BT 2009 Annual Report Download - page 127

ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS BUSINESS AND FINANCIAL REVIEWS OVERVIEW
FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS – NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
125BT GROUP PLC ANNUAL REPORT & FORM 20-F
FINANCIAL STATEMENTS
29. Retirement benefit plans continued
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 triennial funding valuation as at 31 December 2008 has reached an advanced stage of completion. As the parties are at an advanced
stage compared to other scheme valuations and given the uncertain market conditions, the Pensions Regulator has indicated it wishes to
discuss with the Trustee and BT the underlying assumptions and basis of the valuation. The Pensions Regulator has requested that the
valuation and assumptions are not finalised or disclosed in advance of the completion of those discussions. BT, the Trustee and the
Pensions Regulator are keen to complete this as soon as practicable.
BT and the Trustee agreed in May 2009 that deficit contributions of £525m per annum will be made in cash or in specie over the next
three years. This agreement has been approved by the Pensions Regulator.
The last two triennial valuations were determined using the following long-term assumptions:
Real rates (per annum) Nominal rates (per annum)
2005 2002 2005 2002
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 7.13
(after allowing for an annual increase in dividends of) 1.00 3.53
Return on future investments 4.00 6.60
Average increase in retail price index – – 2.70 2.50
Average future increases in wages and salaries 0.75 1.5a3.47 4.04a
Average increase in pensions – – 2.70 2.50
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 £34.4bn (2002: £22.8bn) and were sufficient to cover 90.9% (2002:
91.6%) of the benefits accrued by that date. This represented a funding deficit of £3.4bn compared with £2.1bn at 31 December 2002.
The funding valuation uses conservative assumptions. 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.
Under the 2005 valuation the ordinary contributions rate was 19.5% of pensionable salaries (including employee contributions of 6%)
and deficit contributions were £280m per annum. In 2009, the group made regular contributions of £433m (2008: £380m). No deficit
contributions were made in 2009 as they had been paid in advance during 2008. We expect the regular contribution rate to reduce as a
result of the implementation of the future benefit changes, following the UK pensions review, with effect from 1 April 2009.
The intention is for there to be sufficient assets in the scheme to pay pensions now and in the future. Without any further contribution
from the company, it is estimated that as at 31 December 2005, the assets of the scheme would have been sufficient to provide around
70% of the members’ benefits with an insurance company.
If the group were to become insolvent, however, there are a number of additional protections available to members. Firstly, there is the
Crown Guarantee which was granted when the group was privatised in 1984. This applies, on a winding up of the group, to pension
entitlements for anyone who joined the scheme before 6 August 1984, and to payments to beneficiaries of such persons. Secondly, the
Pension Protection Fund (PPF) may take over the scheme and pay certain benefits to members. There are limits on the amounts paid by
the PPF and this would not give exactly the same benefits as those provided by the scheme.
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. 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 credit 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.