BT 2011 Annual Report Download - page 44

41BT GROUP PLC ANNUAL REPORT & FORM 20-F 2011
BUSINESS REVIEW OUR RISKS
BUSINESS REVIEW
Pensions
We have a significant funding obligation to a defined benefit
pension scheme. Declining investment returns, longer life
expectancy and regulatory changes may result in the cost of
funding BT’s main defined benefit pension scheme (BTPS)
becoming a significant burden on our financial resources. The
triennial funding valuation of the BTPS at 31 December 2008
and associated recovery plan was agreed with the Trustee in
February 2010. Under this prudent funding valuation basis the
deficit was £9bn and a 17-year recovery plan was agreed.
Details of the valuation assumptions and recovery plan are set
out in note 23 to the financial statements.
The valuation and the recovery plan are under review by the
Pensions Regulator whose initial view was that they had
substantial concerns with certain features of the agreement.
Their review is now on hold and is not expected to recommence
until the outcome of the final Court decision, including any
potential appeals, is known on the Crown Guarantee.
Accordingly, as matters stand, it is uncertain as to when they will
conclude their review. This uncertainty is outside of our control.
However, we do not expect this to be before the completion of
the next triennial funding valuation as at 31 December 2011. As
is usual, BT and the Trustee will engage with the Pensions
Regulator regarding the 2011 valuation.
Impact
An increase in the pension deficit and associated funding
requirements would have a direct adverse impact on the future
cash resources of the group. Indirectly it may also have an
adverse impact on the group’s share price and credit rating. A
deterioration in the credit rating would increase the group’s cost
of borrowing and may limit the availability or flexibility of future
funding thereby affecting the ability of the business to invest,
pay dividends or repay debt as it matures.
Risk mitigation
Since the funding valuation at 31 December 2008 there have
been a number of significant developments. With effect from
1 April 2009 a number of benefit changes were implemented
which reduce the cost of future benefit accruals and the
associated risks. During 2011 the UK Government decision to
change the indexation of pension benefits from the Retail Prices
Index to the Consumer Prices Index has affected some sections
of the BTPS and resulted in a significant reduction in the
liabilities and associated risks.
The returns generated on the assets since 31 December 2008
have also been significantly greater than assumed in the funding
valuation. As a result the Trustee’s initial estimate is that the
funding valuation had reduced to £3.2bn at 31 December 2010
after the deficit payment of £0.5bn in March 2011. We took the
opportunity to accelerate the deficit payment due in December
2011 to March 2011 as it was economically advantageous to
do so.
The investment performance and liability experience as well as
the associated risk exposures are regularly reviewed and
monitored by both the company and the Trustee of the scheme.
Growth in a competitive market
We operate in markets which are characterised by high levels of
competition including: regulatory intervention on promoting
competition; declining prices; technology substitution; market
and service convergence; customer churn; declining rates of
market growth; and emerging competitors with non replicable
sources of competitive advantage.
A significant proportion of our revenue and profit are generated
in the UK telecommunications markets which are experiencing
limited growth in revenue terms and in many cases are highly
competitive. Revenue from our fixed line calls and lines services
to consumers and businesses have historically been in decline.
Our ability to deliver profitable revenue growth depends on
delivering on our strategic priorities (see page 11).
Impact
Failure to achieve profitable revenue growth through our
strategic priorities (see Our business and strategy on pages 10
to 13 for further details) may lead to a continued decline in
revenue, erosion of our competitive position and might also lead
to a reduction in future profitability, cash flow and to a
diminution in shareholder value.
Risk mitigation
We have a clearly defined strategy aimed at delivering growth,
as set out on pages 10 to 13, the successful delivery of which
will address the need for growth in revenue.
Our strategic priorities are underpinned by our view of the
markets in which we operate. Performance against our business
plans is closely monitored by management allowing
interventions where appropriate.
The group has a well developed cost transformation programme
in place which has achieved significant savings and which has
from a profitability perspective mitigated the revenue declines
and helped ensure a competitive cost base.
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