BT 2010 Annual Report Download - page 132

FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
130 BT GROUP PLC ANNUAL REPORT & FORM 20-F
29. Retirement benefit plans continued
The BTPS assets are invested in UK and overseas equities, UK and overseas properties, fixed interest and index-linked securities, alternative
assets, deposits and short-term investments. At 31 March 2010 and 31 March 2009, the scheme’s assets did not include any ordinary
shares of the company. However, the scheme held £52m (2009: £65m) of bonds and £6m (2009: £5m) of index-linked notes issued by
the group. The group occupies four (2009: two) properties owned by the BTPS on which an annual rental of £0.2m is payable (2009:
£0.1m).
The Trustee’s main investment objective is to ensure that over the long-term, and after allowing for all future income, the BTPS will
always have sufficient liquid resources to meet the cost of benefit payments to be made as they fall due. The strategic allocation of assets
between different classes of investment is reviewed regularly and is a key factor in the Trustee’s investment policy. The targets set reflect
the Trustee’s views on the appropriate balance to be struck between seeking high returns and incurring risk, and on the extent to which the
assets should be distributed to match its liabilities. The targets are a long-term aim to be achieved over a period as and when favourable
opportunities arise. Current market conditions and trends are continuously assessed and short-term tactical shifts in asset allocation may
be made around the long-term strategic target, for example, by using stock index future contracts.
The BTPS uses financial instruments to manage interest rate risk, liquidity risk and foreign currency risk. Exposure to interest rate
fluctuations on its borrowings and deposits is managed by using interest rate swaps. Liquidity risk is managed by maintaining a balance
between continuity of funding and flexibility through the use of borrowings with a range of maturities. The BTPS has significant
investments overseas, as a result of which the value of the scheme’s assets can be significantly affected by movements in foreign currencies
against Sterling. A portion of the exposure to foreign currencies embedded in the overseas assets is hedged back into Sterling to remove
some of the currency risk.
The assumptions for the expected long-term rate of return and the fair values of the assets of the BTPS at 31 March were:
At 31 March 2010 At 31 March 2009
Expected Expected
long-term long-term
rate of return rate of return
(per annum) Asset fair value Target (per annum) Asset fair value Target
% £bn % % % £bn % %
UK equities 8.5 3.6 10 11 8.5 3.2 11 11
Non-UK equities 8.5 7.5 21 22 8.5 5.9 20 22
Fixed-interest securities 5.0 5.9 17 20 5.9 6.6 22 20
Index-linked securities 4.2 5.8 16 15 4.0 4.4 15 15
Property 7.7 3.8 11 12 7.0 3.2 11 12
Alternative assets 6.9 5.9 17 20 7.0 5.2 18 20
Cash and other 4.2 2.8 8 – 3.5 0.8 3 –
6.5 35.3 100 100 6.7 29.3 100 100
The assumption for the expected return on scheme assets is a weighted average based on the assumed expected return for each asset class
and the proportions held of each asset class at the beginning of the year. The expected returns on fixed interest and index-linked securities
are based on the gross redemption yields at the start of the year. Expected returns on equities, property and alternative asset classes are
based on a combination of an estimate of the risk premium above yields on government bonds, consensus economic forecasts of future
returns and historical returns. Alternative asset classes include commodities, hedge funds, private equity, infrastructure and credit
opportunities. The long-term expected rate of return on investments does not affect the level of the obligation but does affect the
expected return on pension scheme assets within the net finance expense.
The history of experience gains and losses are as follows:
2010 2009 2008 2007 2006
£m £m £m £m £m
Present value of defined benefit obligation (43,293) (33,326) (34,669) (38,779) (38,187)
Fair value of plan assets 35,429 29,353 37,448 38,390 35,640
Net pension (obligation) asset (7,864) (3,973) 2,779 (389) (2,547)
Experience adjustment on defined benefit obligation – gain (loss) 1,632 (238) (22) 190 (527)
Percentage of the present value of the defined benefit obligation 3.8% 0.7% 0.1% 0.5% 1.4%
Experience adjustment on plan assets – gain (loss) 5,157 (9,451) (2,572) 993 4,855
Percentage of the plan assets 14.6% 32.2% 6.9% 2.6% 13.6%
The group expects to contribute approximately £669m to the BTPS in 2011, including deficiency contributions of £525m.