BT's pension scheme liabilities reduced by £4.3bn after it used a lower measure of inflation to set its annual rises for retired workers
Investors could benefit from a £100bn windfall over the next 15 years following a government switch to a lower measure of pension inflation that has given BT a £4bn-plus boost to its finances.
Dividends could soar at hundreds of blue chip firms after BT revealed higher than expected benefits from a ruling that allows it to link annual pension payouts to the lower CPI measure of inflation.
Investors are expected to put pressure on directors for dividend payments from cash previously allocated to close shortfalls in pension schemes.
Several fund managers advised investors to buy BT shares after the company also revealed that its pension deficit had fallen by £6bn, or 76%, to £1.8bn in the year to 31 March. The market value of the pension pot increased by £1.7bn over the period, as BT pumped an extra £1bn of cash into it and the underlying assets increased by £700m, after last year's pension payments were made. Meanwhile, the liabilities have fallen by £4.3bn after the basis for their valuation was switched from RPI to CPI.
BT chief executive Ian Livingston welcomed the boost to the company's £40bn scheme, which has been dogged by huge deficits. In the company's latest annual results, Livingston said switching to the government's preferred measure of inflation helped reduce the deficit.
Britain's biggest fixed-line telecoms company announced a pre-tax profit of £1.7bn for the year to 31 March, as the group cut more than £1bn from its annual costs and added 1.1m broadband customers – the equivalent of a new connection every 30 seconds.
The profit rise came despite a 4% decline in revenues, to £20bn, as competition increased from new-media alternatives such as the Skype internet video phone service, and people continued to turn away from landline phones.
The results marked a continuation in BT's improving performance, after a difficult few years in which the group has cut billions of pounds of annual costs and about 35,000 jobs to combat the decline in its traditional landline market.
Morten Singleton, an analyst at Investec, said: "Despite the revenue figure, profits, dividends, pension developments and the outlook all came out well."
BT is one of several companies that will benefit from changes announced last year by the Department for Work and Pensions in the way schemes calculate their liabilities. Pensions minister Steve Webb said all public sector schemes would switch from using the RPI measure of inflation to CPI to cut costs. He added that private sector firms could shift voluntarily.
The pensions industry has argued the changes were pushed through without consultation and without considering how they will affect pensioners.
Many schemes in the private and public sectors automatically follow the statutory rate, including BT, the Royal Mail Pension Plan and the Railways Pension Scheme, and they saw a 3.1% rise last month.
Others have rules binding them to increase annual payouts in line with RPI. Power industry workers, coal miners and steelworkers are among the former public sector workers benefitting from a rise of 4.6%, in line with RPI, last month.
James Trask of actuaries Lane Clark & Peacock said he was concerned the government had created a chaotic situation that will mean some pensioners are better off than others. He added that it was likely the changes, announced shortly after the coalition came to power, would trigger legal cases from some pensioner groups which will lose out.
Some pensioners will be thousands of pounds worse off once the effects of the cut in annual rises is compounded during their retirement.
Trask said the government, which estimated the private sector would save £83bn over 15 years, had grossly underestimated the savings.