BT said on Friday it would pay 2 billion pounds into its pension fund this month as part of a new, nine-year deal that results in much smaller annual cash payments.

BT, which has been dogged in recent years by its pension and the drag it placed on dividend payouts, said a new triennial funding valuation had put the deficit at the end of June at 4.1 billion pounds, compared with a deficit of 9 billion pounds when it last evaluated the scheme in 2008.

Under the new plan, BT will make a lump sum payment of 2 billion pounds before the end of March, followed by nine deficit payments of 325 million pounds in March of each year.

That compared to a previous payment plan which ran over 17 years and started off at an annual payment of 525 million pounds which would then rise further.

I am pleased that we have been able to reach an agreement with the Trustee, Chief Executive Ian Livingston said in a statement on the deal, which came much earlier than most analysts had expected.

This agreement under which the company makes an immediate contribution to the scheme of almost half of the deficit reflects BT's financial strength and re-affirms our commitment to the Scheme.

BT's long-term sustainable cash generation has improved significantly since the 2008 valuation and we remain focussed on improving BT's financial strength, investing in our future and enhancing shareholder returns.

(Reporting by Kate Holton)