BT Adds Longevity Insurance to Limit Risks of Pension Plan

Jul 04, 2014 1:05 pm ET

(Updates with advisers in eighth paragraph.)

July 4 (Bloomberg) -- BT Group Plc, the U.K.’s biggest phone company, has added longevity coverage for its 40 billion- pound ($69 billion) pension fund in case its members live longer than expected.

The longevity policy gives long-term protection to the plan, BT said in a statement today. The policy won’t require the company to make additional contributions for the U.K.’s biggest defined-benefit plan, it said.

The announcement comes as BT is reviewing its plan that pays more than than 2 billion pounds to members every year. BT may report a funding deficit, before tax, of 8.1 billion pounds as of June, analysts at Macquarie Research said in a note in May. That would mean payments of as much as 770 million pounds a year, more than double the current figure, Macquarie said.

“We expect more schemes to follow suit using this cost effective option,” Ben Stone, a pensions risk specialist for PricewaterhouseCoopers LLC said in an e-mailed statement. “Hedging life expectancy risk in this way could become the norm.”

The risk for longevity has been reinsured with The Prudential Insurance Company of America. The arrangements cover more than 25 percent of the plan’s exposure to longevity, or about 16 billion pounds of its liabilities, BT said.

Biggest Deal

BT created its own insurance company as part of the transaction, giving the company wider access to the global insurance and reinsurance market. The deal is the biggest single longevity risk transfer deal on record, surpassing Aviva Plc, which stuck a similar deal with Swiss Re AG, Munich Re and SCOR SE in March to reinsure 5 billion pounds of liabilities.

“We expect to see this kind of structure replicated by several other schemes in the near future,” said James Mullins, head of risk transfer solutions at Hymans Robertson, who helped advise Prudential on the transaction. “We are seeing first-hand the continued strong appetite that global reinsurers have to take on U.K. longevity risk.”

Prudential was advised by Willkie Farr & Gallagher LLP, Clifford Chance LLP and Hymans Robertson, the company said. BT worked with Towers Watson, Allen & Overy LLP and Hogan Lovells.

U.K. companies are increasingly looking to transfer costly pension liabilities to third parties as people surpass the lifespans that companies projected when they set up defined benefit pension plans decades ago.

Akzo Nobel NV’s ICI Pension Fund, which it inherited through its $17 billion purchase of Imperial Chemical Industries Plc in 2008, struck a 3.6 billion-pound bulk annuity deal with Legal & General Group Plc and Prudential Retirement Income Ltd. in March.

New Growth

BT is looking for new growth, buying rights to top soccer and rugby matches and ultimate fighting to attract users to its packages of phone, television and broadband products.

BT beat analysts’ earnings estimates for the sixth consecutive quarter in the three months ended March 31 as earnings before interest, taxes, depreciation and amortization rose 2 percent from a year earlier to 1.71 billion pounds.

BT shares, up 2.8 percent this year, rose 0.4 percent to 390.2 pence at 12:40 p.m. in London.

--With assistance from Adam Ewing in Stockholm.