British Airways Shifts to DC Pension Plan

The decision follows a internal review of the London-based company’s UK pension arrangements taking into account the changing competitive environment, new accounting rules (FRS17), volatile markets, and rising life expectancy, the company said.

According to a Dow Jones News report, the company’s decision will not affect the pension benefits of the 65,000 members of NAPS, the New Airways Pension Scheme, or the 36,000 members of APS, the original Airways Pension Scheme, which was available to employees who joined before 1984.

Under FRS17, APS/NAPS taken together generate a company accounting shortfall of GBP394 million as at March 31, 2002.

APS/NAPS have investments together valued at nearly GBP10 billion. Both plans meet the statutory Minimum Funding Requirement (MFR).

BA’s move is line with a recent survey by the National Association of Pension Funds, which found that FRS17 could discourage UK employers from linking their pension benefits to their final salaries.

FRS17 requires companies to show the true value of their pension plan assets and liabilities instead of spreading the cost of funding them over a number of years, as under the current standard, SSAP 24.

Under FRS17, assets must be accounted for at market price, and liabilities discounted by the yield on corporate bonds. A shortfall or surplus must be reflected on the company’s balance sheet.

The new rule is expected to hit pension plans hard. A recent William Mercer study estimated that 52% of UK company will see a decrease in their 2001 pension plan assets because of FRS17 — significantly from the previous year’s 28%.