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The most recently completed
actuarial valuation of the BT Pension Scheme (BTPS), BT’s main pension fund,
performed for the trustees of the scheme, was carried out as at 31 December
1999. This valuation revealed the fund to be in deficit to an amount of
approximately £982 million, after taking credit for a special contribution of
£230 million paid by BT in March 2000. Assets of the fund of £29,692 million at
that date covered 96% of the fund’s liabilities. This actuarial valuation took
into account the anticipated effect of the High Court judgement noted below.
The previous actuarial
valuation of the BTPS was carried out as at 31 December 1996. This valuation
revealed the fund to be in surplus to an amount of approximately £66 million.
This actuarial valuation took into account the effect of HM Government’s
measures in July 1997 to end pension funds’ ability to reclaim the tax credit
associated with UK companies’ dividends.
The move into deficit
during the three years was mainly the result of the general trend towards
longer life expectancy and the effect of redundancies.
The group’s annual pension
charge for the 2001 financial year of £326 million has been based on the
December 1999 valuation, but using a slightly higher investment return
assumption than was used for the trustees’ funding valuation summarised above.
The group’s pension charges for the 2000 and 1999 financial years of £167
million and £176 million, respectively, were based on the December 1996
valuation. The charges for the three financial years take into account the
amount of the pension provision which had been established over recent years in
the group’s accounts and which stood at £335 million at 31 March 2001.
Additionally, under UK accounting standards, the cost of providing incremental
pension benefits for early leavers in each of these three financial years has
not been charged against the profit in the period in which people agree to
leave, since the latest relevant actuarial valuation of the pension fund,
together with the pension provision, indicated a surplus. The increase in the
charge in the 2001 financial year was due, in part, to the general trend
towards longer life expectancy. There was also a smaller amortisation of the
combined pension fund position and pension provision held in the BT group
balance sheet. The amortisation credit netted in pension costs amounted to £35
million in the 2001 financial year compared with £163 million in the 2000
financial year.
The group’s ordinary
contribution into the fund was raised to 11.6% of employees’ pensionable pay
for the 2001 financial year compared with 9.5% of pay during each of the two
previous financial years under review. In addition, the company paid special
contributions into the fund of £100 million in March 2001, £200 million in
December 2000, £230 million in March 2000 and £200 million in March 1999 in
part because of redundancies. The company is committed to pay special funding
contributions of £200 million each year until such time as the deficit is made
good. The company may also be required by the trustees of the fund to pay
special contributions to cover any costs on the pension fund arising from
redundancies.
The number of retired
members and other current beneficiaries in the pension fund has been increasing
in recent years and, at 31 December 2000, was approximately 55% higher than the
number of active members. Consequently, BT’s future pension costs and
contributions will depend to a large extent on the investment returns of the
pension fund and could fluctuate in the medium term.
Following a High Court judgement made in October 1999, the BTPS
is liable to pay additional benefits to certain former employees
of the group who left under voluntary redundancy terms. These were
former employees, in managerial grades, who had joined the group’s
business prior to 1 December 1971. The value of the additional benefits
at 31 March 2001 is estimated at £200 million. On 26 April 2001,
an application for permission to appeal against the judgement on
behalf of certain former employees in non-managerial grades was
lodged in an attempt to extend the additional benefits to those
grades. BT will be strongly resisting this new claim if permission
to appeal is given.
A further actuarial
valuation of the BTPS at 31 December 2000 is under consideration. This is in
advance of the normal three-yearly valuation and is being considered in light
of the high level of redundancies since the December 1999 valuation, the fall
in global equity markets in 2000 and the early part of 2001 and the current
restructuring of the group.
The BTPS was closed to new
entrants on 31 March 2001 and we have set up a new defined contribution pension
scheme which will provide benefits to employees joining the scheme based on
their and the employing company’s contributions. This change is in line with
the practice increasingly adopted by major UK groups and is designed to be more
flexible for employees and enable the group to determine its pension costs more
precisely than is the case for defined benefit schemes. The financial impact of
this change is not expected to be significant in the next several years but it
should reduce pension costs in the longer term. |
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