Newsbrief No 54

January 27th.2004.

Contents

1. Valuation 2003.

2. Clause 24 APS Update.

3. Captain Mike Post.

4. Subscriptions Round Up.

5. Lost Property.

Valuation 2003.

In Newsbrief 53 we advised Members that copies of the minutes of APS & NAPS Trustee meetings are available from BA Pensions, these relate to the Valuation 2003 of both Schemes, together with the full valuation reports. We hope that Members will have taken the opportunity to obtain copies of the detailed discussions & comments between the Trustees & the Scheme Actuary. The APS minutes highlight in particular the efforts that were made by the Pensioner Trustees to establish why the actuarial method & assumptions used in the 2003 APS Valuation was so radically different to that used in the 2000 Valuation.

The three Trustees made strenuous efforts to persuade both the Actuary & the other Trustees to use less optimistic, more conservative valuation, which would reflect the maturity of APS (over 90% pensioners) and also their concerns over the ability of BA to meet any substantial deficit.

A valuation using the same methodology as the 2000 Valuation would require BA to make substantial payments to APS in order to restore its discontinuance funding level back towards the 100% level necessary for full financial security.

ABAP supports the Three Pensioner Trustees in believing that a more appropriate valuation would require BA to make deficiency payments & reduce reliance on the Stock Market, which can suffer sharp fluctuations at any time.

The other Trustees opposed this, and two (non-ABAP) elected Trustees stated they had confidence in the Actuary and the Valuation. The three pensioner elected Trustees are to be congratulated on their efforts in trying to minimise the risk to the future security of APS. We look to them to keep a careful watch on the investment strategy to ensure it is carefully formulated with the objective of minimising the risk of any repetition of the serious loss (£1.265 Bn.) over the past few years.

Members have asked what would happen if BA either withdrew support from APS & NAPS, or went into liquidation. They have also been asking about the small APS surplus and for an explanation of "discontinuance." Discontinuance is explained in Sec. 7 of the Actuary's report of the 2000 Valuation of APS & NAPS. He explains it as " if BA, as the principle employer, were to terminate its liability to make contributions." (Para. 7.2)

The Rules of APS & NAPS provide that BA at any time may terminate its contributions to APS & NAPS by giving the appropriate notice required. However, APS has a solvency guarantee, which would require BA to restore APS to solvency, so it is therefore unlikely that BA would follow this course of action on APS.

Under new legislation NAPS effectively also has its own solvency guarantee on discontinuance as long as BA is solvent. If BA became insolvent it would of course apply to both schemes. In such circumstances the outcome for all beneficiaries would depend crucially on the assets available.

In theory the APS solvency guarantee stands (but not for NAPS if BA is insolvent). Any shortfall would of necessity have to take its place with other unsecured creditors. The order of priority for pensions following insolvency is at present under review by the Government. The APS guarantee would only be as good as the value of the assets of BA when it was wound up. The APS fund would simply be another unsecured creditor. If NAPS did not meet the MFR (Minimum Funding Requirement) then the shortfall would be a further unsecured debt.

The discontinuance figures are given by the Actuary in percentages in para. 7.6 of each valuation report. He did not convert these into monetary terms. The "In Focus" report, from BA Pensions, also failed to place a figure on these percentages. The Actuary has given two dates, 31st March 2003, & 18th November 2003 when the Valuation was signed.

For APS a funding level of 86% at 31st March 2003 means a deficiency of £900m. The funding level had improved by 18th November 2003 and was 90% or a deficiency of £600m.

The NAPS figures were 54% at 31st March 2003, & 60% as at Nov 2003 means deficiencies of £2.7Bn.,decreasing to £2.1Bn by November 2003. For NAPS the discontinuance shortfall is only a statutory debt on BA if it is solvent - if BA is insolvent then the statutory debt will be nil, as there is no MFR shortfall currently.

It should be noted that in the APS 2000 Valuation the Actuary used a discontinuance valuation method, which reduced the amount of the surplus. In the 2003 Valuation he used a different method, which reduced the value of the liabilities. In addition the assets were recalculated to include the improved stock market performance after the valuation date of 31st March 2003 this then converted a deficit into a small surplus.

Had the Actuary used the discontinuance method APS would have shown a deficit of £900m. We are advised that this deficit would have required BA to make additional deficiency payments of approx. £109m p.a. over the next 10years. Members should not take comfort from the MFR figures quoted the "In Focus" report and the Valuation Report. We have warned repeatedly that MFR is a very low hurdle and we are advised that this "protection" is unlikely to produce more than 60% of promised benefits for some Members.

WHAT DO THESE VALUATIONS MEAN ?

As far as APS is concerned the valuation means that pensions of existing Pensioners should be secure even if BA ceased contributions. But future index linked increases may be at some risk. (See our warning on future legislation.) The position of Active Members & Deferred Pensioners is that if BA ceased contributions then some portion of the benefits which they had accrued up to 31st. March would be at risk. The benefits they would receive would depend on the value of the assets left after all pensions in payment had been secured.

What they would receive depends on future legislation now under consideration (See Newsbrief 53) on how benefits for Active Members should be assessed. Benefits may be on a sliding scale proportionate to years of service. There may also be a cap, (an upper limit) although no figure has yet been agreed. Future index linked increases are most at risk.

NAPS Pensioners should be secure, but on the figures of discontinuance deficiency of £2.1Bn as of 18th November 2003, the amount Active Members would receive, and future pension increases, may not be secure.

WHAT IF THE MERGER HAD SUCCEEDED?

We asked our Actuaries to give an estimate of what would have happened to APS if the Merger had gone ahead in 1999/2000. Using broad assumptions of £900m more invested in equities for the period 1st April 2001 to March 2002 and £1.8m more for the 1st April 2002 to 31 March 2003 the estimate is that the value of the APS fund would have been some £700m lower as at 31 March 2003. Had that happened BA would have been faced with additional deficiency payments of £86m p.a. over the next 10years. Any benefit improvements or contributions post merger would have increased the deficit further. For example, if £207m had been "spent"(as proposed) then this would correspond to additional contributions required of £33m p.a. for 10 years. It is fair to say that rejecting the BA proposed merger, APS avoided a reduction in the security of pensions. ABAP has been fighting for the security of BA pensions since the 1995 Act, when we lobbied both the Government and MPs in Westminster for a true solvency standard. We shall continue to do so, but we cannot do it alone, we need the help of ALL beneficiaries in APS & NAPS.

WHY ARE APS & NAPS IN SUCH A STATE ?

The Chief Executive of BA, Mr Rod Eddington, who joined BA in 2000, is reported in the national press and BA News (20/11/03) as saying: "When you are rowing against a strong tide, the last thing you want are a couple of dead weights on board. I have often referred to our twin betes noires debt and the hole in our pension fund as the two elephants in the back of the boat holding us back. BA's debt still assumes elephantine proportions, currently standing at around £4.8 billion. But we have made some headway, and although our debt is still much higher than our major competitors it is lower than it has been for over 5 years.

Pensions is the other issue we are tackling as a matter of urgency, and like debt, is a huge challenge. It is no secret that BA's pension funds like those of many other companies - have come under heavy pressure inline with a depressed stock market, particularly when set against the final salary benefits they are designed to pay." He further comments "The valuation of BA's funds are bleak. The surplus in APS - stood at £820m in March 2000 has sunk to just £45m. The NAPS fund which was already £221m in the red 3 years ago, now has a shortfall of £928m."

So it's all the fault of the stock market and the fall in the value of equities !

OR IS IT ?

Well. No, in our opinion IT IS NOT !

Mr Eddington is comparitively new, but he is well aware that BA has enjoyed a contribution holiday from APS since 1989 worth £754m. and since 1989 BA has imposed further substantial liabilities on APS through the use of Clause 24 at a cost of £339m. A total benefit from APS of £1.093Bn. In 1984 BA closed APS because it was too costly. NAPS was introduced as good but cheaper alternative. So what did BA Management do ?

In 1989 BA improved APS & NAPS benefits, reducing the age of retirement & increasing the actuarial rate. Why ? To get Trade Union agreement to the 1989 Pay Deal !

And they said, "To recruit and retain high calibre staff."

Further improvements have been made since that date to solve Industrial Relations problems. Early retirement with augmented pensions has been offered to reduce staff numbers. As APS was in surplus, Clause 24 was used to put the liability on the Fund. NAPS 2 was introduced in 95/96 to improve pensions for lower paid NAPS employees. Early retirement for NAPS Members has increased the NAPS liabilities, although the augmentation has been paid for (£357m in Valuation 2000). All part of the staff reduction plan. In 2002 additional benefits were given for some ground staff in APS & NAPS. In 2003 new salary scales were introduced for pilots. These are additional liabilities which BA decided to give to achieve their objectives.

We have no objections to Members obtaining additional benefits. Although we question whether or not liabilities should be imposed on a fund which was closed in 1984 & to which BA was not making any contributions whatsoever. As BA Management imposed these additional liabilities on the funds, they cannot now complain of the cost, especially as they were given in pay deals or to encourage staff to take early retirement to reduce wage costs.

Mr. Eddington refers to the 2000 Valuation & the £820m. surplus. He should perhaps go back to the 1998 Valuation, which showed surplus of £409m. (disposable surplus of £152m.) This of course ignored the mismatch reserve of £584m. Our Actuaries estimate the surplus was over £1BN. We wrote to the Trustees in January 1999 enclosing a copy of our Actuarial Report and stating that 55% invested in equities was too high for a closed scheme with 70% Pensioners.

Mr. Stevens then Chairman of Trustees, who was also Chief Financial Officer of BA, and a BA Board Member rejected this, as he had done with all prior & subsequent letters which urged a change in investment policy. Since 1996 ABAP has been writing to the Trustees that the policy of 50/60% investment in equities was inadvisable for a closed scheme such as APS with some 70% Pensioners. The current figure is now over 90% Pensioners.

The Trustees & their advisers have always rejected our comments. WHY?

One would have expected the Chief Financial Officer of BA and all the highly paid advisers to the Trustees would have acted more expeditiously and avoided some of the loss of the £1.2BN that has occurred.

After all Boot's Trustees & Advisers got it right ! WHY DIDN'T WE ?

Could it have anything to do with the Merger……..?

In May 1999 Mr Walker Director of Resources wrote to the Trustees proposing a Merger of APS & NAPS. One of the results of a Merger would have been the ability to increase the APS investment in equities. The sweetener for this proposal was that £271m of the £584m mismatch reserve would be distributed as follows: £132.7m for APS beneficiaries. £37.4m for NAPS £99.4m to be used to reduce NAPS costs to BA. The other half of the APS reserve could be released at a later date. The Merger proposal, which the Trustees were "minded to accept" failed due to Member opposition, but the equity policy has been slow to change.

Was the Trustees & their investment policy for APS affected by the BA merger proposal ?

Was the BA desire to have a Merger to reduce NAPS costs a factor which influenced the investment policy ?

Whatever the reason, APS continued to invest heavily in equities in spite of continual ABAP pressure to reduce the exposure.

Clause 24 Complaint.

We have been advised by the Pensions Ombudsman that the complaint concerning Clause 24 (which grants power to BA to grant additional benefits under APS to any existing Member of APS & Any Other BA Employee) is outside his jurisdiction. So he will not investigate it.

His decision was made principally on the basis he considered that, among other things, the complaint may affect the interests of persons who are not parties to the complaint. They would not then have an opportunity to make representations to the Ombudsman.

This is extremely disappointing, particularly since he initially appeared to accept the complaint for investigation. However, as we advised in Newbrief 53, BA challenged the jurisdiction of the Ombudsman to determine this complaint, threatening that if he investigated the complaint they would go to court for a Judicial Review. A majority of the APS Trustees also opposed the Ombudsman's consideration of the complaint on similar grounds. (Although the three Pensioner Trustees dissented, indicating they wanted the Ombudsman to investigate the complaint.)

The Trustees indicated that the only appropriate forum for determining the complaint was the court, but they did not believe they needed to issue court proceedings because they did not consider it raised any real issue affecting the administration of the Scheme. The Trustees through their lawyers have been asked if they would be prepared to refer the matter to the courts or consent to paying ABAP's legal submission costs. The Trustees have declined to do so.

Our opinion is that BA clearly did not wish to have this issue argued in the Courts. Given the recent decision by the Court of Appeal perhaps this is understandable.

Of particular concern to ABAP is that Clause 24(iii) purports to reopen APS to new members by allowing BA to grant pension benefits from APS funds to"any employee or former employee or category thereof ( other than members or pensioners)". This could mean that persons who have never contributed to APS or who are not Members or Beneficiaries of APS.

This provision contradicts the undertakings, assurances, and the countless written statements made in 1984 by BA that APS was closed for All Time and that re entry was not an option for those who had left to join NAPS. At a time of financial uncertainty it allows BA to increase the liabilities of the scheme.

While BA guarantees the solvency of APS in Clause 19, this guarantee is only as good as the financial health of BA. We firmly believe that this provision must be removed from APS.

The decision of the Ombudsman means that our principal options are:

1. Seek a Judicial Review of the decision of the Ombudsman .

2. Submit our complaint to the Court.

3. Consider a complaint to OPRA( Occupational Pensions Regulatory Authority)

We have decided in the current climate of uncertainty on the funding of APS & the financial position of BA, and the potentially heavy legal costs involved in starting Court Proceedings, that we should not risk spending our resources at present. In the mean time we intend to investigate further the possibility of a General Complaint to OPRA. Covering all aspects of APS since the introduction of Rule 34/ Clause 24 in 1986, the Valuations of 1989, 1992, 1995, & 1998, the Merger Proposal and the Actions of All Involved in those Affairs.

Captain Mike Post.

Members will by now be aware that Captain Mike Post is up for re election as a Pensioner Trustee shortly. We are confident that like your Committee, Members remain impressed with his efforts on behalf of all Pensioners during his first term as an APS Trustee. Members will be kept fully informed on this matter in due course.

Subscriptions Update.

The latest batch of Membership cards 2003/2004 has been dispatched. It is requested in order to keep the ABAP database up to date. Any Member who does not have to pay a sub should complete the renewal form recently dispatched. Or if they have not received a copy - to complete a note to the same effect as above to The Treasurer.

Lost Property.

A pen was found at the Concorde Centre after the AGM in October. Would the owner please call George Bell on 01189 351 938. The Committee of ABAP. 27th January 2004