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The
most recently completed triennial actuarial valuation
of the BT Pension Scheme (BTPS), BT’s main pension
fund, performed by the scheme’s 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 last three
years and improved life expectancy of scheme members
and is in spite of the additional deficiency funding
payments totalling £600 million that have been
paid over the last 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
group’s ordinary contribution rate will increase
to 12.2% of employees’ pensionable pay with effect
from April 2003. The contribution rate was 11.6% for
the 2003, 2002 and 2001 financial years. In addition,
the company will make annual deficiency contributions
to the scheme of £232 million with effect for
the 2004 financial year. This compares to the £200
million annual deficiency payments made in the 2003,
2002 and 2001 financial years. 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 2003, 2002 and
2001 financial years amounted to £129 million,
£400 million and £100 million, respectively,
in respect of early leavers. The payment expected to
be made in December 2003 is £100 million in relation
to leavers in the calendar year ended 31 December 2002.
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, including discontinued activities, for the
2003, 2002 and 2001 financial years were £322
million, £382 million and £326 million,
respectively. This includes £314 million, £373
million and £315 million, respectively, in relation
to the BTPS.
The
reduction in the pension charge in the 2003 financial
year reflects the lower membership of the BTPS and the
interest credit on the balance sheet prepayment. The
increase in the pension charge in the 2002 financial
year was due principally to the £46 million charge
for enhanced pension benefits provided to leavers.
Under
the UK accounting standard SSAP 24, and BT’s accounting
policy, if the costs of providing incremental pension
benefits for 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 2001 financial year
the cost of the incremental benefits was charged against
the accounting surplus and was not charged against the
profit in the period in which people agreed to leave.
In the 2003 and 2002 financial years 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. This amounted to £60
million and £46 million in the 2003 and 2002 financial
years, respectively.
The
pension charge for the 2004 financial year will be 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 will be charged at 11.3% of pensionable
salaries compared to the 11.6% rate applied in the 2003,
2002 and 2001 financial years. In addition, the pension
charge will include the amortisation of the combined
pension fund position of £1.4 billion and pension
prepayment of £630 million held on the BT group
balance sheet, over the average remaining service lives
of members which amounts to 13 years, and enhanced pension
benefits provided to leavers.
The
number of retired members and other current beneficiaries
in the pension fund has been increasing in recent years
and, at 31 December 2002, was approximately 94% 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.
We
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 have been scaled down.
This should reduce the level of early leaver costs,
which have been significant in recent years.
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 2003 and 2002 financial years 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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