BT 2014 Annual Report Download - page 55

652 The Strategic Report
Delivering our strategy
Pensions
We have a signicant funding obligation in relation to our dened
benet pension schemes and operate a large dened benet pension
scheme in the UK, the BT Pension Scheme (BTPS).
The BTPS faces similar risks to other dened benet schemes. Future
low investment returns, high ination, longer life expectancy and
regulatory changes may all result in the cost of funding the BTPS
becoming a signicant burden on our nancial resources.
Following conclusion of the last actuarial funding valuation in May
2012, the valuation documentation was submitted to the Pensions
Regulator. The nal Court decision in the Crown Guarantee case,
after any appeals, will give greater clarity as to the extent to which
the liabilities of the BTPS are covered by a Crown Guarantee. This will
inform the Pension Regulators next steps with regards to the valuation
of the Scheme. Accordingly, as matters stand, it is uncertain as to when
it will conclude its review.
Impact
An increase in the pension decit at the next actuarial valuation as at
30 June 2014 may have an impact on the level of decit payments we
are required to make into the Scheme. Indirectly it may also have an
adverse impact on our share price and credit rating. Any deterioration
in our credit rating would increase our cost of borrowing and may limit
the availability or exibility of future funding, thereby aecting our
ability to invest, pay dividends or repay debt as it matures.
Changes over the last year
The BTPS is aected by nancial market conditions. When determining
expected future returns, dierent factors are taken into account,
including yields (or returns) on government bonds. Government bond
yields have remained below the levels at the last funding valuation,
driven by a number of factors, including the Bank of Englands
Quantitative Easing programme. If these conditions continue and a
lower investment return assumption is adopted at the 30 June 2014
valuation, the liabilities may increase, potentially leading to a higher
level of decit payments.
The European Commission published draft revisions to the current
Pensions Directive in March 2014. The proposed changes primarily
focus on governance and transparency and are not expected to impact
the valuation of pension liabilities.
In the UK, the Pensions Regulator has a new objective to consider the
impact on the sustainable growth of an employer when reviewing
funding plans. As a result, the Pensions Regulator is revising its Code of
Practice which is expected to be nalised later this year.
Risk mitigation
The investment performance and liability experience, as well as
the associated risks and any mitigation, are regularly reviewed and
monitored by both us and the BTPS Trustee. The BTPS has a well-
diversied investment strategy, which reduces the impact of adverse
movements in the value of individual asset classes and helps ensure
that an ecient balance of risk and return is maintained.
Our nancial strength and cash generation provide a level of
protection that enables variations in the funding position of the BTPS
to be managed without having a material impact on the ongoing
performance of our business. The funding liabilities also include a
buer against any future negative experience, as legislation requires
that liabilities are calculated prudently.
We regularly review risk mitigation options and in April 2013, we
launched an exercise to allow existing BTPS pensioners to receive a
higher upfront pension, by giving up some of their future pension
increases. This exercise is now largely complete and is expected to
remove the exposure in the scheme to future changes in ination on
around £2.5bn of liabilities.
Growth in a competitive market
We operate in markets which are characterised by high levels of
change strong and new competition declining prices and in some
markets declining revenues technology substitution market and
product convergence customer churn and regulatory intervention to
promote competition and reduce wholesale prices.
A signicant proportion of our revenue and prot is generated in the
UK where the overall telecoms market has been in decline in real terms,
despite strong volume growth in new services. Revenue from our calls
and lines services to consumers and businesses has historically been
in decline but new broadband and connectivity markets are growing.
Our ability to deliver protable revenue growth in a responsible
and sustainable manner depends on us delivering on the strategic
investments we are making (see page 17).
Impact
Failure to achieve sustainable, protable revenue growth could erode
our competitive position and reduce our protability, cash ow and
ability to invest for the future.
Changes over the last year
Despite the slight improvement in the UK economy in the year,
customers are still cautious with their spending, especially those
small business customers not planning to make technology changes.
Regulatory decisions related to charge controls have impacted
negatively our revenue and prots. Regulation has failed to address
imbalances in the competitive playing eld between the heavily
regulated xed telecoms sector and other sectors such as mobile and
pay-TV. This means that some of our competitors in the consumer
space continue to benet from both limited regulation of their core
business and extensive sector-specic regulation of our UK xed-line
business.
The consumer broadband and triple-play markets remain very
competitive. Sky acquired O2 (Telefónica) UKs consumer broadband
business and continues to cross-sell broadband and telephony services
to its pay-TV customers. Virgin Media (acquired by iberty Global in the
year) remains strong in these markets. In addition, the four main UK
mobile operators launched 4G services during the year.
Risk mitigation
Our mitigation of this risk centres on successfully executing our
strategy. We believe that delivering this strategy, with its focus
on delivering superior customer service, transforming our costs,
and investing for growth, will together help us deliver sustainable,
protable revenue growth. We are investing in our business, such as in
bre, content and the high-growth regions of the world. Our extensive
cost transformation programme is already delivering savings and
will continue to support protability trends. We also believe we can
mitigate this risk by seeking changes in regulation to level the playing
eld so that we can compete eectively and benet our customers.