British Airways (BA) recently announced that a consultation exercise would shortly commence regarding the proposals to close its New Airways Pension Scheme (NAPS). A significant and growing funding deficit was cited as the reason for the closure.
Because of this, thousands of British Airways employees’ retirements have been plunged into uncertainty.
British Airways stated that the NAPS scheme’s deficit reached £3.7bn in March of this year, making it the largest of all UK company pension black holes relative to the firm’s overall value. The airline said it had paid £3.5bn into the scheme since 2003. They also stated that in 2015 they had committed to pay between £300m-£450m a year into the NAPS scheme until 2027 and this was regardless of whether new contributions from employees are stopped.
If NAPS remained open to accrual, the cost of providing future benefits could rise to 45% of individuals’ pensionable pay in 2018 – more than four times the typical employer contribution for UK airlines.
The trade unions Unite and GMB slated the move and conveyed their dismay and disappointment at proposals from the airline to shut NAPS to future contributions from its existing 17,000 members.
It is understood that discussions between the airline and the unions had focused on ways to make the scheme sustainable and the possibility of it closing had not been brought up, until the statement by British Airways.
In a joint statement, the two unions said, “Our team of financial analysts has worked tirelessly with the airline over the last few months to explore ways to keep the pension scheme open and secure it for the future.” They added, “This announcement sadly confirms that our advice has gone unheeded and that we have been unable to convince British Airways that keeping the scheme open is the right thing to do, for both the company and its employees.”
British Airways have stated that members would still receive what they were due in their retirement – meaning payments from the Scheme would likely continue for decades. NAPS was created in 1984 and offered members lower benefits in return for a lower contribution rate than its predecessor, The Airways Pension Scheme (APS).
British Airways lost a High Court battle against the Trustees of APS in May after they pushed through a £12m discretionary payment in 2011 to make up for a change in the inflation link.
A challenging period lies ahead for BA, with the company likely to face strong opposition from members, unions and the Trustee Board. However, having regard to the level of NAPS’ deficit and the trend for final scheme closures generally, it should perhaps come as no surprise that BA wishes to close to accrual.
Many defined benefit pension schemes are under pressure due to increased life expectancy of the members and record low interest rates. Pension schemes invest greatly in Government bonds – whose yields have fallen to historic lows in recent years – meaning that the money earned from these investments fails to cover the liabilities that the schemes face.
