Responsibilities to pensioners

26 May 2010

Funding pensions is one of the calls on your company's cash flow each year, along with investing in the future of the business and paying dividends to shareholders. BT takes this funding obligation to its many tens of thousands of pensioners and prospective pensioners very seriously. BT aims to provide its employees with a competitive remuneration package of which a key part is the pension.

Given the importance of this for BT, we thought a bit of background detail would be of interest.

BT provides two key schemes:

(i) a defined benefit scheme – the BT Pension Scheme (BTPS), established under a separate Trust for UK employees who joined BT prior to 1 April 2001 (we inherited this scheme and its funding obligations from pre-privatisation days in 1984). The BTPS, the largest private sector pension scheme in the UK with around 340,000 members (including around 55,000 current employees) and tens of billions of pounds in assets, is well managed by an experienced and independent Trustee board. BT has recently completed a review of its pension arrangements with the aim of ensuring they continue to be fair, competitive and sustainable. This review, which led to a number of benefit design changes, was fully supported by the Trustee and the independent trade unions following ballots where their membership voted overwhelmingly in favour of the proposed changes.

(ii) a defined contribution scheme – the BT Retirement Saving Scheme (BTRSS), a contract based scheme for employees who joined BT on or after 1 April 2001. The BTRSS encourages participation with auto enrolment, low charges and a wide range of investment options for members to select. This is supported by leading edge technology and a world class communication strategy to educate and inform members of the value of the pension scheme. Approximately 18,000 UK employees contribute to the BTRSS.

The funding of the BTPS is monitored on a continual basis with the formal actuarial funding valuation performed every three years. The last valuation, at 31 December 2008, was agreed with the Trustee in February 2010 and disclosed a deficit of £9bn using duly prudent assumptions. Under the agreement, BT will make deficit payments of £525m per annum for the first three years of the 17 year recovery plan, the first payment of which was made in December 2009. The payment in the fourth year will be £583m, then increasing at 3% per annum. If the valuation had used a ‘median estimate’ approach, BT estimates that the deficit would have been £3bn. The ‘median estimate’ approach reflects how investments might on average be expected to perform over time. This implies the funding valuation includes a margin for prudence of £6bn. The valuation assumes future improvements in life expectancy have increased by about two years compared with the previous valuation.

Rod Kent, Chairman of BTPS Trustee, said: “The Trustee is pleased we completed this agreement before the 31 March 2010 statutory deadline. This agreement secures significant additional support to the benefit of scheme members, underpinned by a strong sponsor. The valuation was performed at a time of particularly difficult conditions in the global financial markets. In arriving at this agreement the Trustee has spent exhaustive effort over the last 18 months in detailed analysis supported by leading independent expert advisers.”

The valuation and recovery plan was submitted by the Trustee to the Pensions Regulator for formal review in February 2010 and this review is ongoing. BT and the Trustee continue to work with the Pensions Regulator to progress this matter. Since the valuation date the scheme’s investments have increased in value by £4bn.