Most of the comment thus far on the British Airways merger with Iberia has focused on the impact on shareholders and passengers. As usual, the pension fund members get barely a look-in. The 100,000 Britons whose retirement hopes depend on BA continuing to honour past pension promises were barely acknowledged in the merger announcement.
Yet the real test for this deal is not whether it produces a string of new routes to Latin America, or whether it delivers dividends to long-suffering BA shareholders, but whether it ensures that the £16 billion BA has pledged in retirement promises to current and past employees is actually paid out in the decades to come.
Amid all the excited talk about new services, dual hubs, synergies and boardroom responsibilities, the crisis in the pension fund continues to be overshadowed. Yet with a probable deficit at the next valuation point of £3 billion-£4 billion, the pension shortfall threatens to swamp even BA and Iberia added together.
We are like children cooing over a couple of shiny toy planes while in the shadows of the hangar looms a full-size Jumbo, rusting and crumbling and groaning on its undercarriage.
Of course, the best hope for everyone to be paid their pensions in full is that the sponsoring company returns to financial health and is able to afford the onerous schedule of payments due to be funnelled into its two schemes, APS and NAPS. If the tie-up with Iberia achieves that, the worry may eventually recede.
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But the terms of the merger appear to give pension fund members little reassurance in the short term. Neither Iberia nor TopCo, the putative new holding company for the merger partners, will provide any guarantee or use any cash or loans, to fund the BA pension schemes. Moreover, Iberia, which has hired Mercers to advise on the actuarial headwinds, can duck out of the entire deal if discussions between BA and the pension schemes are in its opinion unsatisfactory.
It is possible to argue that the covenant will be strengthened by the deal. If all goes well, BA will be more profitable when the dust settles. But another reading of the document is less reassuring. First, the schemes will have a claim only on a subsidiary rather than the entire group. Second, it is hard to see how BA can remain genuinely ringfenced once the two sides start to extract synergies from the deal.
It all looks a bit of a fudge. Willie Walsh and Antonio V?zquez have specific plans to hammer the two airlines together, consolidating fleets, IT systems and maintenance to achieve an annual €400 million of savings and extra revenues. Can this really be achieved if BA remains a separate operating business? If it doesn’t remain separate, what exactly is underpinning the pension funds?
Unusually, the Pensions Regulator has not given pre-clearance to this deal, so it could still derail it. It will certainly be fully aware of the devastating drain on the Pension Protection Fund if anything goes wrong.
The trustees of the two schemes, both chaired by Roger Maynard, have a difficult task. They won’t want to obstruct a potentially value-creating merger, but at the same time they want to be sure their claims on the company will not be compromised.
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They have been co-operative in the past, perhaps too co-operative. Over the summer they agreed to sacrifice £330 million of guarantees — which was helpful to BA but shortened the odds on a serious shortfall if the airline were to fail.
Mr Maynard, a senior executive at BA and a 22-year veteran with the company, looks in a particularly awkward position. With so much at stake, it is surely time for both funds to be chaired by someone independent and seen to be independent.