BT in more hot water - could take £16.6m hit

The embattled British incumbent BT has received more bad news, although it wasn't unexpected.

The European Commission ha ruled that BT has enjoyed illegal state aid and must pay more into a pension insurance fund to cover its liabilities, the Financial Times reports. That could cost as much as £16.6 million (€18.449 million).

BT is likely to appeal.

As the FT points out, the sum is modest compared with the increased annual top-up payments that analysts believe BT could have to make to its defined benefit pension scheme from 2009-10. The newspaper quotes Morgan Stanley says the annual payments could rise from £280 million to £500 million.

The situation is complex and unusual: the FT explains that the Commission has been investigating the crown guarantee that covers some of BT's pension liabilities. The guarantee, finalised at BT's privatisation in 1984, means the government would pay some of the company's pension obligations if it became insolvent. It is the UK's largest defined benefit scheme, with liabilities of £33.4 billion at September 30.

BT and the government have yet to agree the scope of the liabilities covered by the guarantee. The Commission said the UK must recover state aid by ensuring BT paid a full levy to the Pension Protection Fund, backdated to 2005.

BT has been making payments to the fund in relating to its post-privatisation employees. It has also paid £16.6m into an escrow account, which represents the additional amount due to the fund under the Commission's ruling.

The FT reported BT saying it was disappointed with the Commission's findings in relation to the fund, and was likely to appeal. It also welcomed the Commission's statement that the crown guarantee benefited some of its employees, and therefore did not constitute state aid. Another one that will run and run.