Members of BMI's pension plan are facing significant benefit cuts after the UK pensions regulator decided not to rely on Lufthansa's support offer for the scheme and transfer it instead to the public Pension Protection Fund.
Lufthansa agreed to pay £10 million ($15.4 million) a year over the next 25 years into the scheme as part of the sale of BMI to British Airways parent International Airlines Group, as the latter did not want to take over responsibility for the pension fund, covering around 3,700 members.
However, Lufthansa did not want to make a legally-binding agreement to provide additional support if its investment does not create enough return to compensate for the deficit in BMI's pension fund which, according to the regulator, stands at about £450 million on a 'buy-out' basis.
Lufthansa's contributions were "insufficient in isolation to prevent a deterioration in the scheme's funding position" and posed "unacceptable risks to members' benefits and [Protection Fund] levy payers", because the proposal was "almost wholly reliant upon investment outperformance", argues the regulator.
The authority has decided to decline the German airline's offer and "explore alternatives" with the tax-covered Fund. This would reduce BMI's pension plan deficit to £230 million, according to the regulator.
However, beneficiaries of the scheme "will take a huge financial hit" in the form of "major cuts" in pension entitlement and caps on future pension increases, according to cockpit union British Airline Pilots' Association. BALPA has thus called on Lufthansa to make a commitment to covering potential shortcomings of its proposal.
The pilot union argues that liability for BMI's pension plan should not be transferred to the Fund while two "large and solvent" companies, Lufthansa and IAG, are cleared of responsibility to their subsidiary's scheme. Jim McAuslan, BALPA's general secretary, warns that this could become precedent for other, similar cases, posing "immense strain" on the Fund and requiring increased levies from all defined pension schemes. "In extremis the taxpayer might have to bail out the fund," he says.
BALPA questions the reasons why the pensions regulator did not demand from Lufthansa greater responsibility for the pension scheme of its former employees. The regulator could have used its "moral hazard powers" to achieve more commitment from the German airline, the union says.
The authority argues, however, that these means were not available, because Lufthansa did allegedly not benefit from its BMI ownership.
"Members of the [BMI] scheme are understandably disappointed that they will not receive their expected pensions in full," says Stephen Soper, executive director for defined benefit regulation. However, in the absence of an employer to stand behind the scheme to fund any shortfall, we felt unable to agree to proposals that exposed [Fund] levy payers and younger scheme members to all the downside risks."