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01 December 2009

Ofcom today published an initial consultation on the way it takes BT's pension costs into account when setting regulated wholesale charges for certain telecommunications services, including broadband and telephone lines. Ofcom is consulting on whether stakeholders believe there are good reasons for changing the current approach, and if so, how the approach should change.

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 recent years, pension deficit payments have become an issue for many companies across the whole of the UK economy. Because of the financial significance of these payments in the case of BT, Ofcom considers it right to consult on whether or how such payments should be factored in when setting BT's regulated prices.

Pension costs assessment

To date, Ofcom has used BT's reported pension costs, excluding deficit repair payments, when determining regulated prices. The consultation considers three broad areas in relation to BT's pension costs: 

• Ongoing service costs this is the estimated cost 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. The consultation asks: What is the most appropriate method of estimating this?
• 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). BT's regulated charges currently take no account of either deficit repair payments or previous pension holidays. Ofcom asks: Should it take these into account in its regulatory decisions and if so, how?
• The "cost of capital" - the return required by BT on its investments and assets as periodically determined by Ofcom for the purposes of setting charge controls. As currently estimated, BT's cost of capital does not include any explicit adjustment to reflect the potential impact of BT's pension fund on the parameters used to determine the cost of capital. Ofcom asks: Whether or not it should adjust the cost of capital?

The consultation is intended to promote a broad debate on whether it is appropriate for Ofcom to maintain or change the approach it currently takes to the treatment of BT's pension costs. So far Ofcom has not taken a view on whether it is appropriate or not to change its current principles in relation to pension costs. If Ofcom changes its approach, any adjustments in wholesale charges would not necessarily be felt proportionately by consumers. If the current approach is maintained, wholesale charges will remain unchanged. If the approach is changed, a variety of outcomes is possible. For illustrative purposes only: 

• If Ofcom concludes that it is appropriate to include relevant deficit repair payments in full, but leave the approach otherwise unchanged, this could increase wholesale regulated charges by up to 4% (however, any such increase would be subject to fluctuation in BT's deficit repair payments).
• If Ofcom concludes that deficit repair payments should continue to be excluded, but amends the approach to estimating ongoing service costs and cost of capital, regulated charges could fall by a small amount.

The consultation provides stakeholders with background information on UK pension schemes, the history of BT's own defined benefit scheme, as well as information on how other regulators deal with pension costs and pension deficit repair payments in particular. The consultation also sets out Ofcom's duties in this area and highlights how they differ from those of certain other regulators. Ofcom expects to publish a further consultation on BT's pension costs in spring 2010 with a statement to follow later in the year. Ofcom’s consultation on BT Pensions can be found at: http://stakeholders.ofcom.org.uk/consultations/btpensions/ Ends. 

NOTES FOR EDITORS

1. *Leased lines are dedicated lines mainly used by businesses, for example to connect their geographically distant offices. 2. A glossary of terms can be found in Annex 8 of the consultation. 3. Ofcom concluded in its final statement on the Openreach Financial Framework that it would be consulting on our treatment of BT's pension costs http://www.ofcom.org.uk/consult/condocs/openreachframework/statement/statement.pdf