BT 1997 Annual Report Download - page 56

NOTES TO THE FINANCIAL STATEMENTS
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21. Financial commitments and contingent liabilities (continued)
At 31 March 1997, there were no contingent liabilities or guarantees other than those arising in the ordinary course of the
group’s business and on these no material losses are anticipated. The group has insurance cover to certain limits for major
risks on property and major claims in connection with legal liabilities arising in the course of its operations. Otherwise, the
group generally carries its own risks.
The company has guaranteed certain borrowings of subsidiary undertakings amounting to £1,577m (1996 – £1,796m).
Satellite consortia, in which the company has participating interests, are organisations without limited liability. At 31 March
1997, the company’s share of the aggregate borrowings of these consortia amounted to £179m (1996 – £153m).
Outstanding at 31 March 1997 were warrants entitling the holders to subscribe in 1999 for US dollar 8.765% guaranteed
bonds at par, repayable in 2009, to be issued by the group with a total principal value equivalent to £123m.
As explained in note 12, the company has agreed to merge with MCI, the original announcement of which was made on
3 November 1996. On 4 November 1996 and thereafter, MCI and all of its directors, including directors who are also executive
officers, were named defendants in 12 complaints filed in the Court of Chancery in the State of Delaware. The company and
three of its directors were named defendants in 10 such complaints. The company and MCI have consulted their respective US
counsel. The complaints were brought by alleged stockholders of MCI, individually and purportedly as class actions on behalf
of all other stockholders of MCI. The complaints allege breaches of fiduciary duty by MCI and its directors arising primarily
from the proposed merger of the company with MCI. Nine of the complaints in which the company was named as a defendant
allege that the company aided and abetted those breaches of duty. One of the complaints in which the company was named as
a defendant alleges that the company owes fiduciary duties to the other stockholders of MCI and that it has breached those
duties in connection with the merger. The complaints seek injunctive relief prohibiting MCI from, among other things,
consummating the merger. The complaints also seek damages and other relief. It is too early to quantify the financial effects
(if any) of these complaints at this stage.
HM Government, newly elected on 1 May 1997, has stated that it is proposing to levy a windfall tax on those regulated
companies privatised since 1979. The company has no knowledge whether such a tax will be levied upon it, nor the amount or
the basis on which it would be levied if the tax was to apply to the company. HM Government has indicated that it will be
announcing tax measures in June or July 1997.
22. Pension costs
The total pension cost of the group charged within staff costs was £291m (1996 – £284m), of which £281m (1996 – £275m)
related to the group’s main pension scheme, the BT Pension Scheme. The increase in the charge for the year was mainly due
to the interest accounted for on the pension provisions in the balance sheet which have risen by £311m to £1,291m in the year.
The pension cost for the year was based on the valuation of the BT Pension Scheme at 31 December 1993. The valuation,
carried out by professionally qualified independent actuaries, used the projected unit method. The major assumptions used by
the actuaries were that, over the long term, the return on the existing assets of the scheme, relative to market values, would be
8.6% per annum and on future investments the return would be 9.7% per annum (allowing for real equity dividend growth of
0.5% per annum), the retail price index would increase at an average of 5.0%, and wages and salary rates would increase at
an average of 6.8%. The assets of the scheme, which had a market value of £17,196m at the valuation date, were sufficient to
cover 97% of the benefits that had accrued to members by 31 December 1993, after allowing for expected future increases in
wages and salaries but not taking into account the cost of providing incremental pension benefits for employees taking early
retirement under release schemes since that date. This cost, charged within redundancy costs, amounted to £258m in the year
ended 31 March 1997 (1996 – £266m).
A further valuation of the BT Pension Scheme is being carried out at 31 December 1996 on the same basis as the December
1993 valuation, for the purpose of determining the group’s future pension expenses. For the December 1996 valuation, the
major assumptions were that, over the long term, the return on the existing assets of the scheme, relative to market values,
would be 8.2% per annum and on future investments the return would be 8.7% per annum (allowing for real equity dividend
growth of 0.5% per annum), the retail price index would increase at an average of 4.0%, and wages and salary rates would
increase at an average of 5.8%. The preliminary results of the valuation show that the assets of the scheme, which had a
market value of £19,879m at 31 December 1996, were sufficient to cover 103% of the benefits that had accrued to members
by that date. In light of the surplus in the scheme, the cost of providing incremental pension benefits for employees taking
early retirement during the year ending 31 March 1998 will not be charged against the profit in that year.