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BT and trustees announce agreement on triennial funding valuation of the BT pension scheme


December 18, 2006

BT and the Trustees of the BT Pension Scheme (BTPS) today announced that they had reached agreement on the triennial funding valuation of the BTPS. Under a new and more conservative actuarial methodology, consistent with regulatory guidance, the deficit as at December 31 2005 has been calculated as £3.4bn. Had the previous valuation approach been used on this occasion, the Scheme would be in surplus. BT will make deficit payments equivalent to £280m per annum for 10 years with the first three years instalments paid up front.

Key features of the agreement are:

• An advanced payment of £840m, representing three years’ instalments of £280m, into the scheme by 30th April 2007 - £500m of which is to be paid in December 2006.

• Payments of £280m pa in 2009-2015 inclusive.

• A “true-up/true down” agreement has been reached to adjust post 2008 Company contributions depending on investment performance. This for example gives the Trustees insurance should investment performance not be in line with expected returns. Subject to Trustee agreement, it gives the company a benefit where investment returns exceed 3.2% real.

• Employee contributions will remain at 6%. Joint employer/employee contribution will increase from 18.2% to 19.5% from 1 January 2007.

Sir Christopher Bland, BT Chairman said “This is a fair and prudent deal for pensioners and for shareholders, which re-confirms that BT stands fully behind its pension obligations. The Scheme is well-managed and assets have grown very strongly in recent years”.

Sir Tim Chessells, Chairman of BTPS Trustees said: “This agreement offers balance and certainty. It secures additional strong support to the benefit of pensioners, is consistent with the interests of scheme members and is further underpinned by having a financially strong sponsor”.

Hanif Lalani, BT’s Group Finance Director said: “Considerable extra prudence has been built into the deficit calculation since 2002. We are wholly comfortable with this agreement, and there is no impact on our profit and loss account.”

Notes to editors:

1.) The BT Pension Scheme (BTPS) is a defined benefit (DB) scheme and was closed to new members on 1 April 2001. A defined contribution (DC) scheme, the BT Retirement Plan, is in place for those joining since 1 April 2001.

2.) Funding valuation: The previous full triennial valuation – as at 31 December 2002 – concluded that there was a funding deficit, which BT agreed to repay at £232m per annum over fifteen years. These sums were additional to regular employer contributions.

3.) The BTPS had assets at 31 December 2002 of £23bn, rising to over £34bn at 31 December 2005 and to £36bn by 30 September 2006.

4.) Scheme assets represent 91% of liabilities at 31 December 2005. These liabilities have been expressed at present value using more prudent discount rates than in 2002. The new discount rates average 2.5% per annum real over the next three years as opposed to 4.5% per annum real in 2002.

5.) Accounting valuation: BT’s IAS19 accounting deficit in relation to the BTPS at 31 December 2005 was £4.0bn (£2.8bn net of tax), and £2.8bn (£2bn net of tax) as at 30 September 2006.

6.) There is no impact from this agreement on the company’s profit and loss account.

7.) The “true up/true down” agreement between the company and trustees means that if the actual investment return from scheme assets over the period between triennial valuations is below 3.2% real per annum, BT will make further cash contributions to BTPS. If investment returns exceed 3.2%, BT’s future deficit contributions will be reduced provided Trustees agree. In doing so, Trustees must of course act in accordance with relevant regulatory guidance, notably that any shortfall should be eliminated as quickly as the employer can reasonably afford after assessing the employers’ covenant. The adjustments take effect post 2008 and are capped each way at £280m p.a.

8.) The existence of the Crown Guarantee, given to BT on privatisation in relation to pensions liabilities for those joining BTPS before 6 August 1984, has not been taken into account in determining the valuation results.

9.) Liabilities assumptions have been updated since 2002. These include the following mortality assumption:
- average life expectancy after retirement at 60 years:
Males 23.8 years
Females 25.4 years
- future improvement every 10 years of about 1 year


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