BT 2011 Annual Report Download - page 135

132
FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23. Retirement benefit plans continued
The assumption for RPI has been assessed by reference to yields on long-term fixed interest and index-linked Government bonds and has
regard to Bank of England published inflationary expectations. CPI is assessed at a margin below RPI taking into account long-term trends.
The impact of using CPI instead of RPI is to reduce BTPS liabilities at 31 March 2011 by £3.5bn. In determining the most appropriate manner
by which to reflect the impact of the change on the scheme liabilities, the directors have had regard to the UITF Abstract 48 “Accounting
implications of the replacement of the Retail Prices Index with the Consumer Prices Index for retirement benefits” issued by the Urgent Issues
Task Force of the UK Accounting Standards Board in December 2010. The Abstract states that, where the obligation is to pay pensions with
increases based on a general measure of inflation rather than a measure linked specifically to RPI, a change in the inflation assumption
represents an actuarial gain or loss rather than a cost relating to past service of employees. Accordingly, the gain on re-measurement of the
liabilities of the BTPS to reflect CPI as the inflation measure is recorded as an actuarial gain in comprehensive income in 2011.
The key financial assumptions used to measure the liabilities of the BTPS under IAS 19 at 31 March 2011 are as follows:
Nominal rates (per annum) Real rates (per annum)
2011 2010 2009 2011 2010 2009
At 31 March %%%%%%
Rate used to discount liabilities 5.50 5.50 6.85 2.03 1.83 3.84
Inflation – increase in RPI 3.40 3.60 2.90 n/a n/a n/a
Inflation – increase in CPI 2.40an/a n/a n/a n/a n/a
Average future increases in wages and salaries 3.40 3.60 2.90–––
aThere is a short-term reduction in CPI of 0.5% for one year.
IAS 19 requires that the discount rate used be determined by reference to market yields at the reporting date on high quality corporate
bonds. The currency and term of these should be consistent with the currency and estimated term of the pension obligations. The discount
rate has been assessed by reference to the duration of the BTPS’s liabilities and by reference to the published iBoxx index of Sterling
corporate bonds of duration greater than 15 years and investment grade AA and above. Allowance is made where the constituent bonds in
the published index have been re-rated or new issues made. The nominal rate is used to discount the future expected benefit payments. The
real rate is shown as a comparator to inflation.
The average life expectancy assumptions, after retirement at 60 years of age, are as follows:
2011 2010
Number of Number of
At 31 March years years
Male in lower pay bracket 25.3 25.2
Male in higher pay bracket 27.6 27.4
Female 28.2 28.1
Average improvement for a member retiring at age 60 in 10 years time 1.1 1.1
The assumptions about life expectancy have regard to information published by the UK actuarial profession’s Continuous Mortality
Investigation Bureau. However, due to the size of the membership of the BTPS it is considered appropriate for the life expectancy
assumptions adopted to take into account the actual membership experience. Allowance is also made for future improvements in mortality.
The BTPS actuary undertakes formal reviews of the membership experience every three years. The IAS 19 life expectancy assumptions
reflect the 2008 triennial funding valuation basis.
Sensitivity analysis of the principal assumptions used to measure BTPS liabilities
The assumed discount rate, inflation, salary increases and life expectancy all have a significant effect on the measurement of scheme
liabilities. The following table shows the sensitivity of the valuation of the pension liability, and of the estimated income statement charge
for 2012, to changes in these assumptions:
(Decrease)
Decrease Decrease increase in
(increase) in (increase) in net finance
liability service cost income
£bn £m £m
0.25 percentage point increase to:
– discount rate 1.4 15 –
– inflation rate (RPI) (0.5) (15) 45
– salary increases (0.2) (5) (15)
Additional one year increase to life expectancy (1.0) (5) (55)
0.1 percentage point increase in expected return on assets – – 35
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