BTPLC Annual Report 2005 - United States Generally Accepted Accounting Principles

vii Pension costs
The following position for the main pension scheme is computed in accordance with US GAAP pension accounting rules under SFAS No. 87 and SFAS No. 88, the effect of which is shown in the above reconciliation statements.
The pension cost determined under SFAS No. 87 was calculated by reference to an expected long-term rate of return on scheme assets of 7.27% (2004 – 7.35%, 2003 – 6.90%). The components of the pension cost for the main pension scheme comprised:

2005
£m 2004
£m 2003
£m

Service cost
507 388 453

Interest cost
1,745 1,657 1,707

Expected return on scheme assets
(1,897 ) (1,646 ) (1,813 )

Amortisation of prior service costs
24 24 24

Amortisation of net obligation at date of limited application of SFAS No. 87
– 2 52

Amortisation of loss (gain)
263 378 (22 )

Additional cost of termination benefits
– 1 60

Pension cost for the year under US GAAP
642 804 461

The information required to be disclosed in accordance with SFAS No. 132(R) concerning the funded status of the main scheme at 31 March 2004 and 31 March 2005, based on the valuations at 1 January 2004 and 1 January 2005, respectively, is given below.

Minimum liability, intangible asset and other comprehensive income
2005
£m 2004
£m

Plan assets at fair value
29,169 26,675

Accumulated benefit obligation
33,160 31,137

Minimum liability
3,991 4,462

Net amount recognised at end of year
(2,535 ) (2,275 )

Minimum additional liability
1,456 2,187

Intangible asset as at 31 March 2004:

Unrecognised prior service cost
(55 ) (79 )

Accumulated other comprehensive income
1,401 2,108

Changes in benefit obligation
2005
£m 2004
£m

Benefit obligation at the beginning of the year
32,448 30,277

Service cost
507 388

Interest cost
1,745 1,657

Employees’ contributions
50 148

Additional cost of termination benefits
– 1

Actuarial movement
943 1,428

Other changes
7 5

Benefits paid or payable
(1,364 ) (1,456 )

Benefit obligation at the end of the year
34,336 32,448

The benefit obligation and pension cost for the main pension scheme were determined using the following assumptions at 1 January 2003, 2004 and 2005:

	2005 per annum %	2004 per annum %	2003 per annum %

Discount rate	5.3	5.5	5.6
Rate of future pay increases	3.6	3.6	3.8
Rate of future pension increases	2.6	2.6	2.25

Contributions expected to be paid to the plan during the next fiscal year are estimated at £459 million.

Estimated future benefit payments are as follows:

			£m

Year ending 31 March 2006			1,392
Year ending 31 March 2007			1,432
Year ending 31 March 2008			1,477
Year ending 31 March 2009			1,532
Year ending 31 March 2010			1,598
1 April 2010 to 31 March 2015			9,039

Changes in scheme assets	2005		2004
	£m		£m

Fair value of scheme assets at the beginning of the year	26,675		22,757
Actual return on scheme assets	3,419		4,195
Employer’s contributions^a	382		1,026
Employees’ contributions	50		148
Other changes	7		5
Benefits paid or payable	(1,364	)	(1,456	)

Fair value of scheme assets at the end of the year	29,169		26,675

Funded status under US GAAP	2005		2004
	£m		£m

Projected benefit obligation in excess of scheme assets	(5,167	)	(5,773	)
Unrecognised prior service costs^b	55		79
Other unrecognised net actuarial losses	2,577		3,419

Net amount recognised under US GAAP	(2,535	)	(2,275	)

^a	The employer’s contributions for the year ended 31 March 2005 includes special contributions of £6 million paid in June 2004 (2004 – £362 million paid in December 2003 and £380 million paid in March 2004).

^b	Unrecognised prior service costs on scheme benefit improvements are being amortised over periods of 15 or 16 years commencing in the years of the introduction of the improvements.

Asset allocation

The Trustees of the main pension scheme approve the target asset allocation as well as deviation limits. The objective of the investment activities is to maximise investment return within an acceptable level of risk, taking into consideration the liabilities of the main pension scheme.


	Fair value £bn	%	Target %

Equities	20.2	69	63
Fixed interest bonds	4.4	15	16
Index linked securities	2.7	9	9
Property	1.9	7	12

	29.2	100	100


	Fair value £bn	%	Target %

Equities	17.1	65	65
Fixed interest bonds	3.9	15	15
Index linked securities	2.1	8	8
Property	3.2	12	12

	26.3	100	100

The assumption for the expected return in scheme assets is a weighted average based on an assumed expected return for each asset class and the proportions held of each asset class at the beginning of the year. The expected returns on bonds are based on the gross redemption yields at the start of the year. Expected returns on equities and property are based on a combination of an estimate of the risk premium above, yields on government bonds and consensus economic forecasts of future returns. The expected return of 7.27% per annum used for the calculation of pension costs for the year ending 31 March 2005 is consistent with that adopted for FRS 17.

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