BT 2011 Annual Report Download - page 134

131BT GROUP PLC ANNUAL REPORT & FORM 20-F 2011
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23. Retirement benefit plans continued
Asset allocation
The target allocation of assets between different classes of investment is reviewed regularly and is a key factor in the Trustee’s investment
policy. The Trustee’s main investment objective is to ensure that over the long-term, and after allowing for all future income, the BTPS will
have sufficient liquid resources to meet the cost of benefit payments as they fall due. The targets set reflect the Trustee’s views on the
appropriate balance to be struck between seeking returns and incurring risk, and on the extent to which the assets should be distributed to
match 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 target,
for example, by using stock index future contracts. The BTPS also uses financial instruments to manage interest rate risk, liquidity risk and
foreign currency risk.
The Trustee reports on investment performance against a target benchmark which is based on the target asset mix and the market returns
for each asset class. BTPS performance against the benchmark for the periods to 31 December 2010 was as follows:
Target Actual Over/(under)
benchmark BTPS performance
return return return
Period ending 31 December 2010 %%%
1 year 10.7 11.8 1.1
3 years (0.2) 1.1 1.3
10 years 4.1 5.1 1.0
Further commentary on investment performance is provided in the Report by the Trustee in the BTPS Annual Report.
Measurement of scheme liabilities – IAS 19
The liabilities of the BTPS are measured as the present value of the best estimate of future cash flows to be paid out by the scheme using the
projected unit credit method. The present value of scheme liabilities is calculated by estimating future benefit payments, including
allowance for benefits to increase with inflation and projected salary levels, and discounting the resulting cash flows.
Principal assumptions used to measure BTPS liabilities
The estimated average duration of BTPS liabilities is 15 years (2010: 15 years) and the benefits payable by the BTPS are expected to be paid
over more than 60 years as shown in the following graph:
The expected future benefit payments are based on a number of assumptions including future inflation, retirement ages, benefit options
chosen and life expectancy and are therefore inherently uncertain. Sensitivities are set out below. Actual benefit payments in a given year
may be higher or lower, for example if members retire sooner or later than assumed, or take more or less cash lump sum at retirement.
The rate of inflation influences the assumptions for salary and pension increases. In assessing the appropriate assumption for pension
increases, management have considered the announcement in July 2010 by the UK Government that the Consumer Prices Index (CPI),
rather than the Retail Prices Index (RPI), will be used as the basis for determining the rate of inflation for the statutory minimum rate of
revaluation and indexation of occupational pension rights. Under the scheme rules the Government’s decision has the following impact with
effect for increases after 1 April 2011:
•members who commenced employment prior to 1 April 1986 – CPI will be used to revalue preserved pensions of deferred members and
for the rate of inflationary increase applied to pensions in payment
•members who commenced employment on or after 1 April 1986 – CPI will be used to revalue preserved pensions of deferred members
and RPI will continue to be used for inflationary increases to pensions in payment.
The Government’s decision does not affect the accrual of benefits for employees while they are active members of the scheme for whom
benefits accrue on a CARE basis that is linked to RPI.
Forecast benefits payable by the BTPS at 31 March 2011
£m
0
500
1,000
1,500
2,000
2,500
3,000
2012 2035 2058 2081 2104
OVERVIEWBUSINESS REVIEWFINANCIAL REVIEWREPORT OF THE DIRECTORSFINANCIAL STATEMENTSADDITIONAL INFORMATION