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1. Funding valuation
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1.1. BT and the Trustee of the BT Pension Scheme (BTPS, or the 'Scheme') have reached agreement on the approach to the 2011 triennial funding valuation (the '2011 valuation').
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1.2. The funding deficit at 30 June 2011 is provisionally agreed to be £4.1bn, using the same methodology as the previous valuation at 31 December 2008, when the deficit was £9.0bn.
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1.3. The final certification of the 2011 valuation result is expected in May when the Scheme Actuary completes his procedures. The final valuation is not expected to be significantly different to the provisional valuation.
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1.4. A summary of the provisional funding position and assumptions is shown in the table below:
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Dec
2008
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June
2011
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Comment
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Assets (£bn)
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31.2
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36.7
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Scheme returns of 10.1% pa over the period
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Liabilities (£bn)
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(40.2)
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(40.8)
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Reduction in the 2011 liabilities due to
certain benefits being linked to CPI has been
offset by the lower discount rate
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Deficit (£bn)
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(9.0)
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(4.1)
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Equivalent real discount rate
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2.5%
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2.0%
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Prudent view of future returns on the
expected asset portfolio
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RPI inflation (long-term)
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3.0%
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3.2%
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Long-term expectations reflecting Bank of
England data
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CPI inflation (long-term)
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n/a
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2.2%
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1.0% margin below RPI compares to Office
for Budget Responsibility projection of 1.3%
to 1.5%. The Bank of England's long-term
CPI inflation target is 2.0%
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Life expectancy
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2011 valuation makes allowance for additional improvements in
future life expectancy compared with 2008 valuation
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1.5. Undertaking the valuation at 30 June 2011 has enabled agreement to be reached before the end of BT's 2012 financial year.
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1.6. It is very difficult to assess the underlying position at 31 December 2011 due to the dislocation in the gilts market as a result of quantitative easing and issues in the Euro zone and the absence of regulatory guidance
and practice as to how to deal with those abnormal market conditions. |
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1.7. Future valuations will take place at 30 June providing better alignment with BT's financial planning and reporting cycle, enabling valuations and associated payment schedules to be agreed within BT's financial year.
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1.8. The next funding valuation will have an effective date no later than 30 June 2014.
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1.9. The existence of the Crown Guarantee has not been taken in to account by the Trustee in reaching this agreement. The valuation has been prepared in line with the Rules of the Scheme and on a basis consistent with
the 2008 valuation as required by the Pensions Act, notwithstanding its uncertainty regarding the applicability of the Pensions Act to the funding valuation of the Scheme. |
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1.10. On a median estimate basis BT believes the Scheme has a surplus of £2.5bn at 30 June 2011. The median estimate approach reflects BT's view on how investments might be expected to perform on average over time
and BT's best estimate of how liabilities will be discharged over time. The IAS 19 gross pension position at 30 June 2011 showed a deficit of £2.4bn (£1.8bn net of tax). |
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2. Funding
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2.1. BT will make a lump sum payment of £2.0bn by the end of March 2012 followed by nine deficit payments of £325m in March of each year from 2013 to 2021.
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2.2. The average life of the 2011 recovery plan is 3.2 years which compares with 8.4 years under the 2008 recovery plan.
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2.3. The 2011 recovery plan has a net present value of £4.1bn with no allowance for investment outperformance compared with the last triennial valuation which included a c.£1.5bn allowance.
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2.4. The lump sum payment will receive tax relief at 26%. There will be no impact on the group's tax charge in the income statement. There is no impact on cash tax payments in the 2012 financial year although there will be a
benefit from lower cash tax payments in the 2013 financial year. |
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2.5. Under the 2008 recovery plan the next payment due was £583m in December 2012. Subsequent annual payments over the next 13 years would have increased by 3% per annum to £856m in 2025.
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2.6. BT remains focussed on improving its financial strength, investing in its future, enhancing shareholder returns and supporting the Scheme.
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3. The Pensions Regulator
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3.1. The valuation documentation will be submitted to the Pensions Regulator within ten working days of its completion.
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3.2. The final Court decision in the Crown Guarantee case, after any appeals, will give greater clarity as to the extent to which the liabilities of the BTPS are covered by a Crown Guarantee. This will inform the Pensions
Regulator's next steps with regards to the valuation of the Scheme. |
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4. Other protections
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4.1. Shareholder distributions
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4.1.1. Extension of the protections agreed under the 2008 valuation, under which additional matching payments are made
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to the Scheme in the event that cumulative net shareholder distributions exceed cumulative pension deficit
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contributions from 1 March 2012 to 30 June 2015.
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4.1.2. Shareholder distributions include dividends and the cost of share buy-backs (excluding any possible buy-back of
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shares associated with existing employee share plans) after deducting any proceeds received from the issue of
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shares.
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4.1.3. BT has agreed to consult with the Trustee if it considers making a special dividend or embarking on a share buy-
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back programme (excluding any possible buy-back of shares associated with existing employee share plans).
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4.1.4. These provisions apply until the finalisation of the next valuation or 30 June 2015 at the latest.
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4.2. Disposals and acquisitions
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4.2.1. Extension of the protections agreed under the 2008 valuation, such that in the event that BT generates net cash
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proceeds greater than £1bn from disposals and acquisitions in any year to 30 June, BT will make additional
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contributions to the Scheme equal to one third of those net cash proceeds.
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4.2.2. BT has also agreed to consult with the Trustee if it considers making acquisitions with a total cost of more than
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£1bn in any 12 month period.
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4.2.3. These provisions apply until the finalisation of the next valuation or 30 September 2015 at the latest.
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4.3. Negative pledge
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4.3.1. Continuation of the protection agreed under the 2008 valuation, that future creditors will not be granted superior
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security to the Scheme in excess of a £1.5bn threshold. This provision applies until the deficit reduces to below
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£2.0bn at any subsequent funding valuation.
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4.4. Future funding commitment
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4.4.1. BT and the Trustee will review the funding of the Scheme in the normal way at the next valuation.
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4.4.2. In the event that the deficit at the 2014 and 2017 valuations is lower than the remaining recovery plan then BT and
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the Trustee will agree a new recovery plan to reflect the lower deficit.
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4.4.3. However, in order to provide more clarity over future payments, BT has agreed with the Trustee a schedule of future
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potential payments based on a range of deficits at the next triennial valuations in 2014 and 2017. These payments
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would be in addition to the remaining deficit payments of £325m per annum under the 2011 recovery plan and would
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have a maximum value of around £3.4bn in 2014 and £2.8bn in 2017 (based on 2011 discount rates).
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4.4.4. At the 2014 valuation, the remaining 2011 recovery plan will be worth c.£1.9bn (based on 2011 discount rates). If
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the deficit agreed at the 2014 valuation exceeds this level, BT will provide extra payments in addition to the
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remaining £325m annual deficit payments under the 2011 recovery plan. The amounts payable are dependent on
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the level of the deficit as shown in the table below:
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Deficit above remaining 2011 recovery
plan present value (£bn)
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Additional contributions payable (£m)
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2015
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2016
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2017
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Nil
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-
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-
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-
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1.0
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182
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188
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194
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2.0
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250
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258
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266
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2.9 or above
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330
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340
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351
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4.4.5. At deficit levels between these values the level of additional contributions is scaled accordingly. At a level above
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£2.9bn these are the maximum additional contributions under the terms of this agreement. A new agreement would
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cover additional contributions if these are required.
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4.4.6. A similar mechanism applies based on the deficit agreed at the 2017 valuation. If this exceeds the outstanding
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recovery plan (with the remaining 2011 recovery plan worth c.£1.2bn in 2017, based on 2011 discount rates), BT will
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provide extra payments in addition to the remaining £325m annual deficit payments under the 2011 recovery plan.
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The amounts payable are dependent on the level of the deficit as shown in the table below:
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Deficit above remaining 2014 recovery
plan present value (£bn)
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Additional contributions payable (£m)
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2018
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2019
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2020
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2021
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2022
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2023
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2024
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Nil
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-
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-
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-
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-
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-
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-
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-
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1.0
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182
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188
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194
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200
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207
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213
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0
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2.0
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315
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325
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336
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346
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358
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369
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381
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2.9 or above
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363
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374
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386
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399
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670
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670
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670
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4.4.7. If the deficit at 2014 is below the value of the remaining 2011 recovery plan, no additional deficit contributions are
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necessary and the remaining recovery plan will be revised. Likewise, if the deficit at 2017 is below the remaining
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recovery plan at that time.
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5. Financial impact
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5.1. The lump sum payment of £2.0bn in March 2012 will reduce the IAS 19 accounting deficit at 31 March 2012. Everything else being equal, this would increase the net pension interest income included in specific items
for the 2013 financial year by c.£120m, assuming that the assumptions for the 2012 financial year are unchanged. |
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5.2. There is no impact on cash tax payments in the 2012 financial year although there will be a benefit from lower cash tax payments in the 2013 financial year.
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