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29. RETIREMENT BENEFIT PLANS
Background
The group offers retirement plans to its employees. The group’s main scheme, the BT Pension Scheme (BTPS), is a defined benefit
scheme where the benefits are based on employees’ length of service and final pensionable pay. The BTPS is funded through a
legally separate trustee administered fund. This scheme has been closed to new entrants since 31 March 2001 and replaced by a
defined contribution scheme. Under this defined contribution scheme the income statement charge represents the contribution
payable by the group based upon a fixed percentage of employees’ pay. The total pension costs of the group, included within the
staff costs, in the year was £603 million (2005: £540 million), of which £552 million (2005: £507 million) related to the group’s
main defined benefit pension scheme, the BTPS.
The increase in the pension cost in the 2006 financial year principally reflects the introduction part way through the 2005
financial year of Smart Pensions, a salary sacrifice scheme under which employees elect to stop making employee contributions
and for the company to make additional contributions in return for a reduction in gross contractual pay. As a result there has been
a switch between wages and salaries and pension costs of £19 million in the year.
The pension cost applicable to the group’s main defined contribution scheme in the year ended 31 March 2006 was £19 million
(2005: £11 million) and £2 million (2005: £1 million) of contributions to the scheme were outstanding at 31 March 2006.
The group occupies two properties owned by the BTPS scheme on which an annual rental of £2 million is payable. The BTPS
assets are invested in UK and overseas equities, UK and overseas properties, fixed interest and index linked securities, deposits and
short-term investments. At 31 March 2006, the UK equities included 15 million (2005: 17 million) ordinary shares of the company
with a market value of £33 million (2005: £36 million).
IAS 19 accounting valuation
In accordance with the amendments to IAS 19 ‘Employee Benefits’ the disclosures below are provided prospectively from the 2005
financial year onwards. BT has applied the accounting requirements of IAS 19 as follows:
– scheme assets are measured at market value at the balance sheet date;
– scheme liabilities are measured using a projected unit credit method and discounted at the current rate of return on high quality
corporate bonds of equivalent term to the liability; and
– actuarial gains and losses are recognised in full in the period in which they occur, outside of the income statement, in retained
earnings and presented in the statement of recognised income and expense.
The financial assumptions used for the purpose of the actuarial accounting valuations of the BTPS under IAS 19 at 31 March
2006 are:
Real rates (per annum) Nominal rates (per annum)
2006 2005 2006 2005
%%%%
Rate used to discount liabilities 2.19 2.63 5.00 5.40
Average future increases in wages and salaries 0.75
a
1.00 3.52
a
3.73
Average increase in pensions in payment and deferred pensions ––2.75 2.70
Inflation – average increase in retail price index ––2.75 2.70
aThere is a short term reduction in the real salary growth assumption to 0.5% for the first three years.
The net pension obligation is set out below:
2006 2005
Assets
Present value
of liabilities Deficit Assets
Present value
of liabilities Deficit
£m £m £m £m £m £m
BTPS 35,550 38,005 2,455 29,550 34,270 4,720
Other schemes 90 182 92 78 165 87
35,640 38,187 2,547 29,628 34,435 4,807
Deferred tax asset at 30% (764) (1,434)
Net pension obligation 1,783 3,373
Amounts recognised in the income statement on the basis of the above assumptions in respect of pension obligations are as
follows:
2006 2005
£m £m
Current service cost 603 540
Total operating charge 603 540
Expected return on pension scheme assets (2,070) (1,918)
Interest on pension scheme liabilities 1,816 1,720
Net finance income (254) (198)
Total amount charged to the income statement 349 342
BT Group plc Annual Report and Form 20-F 2006 Notes to the consolidated financial statements98