BT 2002 Annual Report Download - page 45

Additionally, under UK accounting standards, if the
costs of providing incremental pension bene®ts for early
leavers are less than the total accounting surplus based on
the latest actuarial valuation of the scheme and the amount
of the provision for pension liabilities on the balance sheet,
the costs are not charged to the pro®t and loss account. In
the 2000 and 2001 ®nancial years the cost of the
incremental bene®ts has not been charged against the pro®t
in the period in which people agree to leave. In the 2002
®nancial year the total cost of the incremental pension
bene®ts exceeded the total accounting surplus and
accordingly the excess was charged to the pro®t and loss
account. The share of operating pro®t of associates
includes £6 million and group operating pro®t includes
£21 million of the charge.
The group's ordinary contribution into the fund was
raised to 11.6% of employees' pensionable pay for the
2002 and 2001 ®nancial years compared with 9.5% of pay
during the 2000 ®nancial year. In addition, the company
paid special and de®ciency contributions into the fund of
£600 million in the 2002 ®nancial year, £300 million in the
2001 ®nancial year and £230 million in the 2000 ®nancial
year in part because of redundancies. The company is
committed to pay de®ciency funding contributions of £200
million each year until such time as the funding de®cit is
made good. The company may also be required by the
trustees of the fund to pay special contributions to cover
any costs on the pension fund arising from early leavers.
The de®ciency and special contributions paid in the 2002
®nancial year included £400 million in respect of early
leavers in the 2000 calendar year.
The number of retired members and other current
bene®ciaries in the pension fund has been increasing in
recent years and, at 31 December 2001, was approximately
62% higher than the number of active members.
Consequently, BT's future pension costs and contributions
will depend to a large extent on the investment returns of
the pension fund and could ¯uctuate in the medium term.
Following a High Court judgement made in October
1999, the BTPS is required to pay additional bene®ts to
certain former employees of the group who left under
voluntary redundancy terms. These were former employees,
in managerial grades, who had joined the group's business
prior to 1 December 1971. The value of these additional
bene®ts is estimated to be £200 million.
We have now changed the arrangements for people
leaving BT in advance of the normal retirement age. Under
our NewStart programme launched during the fourth
quarter of the 2001 ®nancial year, BT employees will be
expected to leave with a leaving payment in place of a
redundancy payment, and incremental pension bene®ts are
being scaled down. This should reduce early leaver costs,
which have been signi®cant in recent years.
The next actuarial valuation of the BTPS will be
undertaken at 31 December 2002.
The BTPS was closed to new entrants on 31 March
2001 and we launched a new de®ned contribution pension
scheme for people joining BT after that date which is to
provide bene®ts based on the employees' and the employing
company's contributions. This change is in line with the
practice increasingly adopted by major UK groups and is
designed to be more ¯exible for employees and enable the
group to determine its pension costs more precisely than is
the case for de®ned bene®t schemes. The ®nancial impact of
this change was not signi®cant in the 2002 ®nancial year and
is not expected to be signi®cant in the next several years but
it should reduce pension costs in the longer term.
Regulation and prices
BT has been operating under the existing retail price control
from 1 August 1997, under which a cap of RPI minus 4.5
applies to the services used by the lowest 80% of BT's
residential customers by bill size. This retail price control is
estimated to have covered services representing about 13%
of the group's turnover from continuing activities for the 2002
®nancial year. In the nine month period to May 2002 BT has
reduced its prices by 2.73%, which compares to the required
reduction of 2.44% for the price control year to 31 July 2002.
The equivalent reduction in the previous control year was
1.20% against the required reduction of 1.09%.
Most of BT's interconnect (network) charges to other
UK operators are based on long-run incremental costs. Until
30 September 2001, there were annual reductions in these
charges based on a RPI minus 8 price cap. Since that date,
the broad structure of the interconnect (network) services
has been retained but the ``X'' within the RPI minus X
price-cap formula now varies between 7.5 and 13, this new
price control runs until 2005.
The Competition Commission (CC) required BT to
reduce charges from a BT line to mobile phones by around
25% in the 1999 ®nancial year and an effective annual RPI
minus 7 reduction for the 2000 and 2001 ®nancial years.
The regulatory environment in the UK has had, and is
expected to continue to have, a signi®cant adverse impact
on the group's turnover and operating pro®t. As the group
has extended its activities to other countries, BT is required
to consider the regulatory regimes in those countries.
Competition and the UK economy
BT has a signi®cant market share in its main UK markets for
®xed network calls and provision of exchange lines.
Competition has eroded BT's market share signi®cantly in
the past in key market sectors, in particular areas of the UK
and for certain products and services. This trend has now
slowed and we estimate that BT had 73% of the market for
residential voice calls in the 2002 ®nancial year, compared
with 74% and 78% in the 2001 and 2000 ®nancial years,
respectively. Additionally, we estimate that BT had 48% of
the market for business voice calls in the 2002 ®nancial
year, compared with 51% and 57% in the 2001 and 2000
®nancial years, respectively. BT supplied 83% of the
exchange lines in the UK at 31 March 2002, compared with
84% and 84% at 31 March 2001 and 2000, respectively.
The growth in cable operators' networks in the UK had
an adverse effect on BT's share of the residential market until
the 2001 ®nancial year. BT experienced a small net annual
Financial review
44 BT Group Annual Report and Form 20-F 2002