At 31 March 1996, there were no contingent liabilities or guarantees other than those arising in the ordinary course of the group’s business and on these no material losses are anticipated. The group has insurance cover to certain limits for major risks on property and major claims in connection with legal liabilities arising in the course of its operations. Otherwise, the group generally carries its own risks.

The company has guaranteed certain borrowings of subsidiary undertakings amounting to £1,796m (1995 - £1,557m).

Satellite consortia, in which the company has participating interests, are organisations without limited liability. At 31 March 1996, the company’s share of the aggregate borrowings of these consortia amounted to £153m (1995 - £151m).

Outstanding at 31 March 1996 were warrants entitling the holders to subscribe in 1999 for US dollar 8.765% guaranteed bonds at par, repayable in 2009, to be issued by the group with a total principal value equivalent to £131m.

23. Pension costs
The total pension cost of the group charged within staff costs was £284m (1995 - £248m), of which £275m (1995 - £241m) related to the group’s main pension scheme, the BT Pension Scheme. The increase in the charge for the year was due to the interest accounted for on the pension provisions in the balance sheet which have risen by £309m to £980m in the year.

The pension cost for the year was based on the valuation of the BT Pension Scheme at 31 December 1993. The valuation, carried out by professionally qualified independent actuaries, used the projected unit method. The major assumptions used by the actuaries were that, over the long term, the return on the existing assets of the scheme, relative to market values, would be 8.6% per annum and on future investments the return would be 9.7% per annum (allowing for real equity dividend growth of 0.5% per annum), the retail price index would increase at an average of 5.0%, and wages and salary rates would increase at an average of 6.8%. The assets of the scheme, which had a market value of £17,196m at the valuation date, were sufficient to cover 97% of the benefits that had accrued to members by 31 December 1993, after allowing for expected future increases in wages and salaries but not taking into account the cost of providing incremental pension benefits for employees taking early retirement under release schemes since that date. This cost, charged within redundancy costs, amounted to £266m in the year ended 31 March 1996 (1995 - £483m).

In the year ended 31 March 1996, the group made regular contributions of £234m to the scheme; in the prior year the group made a special contribution of £250m, in addition to regular contributions of £251m.

24. Financial instruments and risk management
The group uses derivative financial instruments primarily to manage its exposure to market risks from changes in interest and foreign exchange rates. The group does not enter into or issue derivative financial instruments for trading purposes.

The notional amounts of derivatives summarised below do not necessarily represent amounts exchanged by the parties and, thus, are not a measure of the exposure of the group through its use of derivatives. The amounts exchanged are calculated on the notional amounts and other terms of the derivatives which relate to interest and exchange rates.

(a) Interest rate risk management The group has entered into interest rate swap agreements with commercial banks and other institutions to vary the amounts and periods for which interest rates on borrowings are fixed. By swapping fixed rates on long-term borrowings into floating rates, the group has obtained lower floating-rate borrowings than those available if borrowing directly at a floating rate. Under interest rate swaps, the group agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional principal amount.

At 31 March 1996, the group had outstanding interest rate swap agreements having a total notional principal amount of £1,253m (1995 - £1,056m).

(b) Foreign exchange risk management The group has foreign currency swap agreements in place which reduce the impact of changes in currency rates on certain of its long-term borrowings denominated in US dollars. The group also enters into forward exchange contracts to hedge interest expense, purchase and sale commitments denominated in foreign currencies (principally US dollars). The terms of the currency swaps are up to 20 years and the terms of currency forward exchange contracts are typically less than one year. The purpose of the group’s foreign currency hedging activities is to protect the group from the risk that the eventual net inflows and net outflows will be adversely affected by changes in exchange rates.

At 31 March 1996, the group had outstanding foreign currency swap agreements and forward exchange contracts having a total notional principal amount of £2,377m (1995 - £1,814m).

The fair values of foreign currency contracts at 31 March 1996 were £396m (1995 - £502m) for purchases of currency and £1,027m (1995 - £358m) for sales of currency. These fair values have been estimated by calculating their present values using the market discount rates, appropriate to the terms of the contracts, in effect at the balance sheet dates.

At 31 March 1996, BT had deferred unrealised gains of £2m (1995 - £3m) and losses of £15m (1995 - £14m), based on dealer-quoted prices, from hedging purchase and sale commitments. At 31 March 1996, the group also had deferred realised net gains of £4m (1995 - £10m). These are included in the profit and loss account as part of the purchase or sale transaction when it is recognised, or as gains or losses when a hedged transaction is no longer expected to occur.

(c) Concentrations of credit risk and credit exposures of financial instruments The group considers that it is not exposed to major concentrations of credit risk. The group, however, is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but does not expect any counterparties to fail to meet their obligations. Based on interest and exchange rates in effect at 31 March 1996, the group had a maximum credit exposure of £116m (1995 - £87m) to one counterparty under foreign currency and interest rate swap agreements. The group limits the amount of credit exposure to any one counterparty. The group does not normally see the need to seek collateral or other security.

(d) Fair value of financial instruments The following table shows the carrying amounts and fair values of the group’s financial instruments at 31 March 1996 and 1995. The carrying amounts are included in the group balance sheet under the indicated headings, with the exception of derivative amounts related to borrowings, which are included in debtors or other creditors as appropriate. The fair values of the financial instruments are the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

(ii) The fair value of short-term borrowings approximated to carrying value due to the short maturity of the instruments.

(iii) The fair value of the group’s bonds, debentures, notes and other long-term borrowings has been estimated on the basis of quoted market prices for the same or similar issues with the same maturities where they existed, and on calculations of the present value of future cash flows using the appropriate discount rates in effect at the balance sheet dates, where market prices of similar issues did not exist.

(iv) The fair value of the group’s outstanding foreign currency and interest rate swap agreements was estimated by calculating the present value, using appropriate discount rates in effect at the balance sheet dates, of affected future cash flows translated, where appropriate, into pounds sterling at the market rates in effect at the balance sheet dates.