BA/Iberia: At least one thing seemed pretty clear in the complicated announcement of BA’s merger with Iberia: the UK airline’s £2.7 billion pension deficit could not consume its Spanish partner’s stockpile of cash. After all, the statement said neither the holding company that is to house the two airlines, nor the Spanish subsidiary containing Iberia’s operating assets, would put cash into the scheme. But while Iberia will not proactively support the pension scheme, it may still be asked to do so.
Pension liabilities attached to UK companies cannot be easily ring-fenced. From a pensions point of view, the best way to think of merger structure is as a single beast - not as three separate corporate entities - which is liable to meet BA’s pension obligations.
This has ramifications for the airline’s upcoming negotiations with the trustees of its pension scheme. They will shortly need to agree the level of BA’s annual contributions to help reduce the pension deficit, which has widened since the last triennial review. Estimates vary, but some observers believe the contributions would have to increase from the current £131 million to plug the deficit over the next 15 years.
The trustees have a dilemma. They have an interest in getting the deal agreed, since the merged company’s stronger balance sheet makes it a stronger sponsor - and that would give BA pensioners more security. But if the trustees are too aggressive in pushing for a near-term increase in contributions, Iberia might be scared into exercising its right to walk away from the deal.
As for Iberia, it has an opportunity to have a say in how the pension scheme is managed before it binds itself to BA forever. The trustees, and the UK pension regulator, won’t want to blow it. They will always have another shot when the pension comes up for review in three years time. For now, they probably won’t want to kill the Spanish goose and its golden egg.