BA moves closer to Iberia deal after agreeing plan to fill pension hole

Published on Tuesday 22 June 2010 20:38

BRITISH Airways has agreed a plan to plug its pension scheme deficits in a move that helps pave the way for its merger with Spanish peer Iberia.

The UK carrier, which has been hit by a series of cabin-crew strikes, yesterday said its agreement with pension trustees would avoid closure of the two final-salary company pension schemes. Together, the schemes have nearly 100,000 members.

BA aims to maintain annual contributions of 330 million, rising in line with inflation, until 2023 and 2026 for the two schemes to plug a gaping 3.7 billion deficit.

However, members will have to either pay more to maintain the same benefits, or see their pension pots reduce.

The airline will submit the plans to the UK Pensions Regulator by the end of the month and Iberia now has three months to consider the pensions deal.

In April, BA and Iberia signed an agreement to create the world's third-biggest airline after months of negotiations during which BA's pension deficit had been one of the main stumbling blocks.

A spokesman for the Spanish airline described BA's pension agreement as "a positive step forward in the merger process".

BA struck an agreement in March with trade unions on the pension changes, which will see members accept a reduction in benefits. However, those in the larger of the two schemes – the 68,800-strong New Airways Pension Scheme (Naps) – can pay 4.5 per cent more in contributions to maintain existing benefits.

BA chief financial officer Keith Williams said: "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."

The Naps scheme had a deficit of about 2.7bn as of last December, while the Airways Pension Scheme (Aps) – with some 31,000 members – is close on 1bn in the red. They both closed to new members many years ago, with the Naps shut in 2003 and Aps in 1984. But they have been under threat amid mounting funding pressure from falling stock markets and increasing liabilities as members live longer.

Analysts at Citigroup said they now expected the merger with Iberia to go ahead given that BA has avoided having to pay an additional lump sum into the pension schemes.

"We had pencilled in 500m as a precautionary measure but this is now not necessary. Given the absence of additional immediate lump sum contributions, we would expect Iberia to confirm its merger agreement with BA by the deadline of 30 September, if not before," they said in a research note.