The pension cost applicable to defined contribution schemes in the year ended 31 March 2002 was £5 million, and there were no outstanding contributions to the schemes at 31 March 2002.

BT Pension Scheme
The pension costs for the years ended 31 March 2002 and 2001 were based on the valuation of the BTPS at 31 December 1999. The pension cost for the year ended 31 March 2000 was based on the valuation of the BTPS at 31 December 1996. The valuation was carried out for the scheme trustees by professionally qualified independent actuaries, using the projected unit method. The valuations were determined using the following long-term assumptions:

	Rates (per annum)
	1999 valuation %		1996 valuation %
Return on existing assets, relative to market values	5.45		7.95
(after allowing for a real increase in dividends of)	1.00		0.75
Return on future investments	7.12		8.42
Average increase in retail price index	3.00		4.00
Average future increases in wages and salaries	4.80		5.82
Average increase in pensions	3.00		3.75-4.00

At 31 December 1999, the assets of the BTPS had a market value of £29,692 million and, taking account of the special contribution by the company in March 2000, were sufficient to cover 96.8% of the benefits that had accrued to members by that date, after allowing for expected future increases in wages and salaries but not taking into account the costs of providing incremental pension benefits for employees taking early retirement under release schemes since that date. This cost, which amounted to £173 million in the year ended 31 March 2002 (2001 - £429 million), will be taken into account in the next actuarial valuation due to be undertaken at 31 December 2002. The costs for the financial year ended 31 March 2000 (£140 million) were taken into account in the 31 December 1999 valuation.

For the purpose of determining the group's pension expenses in the years ended 31 March 2002 and 2001, the same assumptions were used as set out above for the December 1999 valuation, with the exception that, over the long term, it has been assumed that the return on the existing assets of the scheme, relative to market values, would be 5.6% per annum (allowing for real equity dividend growth of 1.25% per annum).

In the year ended 31 March 2002, the group made regular contributions of £303 million (2001 - £308 million, 2000 - £253 million) and additional special and deficiency contributions of £600 million (2001 - £300 million, 2000 - £230 million). The group will continue to make employer's contributions at a rate of 11.6% of pensionable pay in the year ending 31 March 2003 and an annual deficiency payment of £200 million. It will also pay a special contribution in the year ended 31 March 2003 which is expected to amount to approximately £130 million in respect of redundancies and early leavers in the year ended 31 December 2001.

The BTPS was closed to new entrants on 31 March 2001. The age profile of active members will consequently increase. Under the projected unit method, the current service cost, as a proportion of the active members' pensionable salaries, will increase as the members of the scheme approach retirement.

Certain activities of the BTPS are carried out at the company's pension centre, all costs of which are borne by the company. These costs have not been apportioned for accounting purposes between those attributable to the BTPS and those attributable to the company because functions maintained for both entities cannot be meaningfully divided between them. The company occupies seven properties owned by the scheme on which an annual rental of £3 million is payable. The BTPS assets are invested in UK and overseas equities, UK and overseas properties, fixed interest and index linked securities, deposits and short-term investments. At 31 March 2002, the UK equities included 55 million (2001 - 51 million) ordinary shares of the company with a market value of £154 million (2001 - £258 million).

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 on 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 2002 is estimated at £200 million and was reflected in the actuarial valuation at 31 December 1999.

FRS 17 - Retirement benefits
The group continues to account for pensions in accordance with SSAP 24. FRS 17, the new UK accounting standard on retirement benefits, is not mandatory for the group until the year ending 31 March 2004. The transitional disclosures required by this standard on the group's pension liabilities and scheme assets at 31 March 2002 follows.

The financial assumptions used to calculate the BTPS liabilities under FRS 17 are:

	Rates (per annum) %
Average future increases in wages and salaries	4.0
Average increase in pensions in payment and deferred pensions	2.5
Rate used to discount scheme liabilities	6.0
Inflation - average increase in retail price index	2.5

The expected rate of return and fair values of the assets of the BTPS at 31 March 2002 were:

	Expected long-term rate of return (per annum) %	Fair value £b
UK equities	8.0	11.1
Non-UK equities	8.0	8.1
Fixed-interest securities	5.6	3.0
Index-linked securities	4.8	1.9
Property	7.0	2.8
Cash and other	4.5	0.2
Total		27.1

The fair value of the BTPS assets, the present value of the BTPS liabilities based on the financial assumptions set out above, and the resulting deficit, together with those of unfunded pension liabilities at 31 March 2002 were:

		Assets £m		Present value of liabilities £m		Deficit £m
BTPS		27,100		28,900		1,800
Unfunded liabilities		-		30		30
Total deficit						1,830
Deferred tax asset at 30%						(549	)
Net pension liability						1,281

If the above amounts had been recognised in the financial statements, the group's net deficiency and profit and loss reserve at 31 March 2002 would be as follows:

	£m
Net deficiency
Net deficiency excluding net pension liability	(560	)
Net pension liability	(1,281	)
Net deficiency including net pension liability	(1,841	)
Profit and loss reserve
Profit and loss reserve excluding net pension liability	(1,819	)
Net pension liability	(1,281	)
Profit and loss reserve including net pension liability	(3,100	)