BT freezes directors' pay after profits fall: Expected pension fund surplus fails to materialise as voluntary redundancy costs top pounds 1bn

PRE-TAX profits at BT plunged by pounds 1bn to just under pounds 2bn last year following a redundancy programme in which nearly 40,000 people left the company.

The salaries of Iain Vallance, chairman and chief executive, and of other directors will be frozen this year.

The fall in profits surprised City analysts, who had expected redundancy costs to be absorbed by a surplus in the pension fund, estimated to be pounds 1.2bn in March 1992. However, a review by actuaries early this year revealed that the fund had swung to a deficit of pounds 750m.

BT's record fall in profits - the first of any significance in the company's history - comes two months before the Government's sale of all or part of its remaining 22 per stake. The sale in mid-July is expected to generate up to pounds 5.5bn for the Treasury.

The company said the cost of voluntary redundancies in the year to March was pounds 1.03bn. BT reaffirmed plans to shed a further 30,000 jobs over the next two years, again through voluntary release, which is likely to cost a further pounds 500m a year. Meanwhile, the company is paying pounds 800m to bring the fund back into surplus, a move welcomed by the National Communications Union.

In spite of the dramatic dent in profits, BT's dividend for the year is being increased by 8.3 per cent to 15.6p, at the high end of City expectations. Those who buy shares in the July sale will be entitled to the final dividend payment of 9.45p, due on 1 September, even if they have paid only a first instalment.

Mr Vallance defended BT's underlying performance as strong in a difficult year and said that the company was well placed to take advantage of any upturn in the economy. 'We have yet to see how far the green shoots grow into a firm, strong plant,' he said. 'But it (the economy) has turned the corner quite significantly and we are not thinking it is going to turn back.'

Turnover last year fell by less than 1 per cent to pounds 13.24bn. There was almost no growth in the volume of inland calls made during the year although there was a year-on-year increase in the final quarter. International call volumes increased by 6 per cent last year compared with the previous year but the increase, and the positive effect of a weak pound, was offset by reduced prices.

Michael Hepher, BT's group managing director, said the company continued to lose market share to Mercury Communications, the Cable & Wireless subsidiary, but its share of the total market was still about 93 per cent. Cable television companies offering telephone services accounted for very little of the market but their share was rising.

BT faces a further squeeze in the regulatory regime with the introduction of a tougher price control formula in August. Price increases on the basket of basic services will be limited to inflation minus 7.5 percentage points, compared with inflation less 6.25 points now.

The company will be unable to include any new bulk discount schemes for large customers in calculating the overall price reduction.

BT also faces more regulatory hurdles in its attempts to expand outside the UK. An application to become an international telecommunications operator in the US is being fiercely opposed by AT&T, the US group, on the grounds that the British market is insufficiently open to foreign companies.

Meanwhile, the dollars 1.8bn sale to AT&T of BT's stake in McCaw, the US cellular telephone company, has still to be completed.

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