BT 2004 Annual Report Download - page 110

31. Pension costs continued
The assumed rate of investment return, salary increases and mortality all have a significant effect on the funding
valuation. A 0.25 percentage point change in these assumptions would have the following effects on the funding
deficit:
Impact on funding deficit
Increase
£bn
Decrease
£bn
0.25 percentage point change in:
Investment return (0.9) 0.9
Wage and salary increases 0.2 (0.2)
An additional year of life expectancy would result in a £0.7 billion increase in the deficit.
At 31 December 2002, the assets of the BTPS had a market value of £22.8 billion (1999 – £29.7 billion) and
were sufficient to cover 91.6% (1999 – 96.8%) of the benefits accrued by that date, after allowing for expected
future increases in wages and salaries but not taking into account the costs of providing incremental pension
benefits for employees leaving under release schemes since that date. This represents a funding deficit of
£2.1 billion compared to £1.0 billion at 31 December 1999. The funding valuation uses conservative
assumptions whereas, had the valuation been based on the actuary’s view of the median estimate basis, the
funding deficit would have been reduced to £0.4 billion. Although the market value of equity investments had
fallen, the investment income and contributions received by the scheme exceeded the benefits paid by
£0.3 billion in the year ended 31 December 2002. As a result of the triennial funding valuation the group agreed
to make employer’s contributions at a rate of 12.2% of pensionable pay from April 2003 and annual deficiency
payments of £232 million. This compared to the employer’s contribution rate of 11.6% and annual deficiency
payments of £200 million that were determined under the 1999 funding valuation. In the year ended 31 March
2004, the group made regular contributions of £284 million (2003 – £278 million, 2002 – £303 million) and
additional special contributions for enhanced pension benefits to leavers in the year ended 31 December 2002 of
£130 million in the 2004 financial year (2003 – £129 million, 2002 – £400 million) and deficiency contributions
of £612 million (2003 – £200 million, 2002 – £200 million) which includes the early payment of £380 million
scheduled for payment in subsequent years.
Under the terms of the trust deed that governs the BTPS the group is required to have a funding plan
that should address the deficit over a maximum period of 20 years whilst the agreed funding plan addresses
the deficit over a period of 15 years. The group will continue to make deficiency payments until the deficit is
made good.
The BTPS was closed to new entrants on 31 March 2001 and the age profile of active members will
consequently increase. Under the projected unit method, the current service cost, as a proportion of the active
members’ pensionable salaries, is expected to increase as the members of the scheme approach retirement.
Despite the scheme being closed to new entrants, the projected payment profile extends over more than
60 years.
SSAP 24 accounting valuation
The SSAP 24 valuation is broadly on the following basis:
&scheme assets are valued at market value; and
&scheme liabilities are measured using the projected unit method and discounted at the estimated rate
of return reflecting the assets of the scheme.
The pension costs for the 2003 and 2002 financial years were based on the SSAP 24 valuation at 31 March
2000. At 31 March 2000 there was a SSAP 24 deficit of £0.2 billion and the regular cost for the 2003 and 2002
financial years was 11.6% of pensionable salaries. The SSAP 24 valuation at 31 March 2000 was based on the
same assumptions as the December 1999 funding valuation, with the exception that, over the long term, it has
been assumed that the return on the existing assets of the scheme, relative to market values, would be a nominal
5.6% per annum which equates to a real return of 2.5% per annum.
The pension cost for the 2004 financial year was based upon the SSAP 24 valuation at 31 March 2003.
At 31 March 2003 there was a SSAP 24 deficit of £1.4 billion, before taking account of the balance sheet
prepayment and the regular cost is 11.3% of pensionable salaries. The SSAP 24 valuation at 31 March 2003 is
based on the 31 December 2002 funding valuation rolled forward, and uses the same assumptions as set out
above, with the following exceptions:
&return on existing assets is assumed to be a nominal 7.1% per annum, which equates to a real return
of 4.7%;
&average increase in retail price index is assumed to be 2.25% per annum; and
&the average future increases in wages and salaries is assumed to include a short term reduction in the real
salary growth assumption to 0.75% for the first three years, before returning to 1.5%.
BT Annual Report and Form 20-F 2004109 Notes to the financial statements