BA's pension funds: An elephant in a rowing boat?

According to its latest three-yearly valuation, the New Airways Pension Scheme (Naps) is �928m in deficit.

The company said at least �133m extra contributions a year are needed to top up both of its final salary schemes.

BA once described its liabilities as an "elephant in a rowing boat", and will now start talks with unions and staff over how to fund the shortfall.

'Additional burden'

One option up for discussion could be an increase in staff contributions.

BA currently pays �3 for every �1 paid in by employees into the Naps scheme.

But a BA spokesman stressed it was "going to look at every option open" to it.

John Rishton, British Airways' Chief Financial Officer, blamed poorly performing stock markets over the last three years and changes in life expectancy.

They are not turning around and closing it (pension scheme) without having discussions with their staff GMB union spokesman

He said: "British Airways remains committed to its existing pension schemes but these funding increases are a substantial additional burden, particularly in the current difficult trading environment.

"We will be working with our unions and staff to find a sensible solution."

The Naps scheme requires an additional �107m a year, rising to �225m from January 2004.

And annual contributions of �26m are required for the Airways Pension Scheme (Aps) from November 2003.

Both final salary schemes meet the government's minimum funding level, and a pension deficit does not necessarily mean that the full shortfall needs to be met in the long-term.

However, it does provide a useful "snapshot" of a pension fund's health.

"Meaningful discussions"

The GMB union told BBC News Online it had a "lot of concerns", but welcomed BA's consultation with staff and the unions.

"They are not turning around and closing it without having discussions with their staff," said a spokesman.

She said the union hoped for "meaningful discussions" with BA to "safeguard these pensions and proper pension provision for everyone."

As a flagship and socially responsible employer "we would expect them to be an example on this issue", she added.

Amicus, another of the major unions representing BA staff, said it did not want to speculate in advance of the talks.

"Until we know what they are going to offer, we are not going to say anything," a spokesman told BBC News Online.

Contributions holiday

Aps is BA's oldest final salary scheme - being set up in 1948, with 35,500 members of whom 3,500 are serving staff.

It closed in 1984, and BA has had a contributions holiday from Aps since 1989. Its healthy �820m in March 2000 has now fallen to �45m three years on.

Naps was set up in 1984 and has 65,000 members, of whom 39,700 are existing staff.

This scheme's deficit has risen from �221m in March 2000 to �928m at March 2003.

Less risk

In April 2003, BA took the step of closing its Naps scheme to new members. New staff can only join its money purchase or defined contribution plan.

These schemes are less risk for companies to run than final salary schemes, as the burden of risk and responsibility is transferred away from the company's balance sheet to the employee.

As a result, many companies in recent years have closed their final salary schemes to new business and opened money purchase plans for new staff.