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British Airways to defer £450 million in pension plan payments to preserve cash

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In advance of IAG’s full-year results, due later this week, British Airways made two announcements yesterday about its plans to generate liquidity.

A pension scheme with a little airline attached ….

British Airways is occasionally described as a pension scheme which happens to own a small airline. This is not far from the truth.

New Airways Pension Scheme deficit

The last published valuation of the New Airways Pension Scheme (NAPS), at 31st March 2019, showed that it had assets of £18.1 billion. The market capitalisation of IAG is currently £8.4 billion, of which BA accounts for around half. There is some truth in the remark.

The New Airways Pension Scheme, which has been closed to new members since 2003, has a funding hole of around £2 billion. British Airways has been working hard to fill this gap in recent years.

BA will defer £450 million of deficit contributions

British Airways has agreed with NAPS to take a 12-month break from making ‘deficit contributions’.

This has been backdated to October 2020 and will continue to September 2021. There is a cash saving to BA of £37.5 million per month, for a total saving of £450 million.

Under the current plan, BA will resume regular ‘deficit contributions’ from October 2021. The size of these payments will depend on the triennial valuation of the scheme due on 31st March 2021.

However, it will not start to repay the missing £450 million until March 2023. From that point, any dividends paid upstream from BA to its parent IAG must be matched by a deficit reduction payment. These will continue until the £450 million, plus interest, is repaid.

BA has put up various property assets as security in the event that the airline fails before the payments can be made.

British Airways 787

BA is drawing down its £2 billion Government-guaranteed loan

As we covered here on New Years Day, British Airways has agreed a 5-year Government-guaranteed loan worth £2.0 billion.

This is funded via the Export Development Guarantee scheme. The money is provided by commercial banks but the loans are underwritten by the Government to, based on precedent, 80% of the total sum.

British Airways confirmed yesterday that it now needs this money, and will be drawing down the loan before the end of the month.

Conclusion

The good news for British Airways is that, in the short term, liquidity does not seem to be a problem. We should find out from the IAG financial results on Friday how long this £2.45 billion will last.

The hope is that it will see the airline through until passengers have confidence to start booking again. Remember that, if the airline fails, the majority of the £2 billion pension deficit will be picked up by taxpayers, as will 80% of this new £2 billion loan.

You can find out more on the IAG website here.


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Comments (24)

  • Simon says:

    Ref your last line – if you are referring to an insolvency event pushing the Pension Scheme into the PPF then that burden won’t fall on taxpayers – the Fund is funded by a levy on pension schemes, not through the tax pot.

    • Mark says:

      its also worth saying that the staff who have dedicated their careers to British Airways will likely get a reduced pension benefit in the event the BA Scheme enters the PPF

  • J says:

    Take £1bn from the pension, stick it in Bitcoin, wait until December, problem solved 😂

  • J says:

    Or a bigger one created, but pffft, what’s a billion between friends 😉

  • T says:

    Bad deal for the taxpayer. Why the government is not getting equity as part of the deal is just poor.

    • Nick says:

      Because the government is not expecting to have to pay a penny.

      Why on earth did they ever create such a ridiculous pension arrangement in the first place though.

      • Rob says:

        The year before I joined HSBC it had a 20 year pension scheme for management (it closed it just before I joined) – ie if I had worked from 21 to 41 I would have accrued enough pension rights to take a pension at 55 (or whatever) on 2/3rd of my final salary. It was ludicrous. You could get up to, say, £150k base salary by 41, resign, spend 14 years (or whatever) taking it easy knowing that your £100k pa pension was ready to kick in ….

        • MJ says:

          If only I had parents who had told me to take this career path.

        • Chris Heyes says:

          Rob I agree wholeheartedly with you (not the same amounts though)
          But the taking it easy bit has been fantastic the last 23 years
          long may it last
          You will never know what you are missing !
          Not for everyone though, partners brother retired at 68 Dec and he’s lost already
          we knew it would happen if you work all your life when you finish you seem to give up for some strange reason instead of looking forward

        • T says:

          This current system is a massive Ponzi scheme the earlier you get in the better off you are.

        • Jonathan says:

          Rob was this on the international manager program? Or across the bank entirely based on grade?

          I’m still amazed by family in their 90s who were branch managers in their hayday and get private medical for life! The cost of that to self fund at their age would be vast.

      • ken says:

        Life expectancy shorter, nominal investment returns high, inflation ate away pensions in payment.

        In 1989 the BA pension surplus in the old scheme (APS – pre dating privatisation) was such that the trustees granted BA a 30 year contribution holiday !

        One thing Thatcher & Brown have in common.
        Incompetent and catastrophic pension reforms.

      • T says:

        With all due respect that’s short sighted. The taxpayer (You and I) are allowing this company to exist and are the lender of last resort we deserve to be compensated because there IS risk and shareholders will benefit from our generosity.

  • kevbar says:

    Maybe they now need the £2 billion loan to buy enough nectar points for everyone 🙂

  • Chris Heyes says:

    My company stole from the pension pot ( i say stole because they had agreed payments that they “took a holiday” from paying
    If it’s agreed payments and not made, that’s stealing (in my book)
    No-one was informed on the pension board (except the 3 people the company placed on the board) this was over 30 years ago
    The company still exists although taken over twice
    The company is still trying to make up the shortfall it created itself
    shameful !

  • Colin MacKinnon says:

    Be interesting to know if the senior pilots have transferred out. The top pension from the PRF is around £45k – not a lot if you were expecting six figures.

  • will says:

    It blows my mind how anyone’s pension can ever be on the line.

    Why is it so difficult to legislate that everyone’s pension is held separate from any company / public purse and based solely on their contributions and whatever it’s invested in?

    I also object to using pensions in “incentives packages” for high paid workers or public sector workers. Just make that salary, then jobs are directly comparable and we wouldn’t get into this ridiculous situation where an employees pension that they’ve paid into from their salary literally does not exist.

    • ken says:

      Will – defined contribution pensions are exactly as you say.

      These are final salary schemes – the benefit is a promise, albeit backed up by the scheme assets.
      The schemes are at the whim of investment returns, inflation, life expectancy and most of all gilt returns. As interest rates have plunged, the schemes deficits have increased substantially.

      • Jonathan says:

        Frankly a lot of the younger amongst us would relish the chance to have got into a defined benefit scheme of old. Yes there’s credit risk but the prospects of having a good retirement are vastly different to most defined contribution members.

        The most stark example of this is the way they’re treated for tax purposes by arbitrarily use a factor of 20 to decide the employer payments! Show me a DC scheme or other product that uses a risk free rate of 5% by comparison.

        I sympathise with the doctor lower down but the reason you’re being taxed is because you’ve had a huge increase in your pension employer contributions above a level that society deems allowable tax free.

        If you want to moan about pensions it’s the prospect of higher rate tax payers paying some income tax on the way in and still being subject to income tax on the exit, all under the narrative of a flat “tax relief” across bands (albeit now fiscally positive for HMRC presumably).

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