BA closes on Iberia deal with plan for pensions

British Airways took a giant leap towards the completion of its £5 billion merger with Spain's Iberia today, as the British flag bearer set out a recovery plan for its £3.7 billion pension deficit.

BA, which has been hit with a series of strikes this year, said talks with members of the Unite union had for once gone well and it had agreed a plan with staff and pension scheme trustees to cut its massive deficit without closing its two final-salary pension schemes.

The negotiations were the last-remaining barrier to BA's merger with Iberia to form International Airlines Group, an industry giant operating 1700 flights a day.

Iberia had a clause written into the contract giving it the right to walk away from the tie-up, which is due to be put to both airlines' investors in November, if BA's pension deficit became "materially detrimental to the economic premises of the proposed merger".

Iberia now has three months to decide if it is happy with BA's plan, which sees the British airline maintaining its current annual distribution of £330 million a year towards the pension schemes, with inflation-level increases every year, averaging about 3%.

That will continue until 2023 for British Airways' older plan, the Airways Pension Scheme, which ran from 1948 to 1984, and until 2026 for the New Airways Pension Scheme, which was open to employees between 1984 to 2003, when BA stopped offering staff a final-salary retirement plan.

The airline has agreed to make extra deficit contributions if its year-end cash balance is more than £1.8 billion.

It is also giving the two pension schemes £250 million of extra security over the company's assets which would be paid out if the airline went bust.

The deal will now be scrutinised by the UK pensions regulator.

Keith Williams, BA's finance director, called the agreement "a significant and positive step forward".

He added: "The trustees understand that the airline is unable to increase its contributions in the current financial climate, but we have agreed a recovery plan.

"The pensions regulator's initial response to the overall package has been positive and we look forward to receiving their confirmation that they have no objections."