Ofcom statement on BT pensions

15 December 2010

Ofcom today confirmed its decision not to change the way it treats BT's pension costs when setting regulated wholesale charges for telecoms services, including broadband and landlines. This follows an initial consultation published in December last year and a further consultation in July this 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*.

BT's pension deficit contributions have increased in recent years and Ofcom has considered whether there are good reasons for changing the way that it currently treats BT's pension costs. At present Ofcom allows for ongoing pension service costs, as reported in BT's statutory accounts, but excludes payments made by BT in respect of any pension fund deficit.

After considering the evidence, including responses from stakeholders, Ofcom has decided to maintain its current approach.

Pension guidelines

The pension guidelines that Ofcom has published today will also help ensure that the treatment of BT's pension costs is consistent with setting regulated charges efficiently. The guidelines will maintain a consistent regulatory approach.

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

The guidelines meet Ofcom's principal duty to further the interests of citizens and consumers by promoting competition.

Ofcom has set out three decisions in relation to BT's pension costs:

  • No allowance for deficit repair payments. These are cash amounts which BT pays at present to reduce the deficit in the company's defined benefit pension fund. Neither deficit repair payments, nor pension "holidays" (periods where employers are able to reduce or suspend their contributions into pension schemes), are currently taken into account when Ofcom sets BT's regulated charges. Ofcom has decided not to change this.

The alternative - including deficit repair payments in regulated prices - could potentially, lead to those prices being set at levels which do not accurately reflect the relevant underlying costs. It would also be inconsistent with the basis on which BT's prices have been regulated since the company's privatisation.

  • No change to ongoing service costs. These are the costs of pension benefits earned by employees for service in the current period. Ofcom currently includes reported service costs from BT's statutory accounts in its regulated charges. Ofcom has decided to continue with the current approach as it provides the best estimate of these costs.
  • Treatment of the cost of capital remains unchanged. 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. However, Ofcom considers that there is insufficient justification and evidence to support the need to make an adjustment at this point.

Ofcom’s statement on BT Pensions



  1. *Leased lines are dedicated lines mainly used by businesses, for example to connect their geographically distant offices.
  1. Ofcom is the independent regulator and competition authority for the UK communications industries, with responsibilities across television, radio, telecommunications and wireless communications services.
  1. Under the Communications Act 2003, Ofcom has a duty to promote competition and encourage efficient investment and innovation, and this review is being conducted in this context.