BT 2003 Annual Report Download - page 113

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31. Pension costs
Background
The group continues to account for pension costs in accordance with UK Statement of Standard Accounting
Practice No. 24 ‘‘Pension Costs’’ (SSAP 24). In addition, disclosures have been presented in accordance with
Financial Reporting Standard No. 17 ‘‘Retirement Benefits’’ (FRS 17).
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 profit and loss charge represents the contribution paid by the group based upon a fixed
percentage of employees’ pay.
The total pension costs of the group (including discontinued activities) expensed within staff costs in the year
was £322 million (2002 – £382 million, 2001 – £326 million), of which £314 million (2002 – £373 million,
2001 – £315 million) related to the group’s main defined benefit pension scheme, the BTPS. The decline in
the pension cost reflects the reduction in the number of active members of the BTPS and the interest credit
relating to the balance sheet prepayment. This total pension cost includes the cost of providing enhanced pension
benefits to leavers, which amounted to £60 million (2002 – £46 million, 2001 – £nil). In the year ended 31 March
2002 this profit and loss charge of £46 million was not the full cash cost of £186 million because there was
a pension fund accounting surplus, including the provision on the balance sheet of £140 million that was fully
utilised before making a charge to the profit and loss account.
The pension cost applicable to defined contribution schemes in the year ended 31 March 2003 was £4 million,
(2002 – £5 million, 2001 – £nil), and £0.4 million (2002 – £0.3 million, 2001 – £nil) of contributions to the
schemes were outstanding at 31 March 2003.
The group occupies seven properties owned by the scheme on which an annual rental of £3 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 2003, the UK equities included 37 million
(2002 – 55 million, 2001 – 51 million) ordinary shares of the company with a market value of £58 million
(2002 – £154 million, 2001 – £258 million).
BT Pension Scheme
Funding valuation
A triennial valuation is carried out for the independent scheme trustees by a professionally qualified independent
actuary, using the projected unit method. The purpose of the valuation is to design a funding plan to ensure that
present and future contributions should be sufficient to meet future liabilities. The triennial valuation as at
31 December 2002 forms the basis of determining the group’s pension fund contributions for the year ending
31 March 2004 and future periods until the next valuation is completed. The funding valuation is performed
at 31 December because this is the financial year end of the BTPS.
The valuation basis for funding purposes is broadly as follows:
&scheme assets are valued at market value at the valuation date; and
&scheme liabilities are measured using a projected unit method and discounted at the estimated rate of return
reflecting the assets of the scheme.
The last three triennial valuations were determined using the following long-term assumptions:
Real rates (per annum) Nominal rates (per annum)
2002
valuation
%
1999
valuation
%
1996
valuation
%
2002
valuation
%
1999
valuation
%
1996
valuation
%
Return on existing assets, relative to market values 4.52 2.38 3.80 7.13 5.45 7.95
(after allowing for an annual increase in dividends of) 1.00 1.00 0.75 3.53 4.03 4.78
Return on future investments 4.00 4.00 4.25 6.60 7.12 8.42
Average increase in retail price index – – – 2.50 3.00 4.00
Average future increases in wages and salaries 1.50* 1.75 1.75 4.04* 4.80 5.82
Average increase in pensions – – – 2.50 3.00 3.75-4.00
*There is a short term reduction in the real salary growth assumption to 1.25% for the first three years.
Notes to the financial statements
112 BT Annual Report and Form 20-F 2003