Warning for IAG investors as BA faces big bill for £26bn pension
SHAREHOLDERS in British Airways owner IAG should be worried about a looming crunch for BA’s giant €30 billion (£25.8 billion) pension scheme, industry experts have warned.
The trustees of BA’s pension scheme agreed the airline could defer £450million of pension contributions over the past year as it faced Covid travel restrictions.
But that deal expires at the end of September and BA is set to resume paying contributions of €41million each month from October 1.
The huge bill will pile pressure on BA’s battered finances at the worst possible time as speculation mounts that it could have to raise further cash from shareholders.
Separately, The Mail on Sunday can reveal that major hedge funds have turned against the company.
Marshall Wace has more than halved its holding in IAG to 1.3 per cent, down from 3 per cent last October. Meanwhile, US giant Citadel has built up a major short position against IAG since the spring, betting £54million on the share price falling. IAG’s shares are now 149.5p, down 31 per cent since April.
John Ralfe, an independent pensions consultant, said: ‘The pensions agreement was always a short-term fix and the problem hasn’t gone away.
‘This should be a real worry for shareholders because when you look at the size of the pension liabilities, it’s more than the value of the entire company. So BA can’t keep kicking this issue down the road.’ BA’s £25.8billion pension liabilities – the estimated value of payouts it will need to make to retired staff – dwarf IAG’s £7.07 billion stock market value.
Its two retirement schemes – the €8.5billion Airways Pension Scheme (APS) and the €22.2billion New Airways Pension Scheme (NAPS) – are among the country’s largest, corporate, defined benefit schemes, with 85,000 members between them. They closed to new members in 1984 and 2018 respectively.
BA’s pension contributions are based on a valuation of its schemes every three years. The latest valuation, in 2018, showed a €2.7billion
deficit in its NAPS and a €683million surplus in the APS. The next valuation, due by next June, will be used to calculate the repayment plan for the contributions deferred during the pandemic.
In July, IAG’s finance chief Steve Gunning said it was still ‘early days’ for discussions on the remaining BA pensions deficit and the recovery plan.
IAG contributed €32million to its pension schemes over the six months to June 2021, compared to €182million in the same period last year, and has committed to paying €1.28billion to NAPS over the next five years. BA’s pension scheme is run by US investment giant BlackRock. IAG’s latest annual report for 2020 showed assets in the NAPS scheme are invested across classes including private equity, hedge funds, property and derivatives.
As part of BA’s agreement with the NAPS trustees to defer payments over the last year, BA agreed that it would not pay a dividend to parent company IAG before 2024.
When BA resumes paying a dividend to IAG from 2024, it will have to pay a pension contribution equivalent to 50 per cent of the dividend until the deferred £450million has been paid off.
IAG has returned almost €4.1billion to shareholders since 2015 but has frozen shareholder payouts since last April. In July, IAG chief executive Luis Gallego said the group is ‘determined’ to resume payouts as soon as possible.
A BA spokesman said last night: ‘The next triennial valuation is due to be completed by June 2022 and we will make an announcement at the appropriate time.’
City analysts have speculated parent company IAG may launch a rights issue. But this weekend Gallego said he is not considering a rights issue and the company was talking through ‘different options’ with banks as it plans through worst-case scenarios.
Hedge funds Marshall Wace and Citadel declined to comment.