BT 2007 Annual Report Download - page 121

29. RETIREMENT BENEFIT PLANS continued
Sensitivity analysis of the principal assumptions used to measure BTPS scheme liabilities
The assumed discount rate, mortality rates and salary increases all have a significant effect on the measurement of scheme liabilities.
The following table shows the sensitivity of the valuation to changes in these assumptions:
Impact on deficit
(Decrease)/
Increase
£bn
0.25 percentage point increase to:
– discount rate (1.4)
– salary increases 0.3
Additional 1.0 year increase to life expectancy 1.5
Funding valuation and future funding obligations
A triennial valuation is carried out for the independent scheme trustees by a professionally qualified independent actuary, using the
projected unit credit 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 funding valuation is performed at 31 December as 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 credit method and discounted to their present value.
The last three triennial valuations were determined using the following long-term assumptions:
Real rates (per annum) Nominal rates (per annum)
2005 2002 1999 2005 2002 1999
valuation valuation valuation valuation valuation valuation
%%%%%%
Discount rate
Pre retirement liabilities 3.06 5.84
Post retirement liabilities 1.79 4.54
Return on existing assets, relative to market values 4.52 2.38 7.13 5.45
(after allowing for an annual increase in dividends of) 1.00 1.00 3.53 4.03
Return on future investments 4.00 4.00 6.60 7.12
Average increase in retail price index – – – 2.70 2.50 3.00
Average future increases in wages and salaries 0.75 1.5a1.75 3.47 4.04a4.80
Average increase in pensions – – – 2.70 2.50 3.00
aThere is a short term reduction in the real salary growth assumption to 1.25% for the first three years.
At 31 December 2005, the assets of the BTPS had a market value of £34.4 billion (2002: £22.8 billion) and were sufficient to cover
90.9% (2002: 91.6%) of the benefits accrued by that date. This represented a funding deficit of £3.4 billion compared to £2.1 billion
at 31 December 2002. The funding valuation uses conservative assumptions whereas, had the valuation been based on the actuary’s
view of the median estimate basis the scheme would have been in surplus. The market value of equity investments had increased
and the investment income and contributions received by the scheme exceeded the benefits paid. In the three years ended
31 December 2005, however, the deficit had not improved by the same amount as the assets because the liabilities included longer
life expectancy assumptions and used a lower discount rate.
Following the valuation the ordinary contributions rate increased to 19.5% of pensionable salaries (including employee
contributions of 6%) from 18.2%, with effect from 1 January 2007. In addition, the group will make deficiency payments equivalent
to £280 million per annum for ten years. The first three years’ instalments are to be paid up front; £520 million was paid in the
2007 financial year and £320 million was paid in April 2007. Subsequently, annual payments of £280 million will be made, with the
next payment due in December 2009. This compared to annual deficiency payments of £232 million that were determined under the
2002 funding valuation.
In the year ended 31 March 2007, the group made regular contributions of £402 million (2006: £396 million). Deficiency
contributions of £520 million were also made (2006: £54 million), and a further £320 million was paid in April 2007. Accordingly
no further deficiency payments are due until after the 31 December 2008 valuation.
Consolidated financial statements Notes to the consolidated financial statements
120 BT Group plc Annual Report & Form 20-F