Photographer: Luke MacGregor/Bloomberg

U.K. Pension Crisis Spurs Woodford Fund to Exit BAE Stake

  • Fund dumps $209 million holding in defense firm after BT sale
  • Rate cut following Brexit vote deepened U.K. pension deficits

A fund run by Woodford Investment Management LLP has sold its 160 million-pound ($209 million) stake in defense contractor BAE Systems Plc, citing concerns over its underfunded retirement plan in a move that shows how the U.K.’s growing pension crisis is alarming investors.

The CF Woodford Equity Income Fund said in a post on its website that it had unloaded its stake in BAE, which a spokesman pegged at 0.9 percent. The fund, run by Neil Woodford, also recently offloaded a roughly 300 million-pound holding in U.K. telecommunications giant BT Group Plc, whose pension deficit has also swelled.

The Bank of England’s Aug. 4 interest-rate cut, which followed the U.K.’s vote to leave the European Union, has reduced the returns that pension funds receive by pushing yields on government bonds to record lows. The total deficit of U.K. defined-benefit pensions has reached a record 1 trillion pounds ($1.29 trillion), after bond yields plunged further on the bank’s failure to buy back sufficient government bonds on Tuesday, according to a report Friday by pensions consultancy Hymans Robertson.

BAE, like BT, “has a substantial pension deficit which is something of a concern in this environment of ultra-low interest rates,” Woodford said in the statement. “Its yield remains an attraction, but with only modest growth in the dividend expected over the next few years, it is no longer as appealing as other businesses in which we have increasing confidence.”

BAE last month said its share of its net pension deficit had widened by 1.6 billion pounds from December 2015 to 6.1 billion pounds, hurt by lower interest rates. Chief Financial Officer Peter Lynas said at the time that it would be difficult to predict the impact of the pension deficit until the next triennial valuation, starting in April 2017.

Chief Executive Officer Ian King said during the same presentation that relative to BAE’s cash-flow forecasts the pension deficit is “not going to destroy our ability to pay dividends and run the business.”

BAE has a pension deficit recovery plan in place, with a focus on the long term, a spokeswoman said. The next triennial funding review for the plan is set to begin in April 2017, she added.

BAE shares closed up 0.9 percent at 531.5 pence, giving the company a total value of 16.9 billion pounds.

Overall, Woodford funds held 3.92 percent of BAE, worth 660 million pounds, prior to the equity income fund’s sale of its holding, according to data compiled by Bloomberg.

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