BTPLC Annual Report 2005 - Financial review

The most recently completed triennial actuarial valuation of the BT Pension Scheme (BTPS), BT’s main pension fund, performed by the BTPS independent actuary for the trustees of the scheme, was carried out as at 31 December 2002. This valuation showed the fund to be in deficit to an amount of £2.1 billion. Assets of the fund of £22.8 billion at that date covered 92% of the fund’s liabilities. The previous valuation was carried out as at 31 December 1999. The result of this valuation was that the fund was in deficit by £1.0 billion. Assets of the fund of £29.7 billion at that date covered 97% of the fund’s liabilities. The deterioration in the funding position was principally the result of lower equity returns over the three years and improved life expectancy of BTPS members and was in spite of the additional deficiency funding payments totalling £600 million that were paid over the previous three years. The valuation under the prescribed Minimum Funding Requirement approach showed the assets to cover 101% of the liabilities at 31 December 2002. The next triennial valuation will be performed as at 31 December 2005.
     The group’s ordinary contribution rate increased to 12.2% of employees’ pensionable pay with effect from April 2003. The contribution rate was 11.6% for the 2003 financial year. In addition, the company agreed to make annual deficiency contributions to the BTPS of £232 million with effect from the 2004 financial year. In the 2005 financial year no deficiency payments were made. This was because in the 2004 financial year total deficiency contributions of £612 million were made, including early payment of £380 million scheduled for payment in the 2005 and 2006 financial years. This compares to the £200 million annual deficiency payments made in the 2003 financial year. The group is also required to pay special contributions to cover costs arising from enhanced pension benefits provided to leavers. The special contributions paid in the 2005, 2004 and 2003 financial years amounted to £6 million, £130 million and £129 million, respectively, in respect of early leavers. The payment expected to be made in the 2006 financial year is £nil in relation to leavers in the calendar year ended 31 December 2004.
     The group continues to account for pension costs in accordance with UK Statement of Standard Accounting Practice No. 24 (SSAP 24). The group’s total annual pension charges for the 2005, 2004 and 2003 financial years were £465 million, £404 million and £322 million, respectively. This includes £430 million, £376 million and £306 million, respectively, in relation to the BTPS. The increase in the pension charge in the 2005 financial year reflects the introduction of Smart Pensions, a salary sacrifice scheme, as a result of which there is a switch between wages and salaries and pension charges. The 2005 and 2004 financial years include a £154 million amortisation charge for the pension deficit partly offset by a reduction in the number of active members and the interest credit related to the balance sheet prepayment.
     The profit and loss charge for providing incremental pension benefits for leavers amounted to £nil, £1 million and £60 million in the 2005, 2004 and 2003 financial years, respectively.
     The pension charge for the 2005 and 2004 financial years is based upon the SSAP 24 valuation as at 31 March 2003. This valuation is based on the December 2002 funding valuation, rolled forward to 31 March 2003, and uses a slightly higher investment return assumption than was used for the trustees’ funding valuation, a lower inflation rate and lower salary increase assumptions. The resulting SSAP 24 deficit amounts to £1.4 billion. The regular pension cost is charged at 11.3% of pensionable salaries compared to the 11.6% rate applied in the 2003 financial year.
     The full FRS 17 disclosures are provided in the notes to the financial statements. At 31 March 2005 the FRS 17 deficit was £3.3 billion, net of tax, being a £0.3 billion reduction from £3.6 billion at 31 March 2004.
     The number of retired members and other current beneficiaries in the pension fund has been increasing in recent years and, at 31 December 2004, was approximately 122% higher than the number of active members. Consequently, BT’s future pension costs and contributions will depend on the investment returns of the pension fund and could fluctuate in the medium term.
     The BTPS was closed to new entrants on 31 March 2001 and we launched a new defined contribution pension scheme for people joining BT after that date which is to provide benefits based on the employees’ 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 was not significant in the financial years under review and is not expected to be significant in the next few years but it should reduce pension costs in the longer term.

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