BT 2016 Annual Report Download - page 44

48 BT Group plc
Annual Report 2016
Outside the UK, general licensing requirements can make it tough
for us to enter markets and compete. Regulation will also define
the terms on which we can buy wholesale services from others.
Potential impact
Regulatory rules can affect our ability to compete effectively and
earn revenues. UK regulation has the biggest impact – because we
have to supply wholesale access products on regulated terms.
Around £5.7bn of our revenue (£3.3bn of which is to downstream
parts of BT) is from supplying wholesale services to markets where
Ofcom has found us to have significant market power. Most of
these revenues are from products with regulated prices which we
also have to cut each year by a defined, real-term percentage.
The regulatory controls usually last for three years and hold back
revenues during that time.
Where other CPs ask Ofcom to sort out disputes with us, there’s
a risk that Ofcom may set the prices we supply services at, and/or
make us provide specific services. In some circumstances, Ofcom
can adjust past prices and make us pay back CPs.
Regulation outside the UK can hit our revenue too. For example,
overly-restrictive licensing requirements or ineffective regulation
of access to other networks mean we might not be able to
compete fairly. Regulation can also define and control the terms of
access to necessary regulated inputs, which raises our costs.
Link to strategy and business model
• Deliver superior customer service Trend:
• Transform our costs
What’s changed over the last year?
There has been a lot of regulatory activity in different areas.
We’ve summarised this in the Regulation section on page 41.
Alongside the standard cycle of market reviews, in March 2015
Ofcom announced an overarching strategic review of the digital
communications market. In February 2016 it set out its initial
conclusions. Some of these could impact our operations, revenues
and costs if they’re adopted, for example:
• strengthening Openreach’s functional separation;
• keeping structural separation on the table;
• reducing regulation where it’s no longer required; and
• relying on more end-to-end fibre-based competition.
How we’re mitigating the risks
Our team of regulatory specialists include economists and
accountants. Together with legal experts and external advisers they
continuously check for potential disputes with other CPs and look
for opportunities to change regulatory rules. They talk continually
with regulators and other key influencers to understand the
outlook and to make sure we make our positions clear.
We push for fair, proportionate, consistent and evidenced-based
regulation everywhere we do business. Whenever there are market
reviews, charge controls, and disputes or investigations we put
forward evidence and analysis. This helps us manage the risks
around decisions in any particular year.
We can appeal any regulatory decisions we think are wrong. We
can also raise disputes or complain (under the relevant regulatory
framework or competition law) where we have problems getting
access to wholesale services – like to wholesale pay-TV channels
or to other access networks.
Pensions
We have a large funding obligation to our main defined benefit
pension scheme in the UK, the BT Pension Scheme (BTPS or
Scheme). The BTPS faces similar risks to other defined benefit
schemes. Things like future low investment returns, high inflation,
longer life expectancy and regulatory changes may all mean the
BTPS becomes more of a financial burden.
Potential impact
Our contributions to the BTPS are next due to be reviewed at the
triennial funding valuation as at 30 June 2017. If there’s
an increase in the pension deficit, then we could have to increase
deficit payments into the Scheme. That might affect our share
price and credit rating. If our credit rating fell in future, it would
cost us more to borrow money and we might not get such flexible
borrowing terms. Higher deficit payments could mean less money
available to invest, pay out as dividends or repay debt as it matures.
Link to strategy and business model
• Transform our costs Trend:
• Invest for growth
What’s changed over the last year?
The last funding valuation of the BTPS, as at 30 June 2014,
provided certainty over what we need to pay until the next
triennial valuation is concluded.
Things like financial market conditions and expected future
investment returns at the valuation date affect the funding
position. When considering expected future returns, different
factors are reviewed including yields (or returns) on government
bonds, which have dropped significantly since 30 June 2014. If
a lower future investment return is assumed at the next valuation
our liabilities would likely go up, which may lead to bigger deficit
payments.
EE operates the EE Pension Scheme (EEPS) which has a defined
benefit section that was closed to future benefit accrual in 2014.
The EEPS represents less than 2% of the group’s retirement
benefit obligation. The latest funding valuation for the EEPS is
being performed as at 31 December 2015.
How we’re mitigating the risks
The investment performance and liability experience are regularly
reviewed by both us and the Trustee of the BTPS. We also consider
the associated risks and possible mitigations. The assets of
the BTPS are well diversified, softening the impact of sharp drops
in the value of individual asset classes. This helps us maintain
a reasonable balance of risk and return.
Our financial strength and cash generation provide a level of
protection against the impact of changes in the funding position of
the BTPS. The funding liabilities also include a buffer against future
negative experience, as legislation requires that liabilities
are calculated on a prudent basis.