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BAE to Make $1.3 Billion Payment to Shrink Pensions Deficit

BAE to Make $1.3 Billion Payment to Shrink Pensions Deficit

(Bloomberg) --

BAE Systems Plc will make a 1 billion-pound ($1.3 billion) payment to fund a pensions black hole in coming months after Europe’s biggest defense firm reached an agreement with U.K. regulators.

The maker of warships, missiles and Eurofighter warplanes had a pension shortfall of 1.9 billion pounds as of Oct. 31, and will make the debt-funded payment under a deficit-recovery plan that replaces one running until 2026, it said in a statement Thursday. BAE shares rose.

A decade of falling global bond yields has hurt returns on pension-fund investments, while historic gains in longevity mean payouts are being made for longer. BAE, which negotiated the new plan with the U.K. pensions regulator and trustees, warned in November that a low bond-yield environment had reduced the accounting value of its pension reserves.

“The pension agreement we’ve announced today is a really good outcome for all stakeholders and provides near term certainty for members and the company,” Finance Director Pete Lynas said on a call. The London-based company will most likely raise debt in U.S. bond markets, he said.

Jefferies International analyst Sandy Morris said the deal is a major step in resolving a “long-running sore,” though it may stress the company’s balance sheet given BAE’s purchase of more than $2 billion in defense assets that Raytheon Inc. and United Technologies Corp. are selling as part of their merger.

BAE traded 4% higher at 665.40 pence, the highest price since July 2018, as of 9:19 a.m. in London, taking gains this year to 18% and valuing the firm at 21.3 billion pounds.

Top Ups

BAE is due to pay an additional 240 million pounds into the pension pot for the year ending March 31, plus a similar amount by the end of the same month in 2021. Deficit contributions in the U.S. will be $80 million in 2020 and $40 million a year after that.

While the bond environment continues to impact BAE’s pension position, asset returns are actually exceeding expectations and the latest assumptions on mortality have also lowered liabilities. The company based its 2017 and 2019 pension valuations on a maximum life expectancy of 89 years for a man aged 65; a one-year change in either direction results in a 1.3 billion-pound adjustment to the deficit, the company said.

Lynas said BAE wouldn’t rule out seeking to buy out its pension plan entirely in the future, but that “it’s not something we’re looking at today.”

The company announced the payment as it reported a 5% increase in underlying earnings before interest, tax and amortization to 2.1 billion pounds in 2019. For the current year, earnings per share are likely to grow by a mid-single digit percentage from 2019’s 45.8 pence, BAE said.

The company said it’s working with industry partners and the U.K. government to fulfill contractual support arrangements with Saudi Arabia after Germany, a partner of BAE in projects including Eurofighter, banned exports to the Mideast country over the killing of Jamal Khashoggi. A follow-on sale of 48 of the fighters agreed in 2018 has been held up as a result.

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Christopher Jasper, Andrew Noël

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