announces plans to cut almost 2,000 jobs

In a statement, the FTSE 100 listed defence company said that after consultation with the UK Pensions Regulator, it has reached an agreement with the trustee boards of its UK defined-benefit pension schemes on the 2017 triennial funding valuations and deficit recovery plans.

As part of the agreement, the group said its annual deficit recovery payments will increase in 2018 to around £220mln from £205mln currently, and deficit contributions will then increase in line with any percentage growth in dividend payments made by the company.

At the end of March, BAE said its UK defined-benefit pension schemes had a combined deficit of £2.1bn which, it added, was "broadly similar" to the position at the last triennial review in 2014.

Under the new plans, it said deficit recovery payments will sUBSequently fall to around £50mln in 2022 before ending in 2026.

BAE added that its annual deficit contributions to US pension schemes are expected to remain at US$80mln through to 2022.

In morning trading, BAE was a top blue chip gainer, up 2%, or 11p at 555p.

READ: BAE Systems warns on the performance of its Cyber & Intelligence business

In a note to clients, analysts at UBS said: “Overall this is good news as we had modelled up to a £100mln top up in the UK scheme ie a total contribution of £400mln. The contribution over 2018-2020 is more likely to be £280mln pa.”

They added: “BAE is currently trading on 4.4% FCF yield for 2018. Assuming a lower pension contribution the stock would be on a 5-5.1% FCF yield in 2018-19.”

UBS repeated a ‘neutral’ rating and 655p price target for BAE shares.

In a separate statement, BAE - which is moving to the IFRS 15 accounting standard - said the switch would have no impact on the way it managed its contracts and therefore no material impact on its results.

The group will use IFRS15 for the first time when presenting its first half 2018 results.

 -- Adds share price, analyst comment --

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