BT 2016 Annual Report Download - page 198

204 BT Group plc
Annual Report 2016
20. Retirement benefit plans continued
Sensitivity analysis of the principal assumptions used to measure BTPS liabilities
The assumptions on the discount rate, inflation, salary increases and life expectancy all have a significant effect on the measurement of
Scheme liabilities. The table below provides an indication of the sensitivity of the IAS19 pension liabilities for the BTPS at 31 March 2016,
and of the income statement charge for 2016/17, to changes in these assumptions.
The sensitivity of the deficit allows for both the change in the liabilities and the expected change in the assets. For example, the increase in
the deficit under the life expectancy scenario incorporates the expected movement in the value of a contract held to hedge longevity risk.
Decrease
(increase) in
liability
£bn
Decrease
(increase) in
deficit
£bn
Decrease
(increase)
in income
statement
charge
£m
0.25 percentage point increase to:
– discount rate 1.7 0.8a 25
– inflation rate (assuming RPI, CPI and salary increases all move by 0.25 percentage points) (1.4) (0.4)b (15)
– CPI inflation rate (assuming RPI and salary increases are unchanged) (0.9) (0.9) (35)
– salary increases (assuming RPI and CPI are unchanged) (0.2) (0.2) (10)
Additional one year increase to life expectancy (1.3) (1.0) (35)
a Allows for the estimated impact on assets from a 0.25% per year increase to interest rates and corporate bond yields, with credit spreads unchanged.
b Allows for the estimated impact on assets directly linked to inflation from a 0.25% per year increase to inflation.
BTPS funding
Triennial funding valuation
The triennial valuation is carried out for the Trustee by a professionally qualified independent actuary. Thepurpose of the valuation is
to design a funding plan to ensure that the Scheme has sufficient funds available to meet future benefit payments. The latest funding
valuation was performed as at 30 June 2014. The next funding valuation will have an effective date of no later than 30 June 2017.
The valuation methodology for funding purposes, which is based on prudent assumptions, is broadly as follows:
– assets are valued at market value at the valuation date; and
– liabilities are measured on an actuarial funding basis using the projected unit credit method and discounted to their present value.
The results of the two most recent triennial valuations are shown below.
June
2014
valuation
£bn
June
2011
valuation
£bn
BTPS liabilities (47.2) (40.8)
Market value of BTPS assets 40.2 36.9
Funding deficit (7.0) (3.9)
Percentage of accrued benefits covered by BTPS assets at valuation date 85.2% 90.4%
Percentage of accrued benefits on a solvency basis covered by the BTPS assets at the valuation date 63.0% 66.0%
The funding deficit increased to £7.0bn at 30 June 2014. While deficit contribution payments totalling £2.65bn and investment returns
of 5.8% per year since the 2011 valuation contributed to higher assets at the 2014 valuation date, the low interest rate environment
resulted in a higher value being placed on the Scheme’s liabilities which more than offset the improvements in the Scheme’s assets.
Key assumptions – funding valuation
These valuations were determined using the following prudent long-term assumptions.
Nominal rates (per year) Real rates (per year)a
June
2014
valuation
%
June
2011
valuation
%
June
2014
valuation
%
June
2011
valuation
%
Average single equivalent discount rate 4.5 5.2 1.0 2.0
Average long-term increase in RPI 3.5 3.2 – –
Average long-term increase in CPI 2.5 2.2 (1.0) (1.0)
a The real rate is calculated relative to RPI inflation and is shown as a comparator.
The discount rate at 30 June 2014 was derived from prudent return expectations above a yield curve based on gilt and swap rates. The
discount rate reflects views of future returns at the valuation date. This gives a prudent discount rate of 2.1% per year above the yield
curve initially, trending down to 0.6% per year above the curve in the long-term. The assumption is equivalent to using a flat discount
rate of 4.5% per year.