State aid — United Kingdom — State aid C 55/07 (ex NN 63/07) — Crown guarantee to BT Pension Fund — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty (Text with EEA relevance )
Date: 2008-01-19
Institutions: European Commission
Subjects: State aid, United Kingdom, control of State aid, guarantee, infringement procedure (EU), supplementary pension, telecommunications industry

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EN

Official Journal of the European Union

22.1.2008

V

(Announcements)

PROCEDURES RELATING TO THE IMPLEMENTATION OF THE COMPETITION
POLICY

COMMISSION

STATE AID — UNITED KINGDOM

State aid C 55/07 (ex NN 63/07) — Crown guarantee to BT Pension Fund

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(Text with EEA relevance)

(2008/C 15/04)

By means of the letter dated 28 November 2007 reproduced in the authentic language on the pages
following this summary, the Commission notified the United Kingdom of its decision to initiate the proce-
dure laid down in Article 88(2) of the EC Treaty on the exemption of BT plc and BT Pension Fund from the
application of the minimum funding requirements laid down in the 1995 and 2004 Pension Acts for BT
Pension Fund's pension liabilities covered by the 1984 Crown Guarantee and from the payment of the part
of the levy to be paid to the Pension Protection Fund for the part of BT Pension Fund's liabilities covered by
the 1984 Crown Guarantee.

The Commission decided not to raise any objections to the Crown Guarantee itself, as far as it covers BT's
pension liabilities, as described in the letter following this summary.

Interested parties may submit their comments on the measures in respect of which the Commission is initi-
ating the procedure within one month of the date of publication of this summary and the following letter,
to:

European Commission
Directorate-General for Competition
State aid registry
SPA-3 6/5
B-1049 Brussels
Fax (32-2) 296 12 42

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

TEXT OF SUMMARY

DESCRIPTION OF THE MEASURES

PROCEDURE

The measures on which the Commission has opened the proce-
dure laid down in Article 88(2) were brought to the Commis-
sion's attention by a complainant or in correspondence with the
United Kingdom authorities following this complaint. None of
these measures have been notified to the Commission.

Before the privatisation of British Telecommunication, later BT
its employees enjoyed the benefits of a pension
plc (‘BT’),
scheme which was transferred to the privatised entity. BT's liabil-
ities to BT Pension Scheme (‘BTPS’) fall under two heads:
its
regular employment contributions and additional contributions
that BT may be required to make under a recovery plan to
return it to full funding. Under the result of the most recent
actuary valuations, BTPS' liabilities amount to GBP 37,8 billion
while its assets amount to GBP 34,4 billion. According to the
recovery plan, BT must finance this deficit by 2015.

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Under the 1984 Telecommunications Act, the UK government
granted a Crown Guarantee covering the liabilities transferred by
the government to BT. The scope of the present decision is
limited to the effects of this guarantee on BT's pension liabilities.
According to this Crown guarantee, in case BT is insolvent, and
only in respect of the BT's employees at the time of privatisa-
tion, the State will ensure the payment of the pensions if there
are not enough assets in the fund. The aim was to reassure these
employees who, until then, enjoyed State protection for their
pensions.

The 1995 Pension Act introduced minimum funding require-
ments for pension funds. However, the legislation exempted
pension funds enjoying a Crown guarantee, like BTPS from the
application of
these minimum funding requirements. These
minimum funding requirements were altered by the 2004
Pension Act, with once again an exemption for pension funds
enjoying a Crown guarantee.

in case of

The 2004 Pension Act established a Pension Protection Fund
(‘PPF’). Its function is to pay compensation to member of eligible
pension schemes
sponsor
employers, and when the assets of the scheme are insufficient to
cover all the pension liabilities. The PPF is essentially financed
by a levy which is paid by the pension funds. Again, pension
funds with a Crown guarantee are exempted from the payment
of this levy.

insolvency of

the

ASSESSMENT OF THE MEASURES

Existence of aid

On the basis of
the information available, the Commission
considers that the Crown guarantee in itself, as far as it covers
BT's pension liabilities has not conferred any advantage to BT
the 1995 and 2004 Pension Act which significantly
until
changed its effects. Until these dates, and as far as pension liabil-
ities are concerned, the Crown guarantee's only beneficiaries are
the members of the BTPS.

However, in 1995, the exemption from application of minimum
funding requirements to BT's pension liabilities covered by the
Crown Guarantee may have conferred an advantage to BT since
it did not have to finance its pension fund's deficit under the
more stringent conditions imposed by the 1995 Pension Act.
Such an advantage is likely to constitute State aid. The same
reasoning would apply to the funding requirements introduced
by the 2004 Pension Act.

The UK authorities claim that BT financed its deficit indepen-
dently from the Crown guarantee. They have not explained why
BT did not avail itself of this exemption nor why its pension
fund still have a significant deficit if BT respected the funding
requirements laid down in the 1995 Pension Act. As a result,
the Commission has doubts that BT did not receive an aid in
the form of an exemption from the application of the minimum
funding requirements to its guaranteed pension liabilities.

Furthermore, in 2004, the exemption from the payment of a
levy to the PPF of the levy corresponding to the BTPS pension

liabilities covered by the Crown guarantee is also likely to
constitute an advantage, and therefore State aid, to BT.

BTPS and the UK authorities consider that there is no advantage.
First, they argue that since the levy reflects the risk born by the
pension scheme and since the section of the BTPS covered by
the Crown guarantee cannot default, the fact that BTPS and
therefore BT do not have to pay a levy for this section is justi-
fied by the logic of the system.

BTPS also argues that the guarantee was known by the share-
holders when BT was privatised. Consequently,
they paid a
market price for it and no advantage was involved. They also
argue that, in the case this exemption from the payment of part
of the levy constitutes an advantage, it is more than compen-
sated by the extra-liabilities borne by BT and BTPS. These extra
the
liabilities are in particular enhanced redundancy terms,
deficit of the pension scheme inherited at the time of the priva-
tisation, and the enhanced civil service benefits for the members
of BTPS.

these arguments can be
The Commission has doubts that
accepted, and therefore that no advantage and no State aid in
the form of an exemption from the full payment of the levy to
the PPF by the BTPS and BT is involved.

Compatibility of aid

for

these measures,

compatibility for

this stage appear

if
The only basis
they contain State aid, would at
to be
Article 87(3)(c) of the Treaty. However, the measures do not
appear to conform with any of the rules concerning the applica-
tion of that sub-paragraph that the Commission has promul-
gated to date. If therefore State aid is involved, the Commission
doubts whether
these measures are compatible with the
common market.

In accordance with Article 14 of Council Regulation (EC)
No 659/1999, all unlawful aid can be subject to recovery from
the recipient.

TEXT OF LETTER

‘(1) The Commission wishes to inform the United Kingdom
that, having examined the information supplied by your
authorities on the aid measure referred to above, it has
decided to initiate the procedure laid down in Article 88(2)
of the EC Treaty.

1. PROCEDURAL ASPECTS

(2) On 26 April 2006, one of BT's competitors, which
requested confidentiality, lodged a complaint against the
guarantee given by the Minister of the Crown (“Crown
guarantee”) which had been granted to BT. By e-mails
dated 24 May 2006 and 22 June 2006,
it provided
further information to the Commission.

(3) By letter dated 18 May 2006, the Commission requested
information to the UK authorities, which provided it by
letter dated 18 July 2006.

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(4) By letter dated 21 December 2006,

the Commission
requested further information. After an extension of the
deadline, the UK authorities responded by letter dated
27 February 2007.

(5) On 26 March 2007, a meeting was held, at their request,
with the lawyers representing the Trustees of
the BT
Pension Scheme (“BTPS”). They submitted further informa-
tion by e-mail dated 10 May 2007.

(6) By letter dated 10 May 2007, the Commission requested
information to the UK authorities. After an extension of
the deadline and a meeting which took place on 11 June
2007,
responded by letter dated
19 June 2007.

the UK authorities

(7) By letter dated 3 August 2007, the Commission requested
further information. After an extension of the deadline,
the UK authorities responded by letter dated 3 October
2007.

2. DESCRIPTION OF THE MEASURES

2.1. BT Pension Scheme

(8) Until 1969, employees of

the Post Office were civil
servants. In that year, they became employees of the Post
Office public corporation, which ended their status as
members of the civil service. The Post Office was assigned
general responsibility for the payment of staff pensions,
with the establishment of the Post Office Staff Superan-
nuation Scheme (“POSSS”).

(9) By virtue of the British Telecommunications Act 1981,
the telecommunications operation which had formerly
formed part of the Post Office was transferred to a new
public corporation, British Telecommunications. Certain
employees were transferred to the new organisation, while
keeping their status as employees of a public corporation.
In 1983, the British Telecommunications Staff Superan-
nuation Scheme (“BTSSS”),
the terms of which were
closely modelled on those of the POSSS, was established.

(10) The 1984 Telecommunications Act

(the “1984 Act”)
provided for the privatisation of British Telecommunica-
tions, with the transfer of all its property, rights and liabil-
ities (including the BTSSS) to BT plc. As from 31 March
1986, British Telecommunications plc (“BT”) established a
further pension scheme for new employees (the British
Telecommunications plc New Pension Scheme, BTNPS).
The BTSSS was closed to new members from that date.
Both were merged and renamed BT Pension Scheme
(“BTPS”) in 1993.

(11) The investment objective of BTPS is to ensure that over
the scheme will always have enough
the long term,
money to meet the cost of the pension benefits to be
paid. BT's liabilities to BTPS fall under two heads: regular
employment contributions and additional contributions
that BT may be required to make under a recovery plan to
return the BTPS to full funding where Scheme liabilities
are higher than Scheme assets. The latter reflects a general
requirement under BTPS rules for BT to make good any
deficit disclosed by an actuarial valuation.

(12) Under these rules,

the Scheme Actuary is required to
make an actuarial valuation of the assets and the liabilities
(i.e. future pension benefits and other costs and expenses)
the scheme at intervals not exceeding 3 years and
of
report the position to BTPS' Trustees and to BT. BT will
ensure the payment to BTPS of contributions that are
necessary to repair any deficit identified by the valuation.

(13) The results of the most recent valuation were announced
in December 2006 and disclosed accrued liabilities of
GBP 37,8 billion and assets of GBP 34,4 billion (a deficit
of GBP 3,4 billion). According to the recovery plan, fully
financed by BT, the scheme should return to full funding
by 2015: BT agreed to pay GBP 280 million per annum
for ten years, which combined with investment returns, is
anticipated to pay off the deficit. These yearly amounts
come on top of BT's regular employer contributions to
the scheme, which amounted to GBP 395 million in the
financial year 2006/2007.

2.2. The Crown guarantee

(14) The Crown guarantee is laid down in Section 68 of the

1984 Act which reads as follows:

“(1) This Section applies where

(a) a resolution has been passed, in accordance with the
[Insolvency Act 1986], for the voluntary winding up
of the successor company, otherwise than merely for
the purpose of reconstruction or amalgamation with
another company; or

(b) without any such resolution having been passed
beforehand, an order has been made for the winding
up of the successor company by the court under that
Act.

liable on the
(2) The Secretary of State
the winding up to discharge any
commencement of
outstanding liability of
company which
vested in that company by virtue of Section 60 above (1).

shall become

the successor

(…)

(4) Where the Secretary of State makes a payment to any
person in discharge of what appears to him to be a liabi-
lity imposed on him by this Section, he shall thereupon
become a creditor of the successor company to the extent
of
the
the amount paid, his claim being treated for
purposes of the winding up as a claim in respect of the
original liability.”

(15) Section 68(2) was amended by the Communication Act of
2003 and now provides that “the Secretary of State shall
become liable on the commencement of
the winding up to
discharge any outstanding liability of the successor company for
the payment of pensions which vested in that company by virtue
of Section 60 above” (emphasis added). While the Crown
guarantee in its original version covered all liabilities of
the corporation transferred to BT in 1984, it now only
covers the pension liabilities transferred at that date.

(1) Section 60 specifies that all the property, rights and liabilities to which
British Telecommunications was entitled or subject are transferred to
the privatised entity.

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(16) The scope of the present decision is limited to the effect
of the Crown guarantee as far as it covers pension liabil-
ities. This decision is without prejudice to the effects of
the Crown guarantee on the other liabilities that were
transferred to BT in 1984 and that were covered by the
Crown Guarantee until the 2003 Communication Act.

(17) In so far as the pension liabilities are concerned,

the
Crown guarantee requires the UK government to discharge
any liability of the public corporation for payments in
respect of pensions transferred to BT, but only:

(i) if BT is insolvent and is being wound up;

(ii) in respect of employees who were members of the
public corporation's employee pension scheme before
6 August 1984; and only

(iii) if the liability is wholly or partly outstanding at the

beginning of the winding up.

(18) This means that the UK government will ensure payments
in respect of pensions transferred to BT if the company
becomes insolvent, the assets of BTPS are insufficient to
cover its liabilities at the time of insolvency and only in
favour of employees who were members of the public
corporation pension scheme before the date of privatisa-
tion. Although the 1984 Act is not clear on this point,
the UK authorities are of the opinion that the Crown guar-
antee is capable of covering not only the pension rights
acquired by these employees before the privatisation but
also those that they acquired after it.

(19) As concerns pension rights, the Crown guarantee was
apparently provided in view of the concern of the public
corporation's employees that they would no longer enjoy
the comfort of State protection for their pension. They
were in particular worried about what would happen if
the privatised successor company were to become insol-
vent leaving a pension scheme with a deficit between
assets and liabilities. The Crown guarantee responded to
these concerns.

(20) The UK authorities indicated that they were not able to
specify the value of the liabilities that would be covered
by the guarantee.
Indeed the liabilities to be covered
would depend on the members to be covered and on the
assets of BTPS at the time of BT's insolvency.

(21) According to the explanations provided by the UK autho-
rities, in case BT becomes insolvent, the UK government
would immediately become liable on commencement of
the liquidation for any of BT's liabilities to the pension
scheme for staff transferred to BT at privatisation and
which remain outstanding. The Secretary of State would
make payment to BTPS in respect of these outstanding
liabilities and would become an unsecured creditor of BT
for that amount. BTPS would also be an unsecured cred-
itor of the insolvent BT for any liabilities related to staff
not covered by the Crown guarantee since the law does
not give any special preference to pension scheme trus-
tees.

Commission, it appears that the main modifications of the
general pension regulatory framework were introduced by
the 1995 and the 2004 Pensions Acts.

The 1995 Pension Act: minimum funding requirements

(23) Article 56 of

the 1995 Pension Act

introduced a
Minimum Funding requirement
the
assets of the scheme is not less than the amount of the
liabilities of
the Occupational
Pension Schemes (Minimum Funding Requirement and
Actuarial Valuations) Regulations 1996 provide that

the scheme. However,

the value of

that

“Section 56 (minimum funding requirement) does not apply
to […] any occupational pension scheme in respect of
which any Minister of the Crown has given a guarantee or
made any other arrangements for the purpose of securing
that the assets of the scheme are sufficient to meet its liabil-
ities. […] Where such a guarantee has been given in respect
of part only of a scheme, Sections 56 to 60 and these
Regulations shall apply as if that part and the other part of
the scheme were separate schemes” (emphasis added).

(24) Furthermore, Article 75 of the 1995 Pension Act foresees
that if at the time of insolvency the value of the assets of
the scheme is less than the amount of the liabilities of the
scheme, an amount equal to the difference shall be treated
as a debt due from the employer to the trustees or
managers of
the Occupational
Pension Schemes (Deficiency on Winding up) Regulations
1996 provide that:

the scheme. However,

“Section 75 does not apply […] to any occupational
pension scheme in respect of which any Minister of the
Crown has given a guarantee or made any other arrange-
ments for the purpose of securing that the assets of the
scheme are sufficient
(emphasis
added).

liabilities”

to meet

its

The 2004 Pension Act: Pension Protection Fund and Statutory
Funding Objectives

their

following the bankruptcy of

(25) Part 2 of the 2004 Pension Act introduced the Pension
Protection Fund (PPF) on account of intense political pres-
sure, after over thousands workers in various companies
lost large amounts of
their pension benefits in recent
sponsoring
years
companies. The PPF was created in April 2005. Its func-
tion is to pay compensation to members of eligible
pension schemes whose sponsor employers have suffered
insolvency leaving insufficient assets in the scheme to
provide their members with protection equivalent to the
level of compensation payable by the PPF. The PPF is
financed partly by the assets transferred from schemes
from which it has assumed responsibility and partly by an
annual levy raised on eligible pension schemes. This levy
includes an administration levy and a risk levy which
incorporates two elements:

2.3. Main developments of UK pension legislation

since 1984

— a risk-based element that takes into account the likeli-

hood of employer insolvency (80 % of the levy),

(22) UK Pension law has been subject to several changes since
1984. According to the information available to the

— a scheme based element paid by the schemes on the
basis of the size of their liabilities (20 % of the levy).

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(26) The initial levy for 2005/2006 was set without taking into

consideration the risk-based element.

(27) The PPF (Entry Rules) Regulations 2005 specify that “a
scheme in respect of which a relevant public authority has given
a guarantee or made any other arrangements for the purposes of
securing that the assets of the scheme are sufficient to meet its
liabilities” is exempted from the PPF. Where a part of a
scheme is guaranteed by the Crown, the guaranteed and
non-guaranteed parts of the scheme should be considered
as separate schemes.

the Act provides

(28) Finally, Part 3 of the 2004 Pension Act introduced new
scheme funding requirements (“Statutory funding objec-
tives”) which replaced the 1995 minimum funding
requirements. Section 222 of
that
schemes are subject to a requirement to hold sufficient
and appropriate assets to cover their technical provisions.
The Occupational Pension Schemes (Scheme Funding)
Regulations 2005 exempt a scheme which is guaranteed
by a public authority. Again, a part of a scheme is guaran-
teed by the Crown, the guaranteed and non-guaranteed
parts of
the scheme should be considered as separate
schemes.

3. COMMENTS FROM THE PARTIES INVOLVED

(33) Thirdly, the complainant's argument that the managers of
BTPS could have adopted an aggressive investment policy
thanks to the guarantee is not supported by the facts:
BTPS' investment policy is very similar to that of other
large UK pension schemes.

(34) Fourthly, the Crown guarantee did not have any impact
on the management and funding of BTPS. Under the rules
of BTPS, BT is required to make the same provision in
respect of its pension liabilities as if the guarantee did not
exist. In particular, in certifying the contributions required
by BT, the actuary has not taken account of the guarantee
in making his report on the valuation of the assets and
liabilities of the pension funds. Similarly, BT has not taken
the guarantee into account in making good any deficiency
identified by the actuary.

(35) Finally, the exemption from the payment of levy to the
PPF does not constitute State aid since the reduction is
within the logic of the system: the contribution to the PPF
is supposed to reflect
the risk born by the pension
schemes concerned. If a pension scheme has a zero risk of
defaulting, it will not have to pay any levy. In the present
case, since part of the liabilities are guaranteed, the fact
that BT does not have to pay a levy on these liabilities is
within the logic of this system and therefore is not an
advantage.

3.1. The complaint

3.3. Position of BTPS' trustees

(29) The main argument of the complainant is that the guar-
antee allows the managers of BT's pension fund to adopt
an aggressive, riskier investment policy, which provides
higher returns. These higher returns may have been taken
into account by the actuaries in their valuation of the
assets and liabilities. The increase in the value of the assets
has the effect of decreasing the deficit of the pension fund
and the level of contribution that BT will have to pay to
achieve full funding. The Crown guarantee would allegedly
reduce the pressure on the fund to ask BT for the repay-
ment of the deficit. This is an advantage which,
in the
view of the complainant, results into State aid.

3.2. Position of the UK authorities

(30) The UK authorities consider that BT did not receive State
they submitted the

claim,

aid. To substantiate this
following arguments.

(31) Firstly, since the guarantee applies only if BT is wound up,
the Section does not have the effect of preventing BT
from becoming insolvent. Since BT is solvent, the guar-
antee has not helped BT to meet its obligation under BTPS
rules to contribute sufficient amounts to the pension
scheme to remove any deficit between assets and liabil-
ities.

(32) Secondly, the Crown guarantee has had no impact on the
credit rating of BT. They provided quotations by Standard
and Poors and Fitch indicating that the guarantee had had
no impact on their assessment of BT's default rating since
it is only effective for pension creditors after it becomes
insolvent.

(36) BTPS provided similar arguments to those put forward by
the UK authorities. In particular, on the specific issue of
the exemption from the payment of the levy to the PPF,
BTPS claimed that this exemption did not constitute State
aid since it was within the logic of the system. It further
argued that the guarantee was known from the share-
holders when they bought BT in 1984, as a result of
which its value was taken into account in the overall price
that they paid for BT. Consequently, they paid a market
price for this guarantee, and no advantage was involved.

(37) Furthermore, BTPS argued that the potential advantage
resulting from this exemption is more than compensated
by the extra liabilities borne by BT and BTPS because of
the special nature of BTPS and of
the status of BT's
employees at the time of privatisation. These extra liabil-
ities are:

— Enhanced redundancy terms. After privatisation, BT
employees retained special
rights in the event of
redundancy that they had enjoyed as former public
sector employees. The enhanced pension terms on
redundancy applying to the employees covered by the
Crown Guarantee consists in particular of unreduced
pensions from age 50. These benefits are mandatory
in the event of compulsory redundancy. As a result,
BT has had to offer similar terms in order to induce
such members to accept voluntary redundancy. BT has
therefore incurred significant additional redundancy
costs over the period since privatisation, since redun-
dancy significantly increases the Scheme's liabilities.
These extra costs are estimated to amount to […] (*)
for the period 1984-2005.

(*) […]: the information in brackets is covered by the obligation of profes-

sional secrecy.

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— The 1984 deficit in the pension scheme: upon privati-
sation, the new company inherited a net deficit of
around GBP 470 million in the pension scheme which
BT has subsequently had to make good.

— […].

in respect of

the time of privatisation,

— Enhanced civil service benefits for certain membership
categories of BTPS. Under the terms of BTPS deed in
the BTPS was
place at
required to provide benefits
those
employed at that time in line with civil service bene-
fits. In practice, the benefits that the scheme has been
required to provide since privatisation have been
significantly better than those typically offered by the
private sector pension schemes in the 1980s. For
instance, BTPS is required to pay benefits from age 60
to men and women, whereas typical pension schemes
had normal retirement ages of 65 for men. According
to BTPS, the gross estimate of these additional costs
amounts to more than […].

4. ANALYSIS

4.1. Qualification of the measures as State aid

(38) Article 87(1) of the EC Treaty states:

“Save as otherwise provided in this Treaty, any aid granted
by a Member State or through State resources in any form
whatsoever which distorts or threatens to distort competition
by favouring certain undertakings or
the production of
certain goods shall,
in so far as it affects trade between
Member States, be incompatible with the common market.”

In order for Article 87(1) to be applicable, there needs to
be an aid measure imputable to the State which is granted
by State resources, affects trade between Member States
and distorts competition in the common market, and
confers a selective advantage to undertakings.

(40) As a preliminary remark, it must be underlined that BTPS
and BT are two different legal entities. The Crown guar-
antee covers partly any deficit between BTPS'
liabilities
and assets and also the exemptions mentioned in point (b)
and (c) in the previous paragraph directly concern BTPS.

(41) However, it is concluded that if there is an advantage to
BTPS, it can be considered that this advantage is entirely
and directly transferred to BT since the latter must cover
any deficit and administrative costs of its pension scheme
as long as it is solvent.

4.1.1. The 1984 Crown Guarantee as

far as

it

concerns

pension liabilities

(42) It appears that the Crown guarantee, as far as it concerns
pension liabilities, was granted in 1984 with the aim of
reassuring BT's employees by providing them with the
same degree of protection of their pension rights as they
had enjoyed when they were employed by a public
corporation. The beneficiaries of this guarantee are these
employees. The Commission must check whether BTPS
and as a result BT could not have also benefited from the
guarantee.

(43) It is to be noted that the Crown guarantee is different
from traditional loan guarantees, referred to in the Com-
munity notice on the application of Article 87 and 88 of
the EC Treaty to State aid in the form of guarantees (2).
Loan guarantees enable the beneficiary to obtain more
favourable interest rates and/or offer less security. This is
why the undertaking should normally pay a market
premium for such a guarantee. State guarantees granted
without a premium are generally considered to fall within
the scope of Article 87(1) EC. The question in the present
case is whether the Crown guarantee provided an advan-
tage to BT so that BT would normally have been willing to
pay a premium in order to benefit from this guarantee. If
such an advantage exists, and since BT did not pay any
premium for this guarantee, it would then be possible to
conclude to the presence of State aid. On the basis of the
information currently available to it, the Commission has
analysed the various potential economic effects of
the
guarantee on BT.

(39) In order to analyse the presence of State aid, it is neces-
sary to successively analyse the different measures under
consideration in this case:

Po t e n ti a l e f f e c t s o n t h e i n v e st m e n t p o l i c y o f
B T P S

(a) The granting of the Crown guarantee on BT's pension

liabilities in 1984 to BT.

(b) The exemption of BTPS from the application of the
minimum funding requirements introduced by the
1995 and 2004 pension acts to the BTPS' pension
liabilities covered by the Crown guarantee.

(c) The exemption of BTPS under the PPF (Entry rules)
Regulations 2005 from the requirement laid down in
part 2 of
the 2004 Pension Act to contribute an
annual levy to the PPF corresponding to its pension
liabilities covered by the Crown guarantee.

(44) The argument put

forward by the complainant

to
conclude to the presence of State aid is that, thanks to the
guarantee, the fund managers of BTPS were able to adopt
a riskier investment policy, with a higher rate of return,
which would have the effect of reducing the deficit of the
fund, and therefore the contributions that BT has to pay
to rebalance it.

(45) However, the guarantee can only be called upon in case of
insolvency of the sponsor company, not in case BTPS
makes losses as a consequence of its investment decisions.
Any loss of BTPS must be covered by BT as long as it is
solvent. This has several implications:

(2) OJ C 71, 11.3.2000, p. 14.

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(46) First, in the hypothetical case that BTPS' managers decided
to adopt a more risky investment policy with the prospect
of a higher but more volatile return, this could not auto-
matically be linked to the existence of the Crown guar-
antee.
Indeed any losses incurred by BTPS would be
covered by BT as long as it is solvent without calling upon
the Crown guarantee. The only situation in which the
Crown guarantee could be called upon is BTPS' investment
policy is so risky that it may generate losses large enough
to make it
impossible for BT to cover them without
becoming insolvent. This is an extremely remote possibi-
lity, given the binding rules under which BTPS trustees
operate (3).

(47) Second, a BTPS investment policy risky to the point of
threatening BT's solvency is most likely not to the advan-
tage of BT. On the one hand, it can hardly be argued that
BT would accept bankruptcy as an acceptable risk to
obtain reduced contributions to BTPS. On the other hand,
BT would remain liable for all potential losses of BTPS it
could afford to pay without becoming insolvent.

(48) Third, BTPS would adopt an extremely risky policy only if
it was not concerned about the solvency of its sponsor
company. Such an assumption does not appear to be
reasonable given the economic dependency of BTPS on its
sponsor employee BT: BT is the only provider of funds to
BTPS.

(49) Fourth,

it should be recalled that

the guarantee only
covers part of BTPS' liabilities, i.e. the pension liabilities of
BT's employees at the time of the privatisation. If it were
to adopt a risky investment policy because of the Crown
guarantee, BTPS would not take into account the interests
of the uncovered employees, whose pension liabilities are
not negligible since they represent about a quarter of the
total liabilities.

(50) In conclusion, the existence of an economic advantage
resulting from a risky investment policy which would be
made possible by the Crown guarantee cannot in principle
be established.

(51) Moreover,

information provided by the UK authorities
does not indicate that BTPS fund managers implement a
particularly aggressive investment policy. The UK authori-
ties provided data on BTPS' investment policy, as well as
summary data on the 50 largest UK pension schemes (the
“WM 50”) over the period 1996-2005 and an indepen-
dent benchmarking operated by WM Performance
Services. The Commission considers that data over that
period can be considered to be sufficient to draw general
conclusions on the effects of the Crown guarantee on
BTPS investment policy since 1984.

(52) First, this data indicates that BTPS' assets allocation is very
similar to the average asset allocation of the WM 50. In
recent years, it appears that BTPS has generally held less

(3) For instance, under Section 35 of the 1995 Pension Act, the trustees
must elaborate and at regular intervals of time revise a statement of
investment principles, which must be submitted to an expert and the
employer. According to this statement, “the investment of the assets of
the scheme should be consistent with funding a defined level of benefits
while trying to minimise the cash cost to BT over the long term, having
regard to the funding requirements of the Pension Act 2004 and an
acceptable level of risk of significant cash injections being required
from BT”.

than average in equity investments but rather more in
property, which does not appear to be an indication of a
risky strategy.

the Commission found that

(53) Second, on the assumption that a more risky investment
policy is generally characterised by higher volatility of
returns,
the variations of
BTPS' returns over the period are not indicative of a more
risky investment policy. It appears that BTPS has never
been among the best or worst performers among these
50 funds in any given year, with the possible exception of
2003 and 2004 when it was the third best performing
fund. Apart from these two years, the deviation of its
return with respect to the average return is always inferior
to the standard deviation.

(54) The Commission also notes that

investment decisions
taken by the Fund managers such as a predominantly
passive investment strategy (4) or the decision to hedge
the currency exposure associated with overseas equities
within the scheme are also indicative of an investment
policy that does not seem particularly risky.

relatively more successful

(55) To conclude on this point, although it appears that BTPS'
investment policy is
than
average (it has produced an annual average investment
return over the last 10 years of 9,2 % compared to an
average return of 8,3 % for the WM 50), there is no indi-
cation that this is the result of a more risky strategy.
According to the UK authorities, BTPS' relatively higher
returns would be linked to the performance of the fund
manager. The fact that the returns of BTPS and the returns
on other mandates of
the fund manager were similar
supports the claim of the UK authorities.

(56) Given that the existence of an advantage for BT or BTPS
deriving from a risky investment policy cannot be demon-
strated, that data available to the Commission does not
indicate that BTPS has had a more risky investment policy
and that
the investment policy followed by the fund
manager of BTPS is comparable to its investment policy
for other mandates, the Commission concludes that on
the basis of the information available no link between
BTPS investment policy and the Crown guarantee as far as
it concerns BT's pension liabilities can be established.

Po t e n ti a l e f f e c t o n t h e e m p l oy m e n t p o l i c y o f B T

(57) The Commission also considers that the Crown guarantee
as far as it concerns BT's pension liabilities does not
provide advantages to BT in terms of employment policy:
the existence of the guarantee may have facilitated the
privatisation process back in 1984 and avoiding some
social unrest at that time by reassuring BT's employees
concerning their pension rights, but if the guarantee had
this effect, it was mainly to the benefit of the UK govern-
ment while it was conducting the privatisation process of
BT. It cannot be argued either that this guarantee helped
BT to recruit some valuable employees who could have
been attracted by safer pension rights, since the guarantee
only applies to those who were employed in 1984, and
not to those who were hired after privatisation.

(4) Passive investment strategy involves investment in a well diversified
portfolio to represent a broad-based market index without attempting
to search out mispriced securities.

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Po te n t i a l e f f e c t o n t h e c r e d i t r a t i n g o f B T

(58) As underlined above, this guarantee is different from loan
guarantees: loan guarantees provide an advantage to the
firm if they enable it to obtain a loan on conditions that
are more favourable than the market would have allowed.
A State guarantee could be specific to a loan, or of a more
general nature, such as the special status of a firm that
would guarantee creditors' debts in case it goes bankrupt,
and could therefore affect its credit rating. In the present
case, the guarantee does not affect the ranking of any of
BT's liabilities. As a result, the fact that the guarantee
exists does not imply that more assets would be available
to these creditors. It cannot be argued that creditors might
be more willing to lend to BT since the guarantee does
not make their claims more secure or more likely to be
satisfied. The fact that the guarantee has no impact on
BT's credit rating is further confirmed by the fact that
credit ratings agencies have not taken the guarantee into
account when assessing BT's default rating. In its report
on BT dated 19 September 2006, Standard & Poors
stated:

“the existence of a Crown Guarantee for about three-quarters
of the current pension liabilities is not important for our
probability of default rating analysis, because it is only effec-
tive for pension creditors after BT becomes insolvent”

(59) In their report “BT Pension Funding Removes Uncertainty”
of 19 December 2006, Fitch stated that the Crown Guar-
antee would at best
scheme
“guarantee
members once a default has already occurred. Its presence or
otherwise does not have any impact on BT's Issuer Default”.

the pensions of

C o n c l u s i o n

(60) The Commission's analysis on the basis of the information
available indicates that the guarantee itself, as far as it
concerns BT's pension liabilities does not confer any
advantage to BT:
it cannot affect the investment policy,
credit rating or employment policy of BT. The Commis-
sion can therefore conclude that the Crown guarantee as
far as it concerns BT plc's pension liabilities in case of
insolvency did not confer in itself on BT any specific addi-
tional advantage, independently from the changes in the
legal framework introduced in 1995 and 2004, and there-
fore any State aid within the meaning of Article 87(1) EC.

4.1.2. The exemption from the minimum funding requirements
laid down in the 1995 and 2004 Pension Acts

(61) As explained in Section 2.3, the 1995 Pension Act intro-
duced a minimum funding requirement,
from which
pension funds which enjoy a Crown guarantee are
exempted. Part 3 of the 2004 Pension Act also introduced
new scheme of funding requirements, from which pension
funds with a Crown guarantee are also exempted.

(63) This exemption from the minimum funding requirement
resulting from the Crown guarantee could in principle
constitute State aid. Indeed, this exemption would consti-
tute an advantage since the firm would not have to
finance its pension fund's deficit under the more stringent
conditions imposed by the 1995 and 2004 pension acts.
Therefore, BT could use the funds that it would have had
to apply to remedying its pension fund's deficit under the
strict conditions laid down in the 1995 and 2004 legisla-
tion for its other economic activities.

(64) If the presence of an advantage is confirmed, it appears
that this advantage is financed out of State resources: in
order to benefit from this guarantee, without which the
exemption of the minimum funding requirements is not
possible, BT would have had to pay a premium in 1995,
which it did not. In addition, the exemption from the
minimum funding requirements means that the assets in
the pension fund could be lower and that the exposure of
the State in case of bankruptcy could be higher after 1995
than it would have been if the minimum funding require-
ments had been binding on BT. To summarise, the new
legal frameworks in 1995 and 2004 and the new rules
that they laid down on minimum funding requirements
substantially altered the nature and effects of the Crown
guarantee, as a result of which an advantage financed by
the State was granted to BT and the BTPS from 1995
onwards.

telecommunications,

(65) Given BT's activities in national and international markets
affect
this
for
competition and trade between Member States and there-
fore is likely to constitute an aid within the meaning of
Article 87(1) EC.

advantage may

(66) However, the UK authorities claim that, in effect, BT has
not made use of
the exemption from the minimum
funding requirements laid down in the 1995 and 2004
Pension Acts and has therefore funded BTPS as if these
rules fully applied to it. The UK authorities provided all
BTPS' Statement of Investment Principles since 1996 to
the Commission. It is correct that they always state that
investment policy of BTPS had regard to the minimum
funding requirements laid down in the 1995 and 2004
Pension Acts.

(67) Furthermore, the content of the latest BTPS recovery plan,
agreed between BT and BTPS trustee in December 2005,
to the Pension Regulator's scrutiny. The
was subject
Pension Regulator is an independent authority, set by the
2004 Pension Act, in charge of the regulation of pension
schemes. The British authorities formally confirmed the
Pension Regulator was satisfied that the guarantee was not
being used to extend the recovery period or affect any of
the key assumptions in the actuarial valuation or recovery
plan of BTPS.

(62) The 1995 Pension Act provides that the value of

the
assets of the scheme must not be less than the amounts of
the liabilities of
the scheme. However, pension funds
which, like BTPS, enjoy a Crown guarantee are exempted
requirement by the Occupational Pension
from this
schemes Regulations 1996. Part 3 of the 2004 Pension
Act introduced new funding requirements, from which
pension fund with a Crown guarantee are exempted.

(68) However, the Commission notes that, despite the fact that
under the 1995 Pension Act, the value of the assets of the
scheme must not be less than the amounts of the liabil-
ities of the scheme, BTPS still had a GBP 3,4 billion deficit
according to the 2006 valuation. The UK authorities have
not explained how such a significant deficit could have
accrued if the principles laid down in the 1995 legislation
had been fully respected and applied by BTPS and BT.

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Official Journal of the European Union

22.1.2008

(69) In conclusion,

the Commission has doubts about

the
claims that BTPS did not avail
itself of the exemptions
from the application of the minimum funding require-
ments laid down in the 1995 and 2004 Pension Act, and
that as a result, BT has not received State aid in the form
of
its
less stringent conditions
pension fund deficit since 1995.

the financing of

for

4.1.3. The exemption from the payment for a levy to the PPF
corresponding to the pension liabilities covered by the
Crown Guarantee

(70) As described in Section 2.3, the 2004 Pension Act intro-
duced another significant change:
it created the Pension
Protection Fund, to which pension funds generally have to
contribute by paying an annual levy, unless they benefit
from a Crown guarantee and are as a result exempted
from this payment.

(71) BT's

trustees'

regulations,

cover BTPS'

contribution must

costs,
including the PPF levy payments. Under the PPF entry
rules
the guaranteed Section of BTPS is
exempted. Therefore, BTPS levy is calculated by the PPF
excluding all members of the scheme who joined before
privatisation on the understanding that Section 68 of the
1984 Act guarantees the liability of BT to make contribu-
tions to BTPS in respect of these members. The initial levy
levy had been
was actually set at GBP […]. If the full
charged, BTPS would have paid GBP […]. No determin-
ation has yet been made in respect of the 2006/2007
levy (5) […].

(72) The Crown guarantee on Pension liabilities and the PPF
to offer additional
pursue basically the same purpose:
protection to workers
the
insolvency of
in case of
employer. Up to 2004, protection of pensions in case of
insolvency was limited to a portion of the workers bene-
fits and ensured by the State on an individual company
basis. As from 2004 the PPF general system has been
established and occupational pension schemes
(and
indirectly employers) have to make contributions to the
PPF, which guarantees the employees of any contributor
scheme. In other words the general system is that addi-
tional protection must be paid by the employers in the
form of the payment of a full levy.

(73) It should be recalled, however, that the UK authorities and
BTPS have argued that BTPS and BT did not receive any
advantage for the reasons described in Section 3.2 and 3.3
of this decision. However, the Commission has doubts
that these arguments can be accepted.

(74) The Commission has doubts that the reduction of the levy
to be paid to the PPF is justified “by the logic of the
system”. The Commission does not consider that
the
“system” can be regarded as constituted by the PPF only.
Rather, all measure established in order to achieve a
protection of pensions must be taken into consideration.
In this context, it is noted that whereas under the PPF, the

(5) BTPS indicated that these amounts are likely to increase in the future,

maintaining the same ratio between actual and full levy.

employers must make a financial contribution to the
protection of the pensions of their employees, this does
not apply for the pensions covered by the Crown guar-
antee. The Commission does not consider that this differ-
ence in approach can be justified by a “logic of
the
system”. The only “logic” apparent in this case is that
where State resources are made available for the protec-
tion of an undertaking's pension scheme, private provision
becomes otiose.

(75) The Commission has also doubts that no advantage is
present on the ground that this guarantee has already
been paid by BT's shareholders in the overall price that
they paid for the company in 1984. As explained in
Section 4.1.1 of this decision, the Commission concludes
on the basis of the information available that the Crown
guarantee in itself, as far as it covers BT's pension liabilities
did not confer any advantage to BT at the time it was
granted, and not until 1995, when its effects were
substantially changed by the legislation. It means that at
least at the time of the privatisation, the Crown guarantee
on pension liabilities had no value to BT's shareholders: in
1984, it was not possible to anticipate the application of
minimum funding requirements and the obligation to
contribute to the PPF, nor the potential economic advan-
tage resulting from the exemption from these obligations
thanks of the Crown guarantee.

(76) BTPS also put forward the argument that the potential
advantage deriving from the lower levies to the PPF is
more than compensated by extra liabilities borne by BT
and BTPS because of the special nature of BTPS. First, the
Commission notes that, in application of BTPS' reasoning,
the nature of the contracts with BT's employees before
privatisation was known at the time of privatisation, and
should have therefore been taken into account into BT's
price: the argument is therefore in contradiction with the
one described in the previous paragraph. Secondly, the
disadvantages described by BT are linked to specific rules
that have been applied to BTPS and a certain category of
employees since the privatisation of BT. Thee is no causal
nor temporal link between these alleged disadvantages and
the apparent advantage resulting from a reduced contribu-
tion to the PPF, which materialised 20 years later. The
Commission therefore has doubts that these alleged disad-
vantages could be used to offset this advantage.

In addition,

(77) If the arguments put forward by BTPS and the UK autho-
rities are rejected, and if it is concluded that there is an
advantage in the form of a reduced contribution to the
PPF, this advantage appears to be financed through State
resources since it is the consequence of the State guar-
antee, which has been granted to BT without the payment
of any premium by this firm.
in case BT
becomes insolvent and its pension fund is in deficit, the
pensions of the employees concerned will be paid by the
State, rather than by the (privately funded) PPF, as would
be the case if the normal rules had applied. To summarize,
the change in the legal framework in 2004 and the setting
up of a new system based on the PPF with an exemption
for funds with a Crown guarantee substantially altered the
nature and the effects of the Crown guarantee enjoyed by
BT, as a result of which an advantage financed by the
State appears to have been granted to BT from 2004
onwards.

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(78) This advantage would be selective, since it is available only
to BT for the part of its employees covered by the Crown
guarantee.

(79) Given BT's

activities

in national

and international
markets for telecommunications, this advantage may affect
competition and trade between Member States and there-
fore is likely to constitute an aid within the meaning of
Article 87(1) EC.

(80) To conclude, on the basis of the information available at
this stage, the Commission is of the opinion that the
exemption from the contribution to the PPF for BTPS
pension liabilities covered by the 1984 Crown guarantee
is likely to constitute State aid granted to BT.

4.2. Lawfulness of the measures if State aid if present

(81) The 1995 and 2004 Pension Acts have created general
obligations for pension funds from which BTPS and
consequently BT are relieved thanks to the Crown guar-
antee. These new legislations have substantially altered the
effects of the Crown guarantee on BT's pension liabilities.
Since the enactment of these acts, the Crown guarantee
on BT's pension liabilities appears to provide an advantage
to BT in the form of an exemption of BTPS from the
minimum funding requirements, on the one hand, and
from the full contribution to the PPF, on the other hand.

(82) These advantages are likely to constitute State aid within
the meaning of Article 87(1) of the EC Treaty.
If the
presence of State aid is confirmed,
it has not been
notified. As a result, it is unlawful as from ten years before
in
the Commission started its investigation in 2006,
compliance with Article 15 of Council Regulation (EC)
No 659/1999.

4.3. Assessment of compatibility of the measures if

State aid is present

(83) To the extent that the presence of State aid in the form of
an exemption from the minimum funding requirement or
in the form of an exemption from the minimum funding
requirements and from full contribution to the PPF levy is
confirmed, it is necessary to consider the compatibility of
such State aid under Community rules.

(84) Although BT is entrusted with certain obligations of
general public interest,
if State aid is
present, it benefits the entirety of its activities, in which
case Article 86(2) EC would not be applicable.

it appears that,

social

(85) The measures involved do not appear to be compatible
under Article 87(2) EC either. Article 87(2)(a) EC concerns
aid with a
granted to individual
consumers. The State aid at stake consists in an exemption
from minimum funding requirements and from the
contribution to the PPF: such aid benefits BT itself. Conse-
quently, such State aid would not fall within the scope of
Article 87(2)(a) EC.

character

(86) The

for

only

basis

possible

under
Article 87(3) EC for these measures, if they contain aid,
would at
this stage appear to be Article 87(3)(c) EC,
which provides that aid to facilitate the development of
certain economic activities or certain economic areas can

compatibility

be found to be compatible when it does not affect trading
conditions to an extent contrary to the common interests.

(87) However, the measures involved do not appear to comply
with any of the rules concerning the application of that
sub-paragraph that the Commission has promulgated to
date in the form of guidelines and communications.
Consequently, the compatibility of these measures, if they
contain aid, would have to be assessed directly on the
basis of Article 87(3)(c) EC. To date, the UK authorities
have not provided any information that would enable the
Commission to conclude to the compatibility of
these
measures on that basis.

(88) To conclude,

if State aid is involved, the Commission
doubts whether these measures are compatible with the
common market.

5. DECISION

(89) In the

the

light of

foregoing

considerations,

the EC Treaty,

the
Commission, acting under the procedure laid down in
the United
Article 88(2) of
Kingdom to submit its comments and to provide all such
information as may help to assess the exemption of BTPS
from the minimum funding requirements laid down in the
1995 and 2004 Pension Acts and from the payment of a
levy to the PPF, for the pension liabilities covered by the
Crown guarantee.

requests

(90) In particular, the Commission requests the UK to provide:

— Explanations as to why and clear evidence that, as
alleged by the UK authorities, BTPS did not avail itself
of the exemption from the minimum funding require-
ments imposed by the 1995 and 2004 Pension Acts.

— Full explanations as to why, in their views, the exemp-
tion from the contribution to the PPF does not consti-
tute aid.

— Full explanations as to why these measures, should the
Commission conclude that they constitute State aid,
can be found to be compatible with State aid rules,
and in particular under Article 87(3)(c) EC.

(91) The Commission requests your authorities to forward a
copy of this letter to the potential recipient of the aid
immediately.

(92) The Commission wishes to remind the United Kingdom
that Article 88(3) of the EC Treaty has suspensory effect,
and would draw your attention to Article 14 of Regu-
lation (EC) No 659/1999, which provides that all unlawful
aid may be recovered from the recipient.

Journal of

(93) The Commission warns the United Kingdom that it will
inform interested parties by publishing this letter and a
meaningful summary of it in the Official
the
European Union. It will also inform interested parties in the
EFTA countries which are signatories to the EEA Agree-
ment, by publication of a notice in the EEA Supplement
to the Official Journal of the European Union and will inform
the EFTA Surveillance Authority by sending a copy of this
letter. All such interested parties will be invited to submit
their comments within one month of the date of such
publication.’