BT is to make a one-off payment of #500 million into its main pension scheme by the end of this month.
The boost to its defined benefit scheme – closed to new members in April 2001 – comes after a more prudent accounting method calculated the deficit at the end of 2005 at a bigger than expected #3.4 billion.
BT will accelerate payments to cover the shortfall, equivalent to #280 million a year for ten years. It will make an advanced payment of #840 million by April – including the #500 million this month – followed by payments of #280 million a year between 2009 and 2015.
In the wake of the last valuation three years ago, BT said it would pay at #232 million a year over 15 years. It pointed out that if the previous valuation approach had been in force, the scheme would currently be in surplus.
The scheme has 350,000 members in total, including 177,000 pensioners and 77,000 workers who are still contributing.
BT also said the rise in the triennial deficit was due in part to increasing assumptions on life expectancy.
It now expects scheme members to live to an average of 83.8 years if they are men and 85.4 years if they are women, both up six months on previous estimates.
It also now assumes that life expectancy will rise by a further 12 months every ten years, up from its previous estimate of six months.
Yesterday’s agreement with pension fund trustees includes the potential for higher contributions in the event that investment performance is not in line with expected returns. Employee contributions will remain the same, BT added.
Chairman Sir Christopher Bland said: "This is a fair and prudent deal for pensioners and for shareholders, which re-confirms that BT stands fully behind its pension obligations. The scheme is well-managed and assets have grown very strongly in recent years."
Sir Tim Chessells, chairman of trustees at the BT Pension Scheme, said: "This agreement offers balance and certainty.
"It secures additional strong support to the benefit of pensioners, is consistent with the interests of scheme members and is further underpinned by having a financially strong sponsor."
However, traders and analysts said they had expected the deficit to be around #3 billion, and some said the upfront payments into the scheme could cut valuations of the company.
"BT is paying out #840 million in the next 12 months, which is a huge cash flow," said WestLB's Morten Singleton. "Analysts will revise their discounted cash flow numbers, and I'd expect more downgrades."
Investec Securities analyst Christian Maher wrote in a research note: "While the headline deficit of #3.4 billion is higher than some forecast, the payment profile is broadly as expected, and many of the deficit calculations appear to be very conservative."
He added: "We now expect the debate to move on to returning more cash to shareholders, with BT looking undergeared on a March 2008 net debt/EBITDA (earnings before interest, tax, depreciation and amortisation) of 1.45 times versus the EU Telco average of 2.1 times."
Shares closed down 2p at 313p.