The group's annual pension charges for the 2002 and 2001 financial years of £361 million and £326 million, respectively have been based on this 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 charge for the 2000 financial year of £167 million was based on the December 1996 valuation.

The increase in the pension charge in the 2002 and 2001 financial years was due, in part, to the 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 £nil in the 2002 financial year compared with £35 million in the 2001 financial year and £163 million in the 2000 financial year.

Additionally, under UK accounting standards, if the costs of providing incremental pension benefits for early leavers are less than the total accounting surplus based on the latest actuarial valuation of the scheme and the amount of the provision for pension liabilities on the balance sheet, the costs are not charged to the profit and loss account. In the 2000 and 2001 financial years the cost of the incremental benefits has not been charged against the profit in the period in which people agree to leave. In the 2002 financial year the total cost of the incremental pension benefits exceeded the total accounting surplus and accordingly the excess was charged to the profit and loss account. The share of operating profit of associates includes £6 million and group operating profit includes £21 million of the charge.

The group's ordinary contribution into the fund was raised to 11.6% of employees' pensionable pay for the 2002 and 2001 financial years compared with 9.5% of pay during the 2000 financial year. In addition, the company paid special and deficiency contributions into the fund of £600 million in the 2002 financial year, £300 million in the 2001 financial year and £230 million in the 2000 financial year in part because of redundancies. The company is committed to pay deficiency funding contributions of £200 million each year until such time as the funding 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 early leavers. The deficiency and special contributions paid in the 2002 financial year included £400 million in respect of early leavers in the 2000 calendar year.

The number of retired members and other current beneficiaries in the pension fund has been increasing in recent years and, at 31 December 2001, was approximately 62% 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 required 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 these additional benefits is estimated to be £200 million.

We have now changed the arrangements for people leaving BT in advance of the normal retirement age. Under our NewStart programme launched during the fourth quarter of the 2001 financial year, BT employees will be expected to leave with a leaving payment in place of a redundancy payment, and incremental pension benefits are being scaled down. This should reduce early leaver costs, which have been significant in recent years.

The next actuarial valuation of the BTPS will be undertaken at 31 December 2002.

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 2002 financial year and is not expected to be significant in the next several years but it should reduce pension costs in the longer term.