Ofcom proposals on BT pensions - No proposed change to link with regulated prices

23 July 2010

Ofcom today published proposals on the way it takes BT's pension costs into account when setting regulated wholesale charges for certain telecoms services, including broadband and landlines. This follows an initial consultation published in December last year.

Ofcom sets the prices that Openreach, BT's wholesale access division, can charge other communications providers to deliver services to consumers. Regulatory controls also apply to certain other services provided by BT Wholesale such as leased lines*.

In its initial consultation, Ofcom asked stakeholders whether there were good reasons for changing the way that it currently takes BT's pension costs into account when setting regulated charges. At present Ofcom takes account of ongoing pension service costs, as reported in BT's statutory accounts, but excludes payments made by BT in respect of any pension fund deficit.

At this stage, Ofcom has not received compelling evidence from stakeholders which would justify a change in approach. Therefore, in this second consultation, Ofcom proposes that the current approach to the treatment of BT's pension costs be maintained.

Pension proposals

Ofcom believes that predictability and consistency are important for creating an environment in which regulated firms, such as BT, and their wholesale customers are willing and able to invest.

Following its initial consultation, Ofcom has today set out three proposals in relation to BT's pension costs. These proposals would maintain regulatory certainty and consistency, and ensure that the treatment of BT's pension costs is also consistent with setting regulated charges at efficient levels:

• Deficit repair payments (cash amounts which the company pays over time to reduce a pension fund deficit) and pension "holidays" (periods where employers reduce or suspend their contributions into pension schemes) are not currently taken into account when Ofcom sets BT's regulated charges. Ofcom proposes not to change this. Ofcom believes that its current position provides consumers with regulated prices that most closely match a fully competitive market.The alternative could lead to fluctuations in BT's wholesale prices as a result of changes to BT's pension deficit (and deficit repair payments) which would not provide certainty for stakeholders and would, potentially, lead to those prices being set at levels which do not accurately reflect the relevant underlying costs.

• Ongoing service costs - these are the estimated costs of pension benefits earned by employees for service in the current period. Ofcom currently includes reported costs from BT's statutory accounts in its regulated charges. Ofcom proposes not to change this in order to provide consistency and certainty for stakeholders.
• Cost of capital - the cost of capital is an element of the return BT is allowed to make on its investments and assets as periodically determined by Ofcom in order to set charge controls. There is, in principle, a potential connection between the existence of a defined benefits pension scheme (such as that operated by BT) and the estimated cost of capital. At present, however, Ofcom considers that there is insufficient evidence to support the need to make an adjustment.

Ofcom expects to publish a final statement on its pensions review by the end of 2010.

Ofcom's second consultation on BT Pensions can be found at: http://stakeholders.ofcom.org.uk/consultations/pensions-review/

Ends.

NOTES FOR EDITORS

1. *Leased lines are dedicated lines mainly used by businesses, for example to connect their geographically distant offices.