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BBC Pension Scheme

Report on the actuarial valuation as at 1 April 2010

31 March 2011

BBC Pension Scheme i

31 March 2011

Table of Contents

Section 1 : Summary of main conclusions...................................................................................1 Section 2 : Background to the valuation ......................................................................................5 Section 3 : Financial assumptions ...............................................................................................9 Section 4 : Demographic assumptions ......................................................................................17 Section 5 : The funding position and future contribution requirements.....................................25 Section 6 : The position of the Scheme on discontinuance .......................................................33 Section 7 : Sensitivity of the results...........................................................................................37 Appendix A : Summary of Scheme benefits...............................................................................39 Appendix B : The information supplied......................................................................................45 Appendix C : Summary of relevant legislation ...........................................................................47 Appendix D : Statement of Funding Principles ..........................................................................53 Appendix E : Statutory certificate ..............................................................................................63 Appendix F : Glossary................................................................................................................65

Throughout this document:

“Scheme” refers to the BBC Pension Scheme

“SFP” refers to the Statement of Funding Principles dated 23 March 2011

“Trustees” refers to the Board of BBC Pension Trust Limited

Further definitions and terms in italics are explained in the glossary (Appendix F)

ii BBC Pension Scheme

Towers Watson Confidential

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BBC Pension Scheme 1

31 March 2011

Section 1: Summary of main conclusions Introduction

1.1 This is my report on the actuarial valuation of the BBC Pension Scheme as at 1 April 2010. The report is addressed to the Trustees and to the BBC.

1.2 The main purposes of the actuarial valuation are to review the financial position of the Scheme relative to its statutory funding objective, as required under the Pensions Act 2004, and to determine the appropriate level of future contributions.

1.3 The valuation is required under the terms of Clause 15.2 of the 43rd Deed of Variation of the Trust Deed and Rules dated 23 June 1949 and Part 3 of the Pensions Act 2004. Both the Trustees and the BBC have an interest in the valuation process and, as required by law, a copy of this report must be provided to the BBC. This report has been prepared in accordance with the guidance note GN9 version 9.0 “Funding Defined Benefits – Presentation of Actuarial Advice” issued by the Board for Actuarial Standards and effective from 1 November 2010.

1.4 This report on the actuarial valuation also falls within the scope of two Technical Actuarial Standards (TASs) published by the Board for Actuarial Standards, TAS R: Reporting Actuarial Information and TAS D: Data. I confirm that the report complies with these two TASs. However, because it is a ‘report of record’, and not a report provided with the intention of assisting the Trustees or any other party to make any decisions, the requirements of TAS R are not, in practice, relevant.

1.5 This valuation is based on the Statement of Funding Principles agreed by the Trustees and the BBC dated 23 March 2011. The principal conclusions of the valuation are summarised below:

Ongoing funding position

1.6 Past service:

On the assumptions adopted by the Trustees and agreed with the BBC, and allowing for the BBC’s pension changes, the Scheme had a shortfall relative to its statutory funding objective of £1,131.0 million at the valuation date. This means that the assets of £8,233.0 million covered 87.9% of the Scheme’s technical provisions.

The past service position before allowance is made for the pension changes in 2011 is described later in this report.

2 BBC Pension Scheme


1.7 Recovery plan:

The BBC and the Trustees have agreed that the BBC will pay additional contributions as set out in the table below. If the assumptions set out in the Statement of Funding Principles are borne out in practice, the shortfall will be removed within a period of 11 years from the valuation date.

Due date Amount 1 April 2011 £110 million 1 April 2012 £60 million 1 April 2013 £60 million 1 April 2014 £100 million 1 April 2015 £100 million 1 April 2016 £100 million 1 April 2017 £75 million 1 April 2018 £75 million 1 April 2019 £75 million 1 April 2020 £75 million 1 April 2021 £75 million

1.8 Future service:

On the assumptions adopted, the BBC’s basic contribution rate required to fund future benefits for employed members is 15.5% of their pensionable salaries, reducing to 14.5% from 1 January 2012.

1.9 Expenses:

A reserve of £100 million is included in the technical provisions for administrative expenses. No allowance is included in the future service contribution rate for such expenses.

The BBC has agreed to reimburse the Trustees for all Pension Protection Fund levies as they are incurred.

1.10 The Pensions Act 2004 requires the Trustees and the BBC to agree a revised schedule of contributions, which was completed on 23 March 2011. The Trustees will also need to submit a recovery plan to the Pensions Regulator.

Discontinuance position

1.11 If the Scheme had been discontinued and wound up at the valuation date, there would not have been sufficient assets to secure the accrued benefits through the purchase of annuity policies with an insurer. My estimate of the solvency of the Scheme at the valuation date is 62%. The approach I have followed in making this estimate is specified in Section 6 of this report.


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Reporting to members

1.12 The Trustees are required to disclose to members, in a summary funding statement, certain outcomes of this actuarial valuation within a reasonable period.

Next actuarial valuation

1.13 The financial position of the Scheme and the level of BBC contributions to be paid will be reviewed at the next actuarial valuation, which is expected to be carried out as at 1 April 2013. However in the intervening years the Trustees will obtain annual actuarial reports on developments affecting the Scheme’s assets and technical provisions. The first such report as at 1 April 2011 must be completed by 1 April 2012.

A J Blay Fellow of the Institute and Faculty of Actuaries 31 March 2011

Towers Watson Limited Watson House London Road Reigate Surrey RH2 9PQ UK

Authorised and regulated by the Financial Services Authority \\Wwp\data\General Data Redhill\PENC\BBC\2011 Corresp\Valuation report 1 April 2010.doc



The limitations of the investigation

Third parties

I have written this report for the Trustees and the BBC, as required under Clause 15.2 of the 43rd Deed of Variation of the Trust Deed and Rules dated 23 June 1949. I have prepared it to satisfy both the requirements of the Deed and the statutory requirements of section 224 of the Pensions Act 2004. It has not been prepared for any other purpose. As such, it should not be used or relied upon by any other person for any other purpose, including, without limitation, by individual members of the Scheme for individual investment or other financial decisions, and those persons should take their own professional advice on such investment or financial decisions. Neither I nor Towers Watson Limited accepts any responsibility for any consequences arising from a third party relying on this report.

Except with the prior written consent of Towers Watson Limited, the recipient may not reproduce, distribute or communicate (in whole or in part) this report to any other person other than to meet any statutory requirements.

Data supplied

The Trustees bear the primary responsibility for the accuracy of the information provided, but will, in turn, have relied on others for the maintenance of accurate data, including the BBC who must provide and update certain membership information. Even so it is the Trustees’ responsibility to ensure the adequacy of these arrangements. I have taken reasonable steps to satisfy myself that the data provided is of adequate quality for the purposes of the investigation, including carrying out basic tests to detect obvious inconsistencies. These checks have given me no reason to doubt the correctness of the information supplied. It is not possible, however, for me to confirm that the detailed information provided, including that in respect of individual members and the asset details, is correct.

This report has been based on data available to me as at the effective date of the actuarial valuation and takes no account of developments after that date except where explicitly stated otherwise.

Assumptions

The choice of assumptions, as set out in the Scheme’s SFP, is the responsibility of the Trustees, in agreement with the BBC, after taking account of my advice. They are only assumptions; they are not predictions and there is no guarantee that they will be borne out in practice. In fact I would expect the Scheme’s experience from time to time to be better or worse than that assumed. The Trustees and the BBC must be aware that there are uncertainties and risks involved in any course of action they choose based on results derived from these assumptions.


31 March 2011

Section 2: Background to the valuation Purposes of the valuation

2.1 The main purposes of the actuarial valuation are to:

review the financial position of the Scheme relative to its statutory funding objective as required by section 224 of the Pensions Act 2004, and to determine the level of future BBC contributions required; and

examine the extent to which the Scheme’s resources would have been adequate to secure accrued benefits if it had discontinued at the valuation date.

Previous valuation and the contributions paid since then

2.2 The previous actuarial valuation of the Scheme was carried out by me as at 1 April 2007. The main results were:

a past service surplus on an ongoing basis of £274.6 million which meant that the Scheme’s assets of £8,205.2 million were expected to cover 103% of the benefits earned for service to 1 April 2007.

The joint contribution rate required to cover the accrual of the future service benefits was 25.65% of pensionable salaries, including AVC Plus but excluding Pension Protection Fund levy contributions.

2.3 The actual contributions paid between 1 April 2007 and 1 April 2010 were as set out below.

Active members % of Pensionable Salaries

BBC* % of Pensionable Salaries

Old and New Benefits

Career Average Benefits

Until 30 June 2008 19.10% 6.00% 4.00% From 1 July 2008 19.65% 6.00% 4.00% From 1 April 2009 18.90% 6.75% 4.00% From 1 April 2010 18.15% 7.50% 4.00%

* including contributions under the matching provisions of the AVC Plus arrangement.

With the Trustees’ consent, the BBC deducted the following amounts from the total contributions otherwise payable in respect of the months shown below:

July 2008 £10 million August 2008 £10 million September 2008 £4 million



These deductions offset an additional contribution made by the BBC in connection with a recovery plan set up following the 2005 valuation, in anticipation of a deficit at the 2007 valuation, which did not emerge in practice.

Members’ Added Years and AVC contributions were payable in addition to the above.

Legislation

2.4 A summary of relevant legislation is provided in Appendix C.

Scheme benefits valued

2.5 As a first step, I have valued the Scheme’s benefits prior to the changes being introduced by the BBC in 2011. The Trustees have committed that the results of the valuation on this basis will be provided to members. These results are referred to in this report as the “pre change results”.

2.6 Following consultation with Scheme members, the BBC is introducing changes to the Scheme benefits for active members. Members who stay in the Old, New or existing Career Average Benefits sections will be subject to a limit on increases to their pensionable salaries of 1% pa. Active members are being given a one-off opportunity to opt out of their current section and join the new Career Average Benefits 2011 (CAB 2011) section for future service. If they choose this, their past service benefits will be treated as if they left pensionable service. Active members have the ongoing opportunity to opt out of their current section and join LifePlan, a new separate defined contribution plan, which will again lead to their past service benefits being treated as if they left pensionable service. The Scheme also closed to new entrants on 1 December 2010.

2.7 A summary of the main benefits applying to employed members in each section is shown in Appendix A. The existing Career Average Benefits section will be referred to as CAB 2006.

2.8 I have valued the Scheme’s benefits as set out in the 43rd Deed of Variation of the Trust Deed and Rules dated 23 June 1949 (as amended) allowing for the changes as set out above and the introduction of CAB 2011. The 1% pa limit to pensionable salary growth is to be applied from 1 April 2011 on a contractual basis, rather than via a Scheme amendment.

2.9 The treatment of discretionary benefits, including discretionary increases in benefit, is described in the SFP, which is reproduced in Appendix D. There have been no discretionary increases to pensions granted in the last five years except in relation to the revaluation of CAB 2006 benefits (both in service and deferment), where increases in line with the Retail Prices Index (RPI) for the year to December have been granted in each year.

2.10 There have been no changes to the Rules in the three years to the valuation date that materially affect the results of the actuarial valuation.

Membership data

2.11 In order to carry out the present valuation, I have obtained detailed information regarding the membership of the Scheme from the BBC Pension and Benefits Centre. A summary of the data supplied is shown in Appendix B.


31 March 2011

2.12 I have taken reasonable steps to satisfy myself that the data provided are of adequate quality for the purpose of the valuation, but have otherwise relied on the accuracy of the data provided.

Assets

2.13 I have been provided with audited accounts for the period since the previous valuation. The market value of the Scheme’s assets, including £78.2 million in respect of AVCs, was £8,233.0 million at the valuation date. A summary of the main classes of the Scheme’s assets is shown in Appendix B.

2.14 The corresponding market value of assets at the previous valuation date was £8,205.2 million.

Reference Scheme Test

2.15 Old Benefits and New Benefits members of the Scheme are contracted out of the State Second Pension, which means that members and the BBC pay lower National Insurance contributions. To qualify for contracted out status, the benefits accruing in the Scheme have to be at least as valuable as those provided by a Reference Scheme.

2.16 The actuary must consider at regular intervals whether the membership profile is such that the Scheme benefits continue to meet the Reference Scheme Test (RST). I confirm that, as at 1 April 2010, the benefits provided to Old and New Benefits members meet the RST.

2.17 At the current time, there is a substantial margin between the value of Scheme benefits for Old and New Benefits members and benefits from the Reference Scheme. However, with the passage of time, it may be expected that this margin will be eroded by the future pensionable salary growth limit of 1% pa.


31 March 2011

Section 3: Financial assumptions Financial assumptions

3.1 The financial assumptions on which the valuation is based are generally of greater significance than the demographic assumptions. A small change in their relative levels can have a significant effect on the value placed on the estimated benefit outgo and income.

Assumptions used in 2007

3.2 The financial assumptions are used to estimate the projected amount of the benefits becoming payable and the likely proceeds from contributions and the Scheme's assets. The principal financial assumptions adopted for the technical provisions in 2007, expressed in nominal terms and also in real terms, ie relative to retail price inflation, were:

2007 assumptions Nominal % pa

Real+ % pa

Main financial assumptions: Retail Price Inflation 3.0 - Discount rate for technical provisions - pre retirement 6.7 3.6 - post retirement 5.3 2.25 Earnings growth (including promotional allowance) - in the period to 31 March 2010 4.0 0.97 - in the period from 1 April 2010 5.0 1.94 Rate of revaluation of Career Average Benefits (CAB 2006) 3.0 - Pension increases - Old Benefits 3.0 - - New Benefits 2.8 (0.2) - CAB 2006 2.5 (0.5)

+ allowing for compounding

Assumptions in 2010

3.3 Following detailed consideration by the Trustees and the BBC, as instructed we have adopted the following assumptions for the 2010 valuation.



Price inflation

3.4 We have assumed that future price inflation, as measured by the RPI, will be 3.7% pa. This assumption is broadly consistent with the yield curve reflecting the inflation expectations implicit in gilt prices (as published by the Bank of England at relevant durations). In 2007 we assumed that price inflation would be 3.0% pa. The assumption in 2010 has therefore increased by 0.7% pa, which reflects the increase in market inflation expectations. The assumption in 2010 is therefore broadly consistent with the assumption in 2007, because both were derived in the same way and reflect market expectations at the valuation date.

3.5 In previous valuations, the absolute level of assumed price inflation has been of less financial significance for the Scheme than the relationship between it and the other financial assumptions. Whilst this is still the case in relation to the majority of the liabilities, it should be noted that the introduction of the 1% pa limit to pensionable salary growth means that the absolute level of price inflation will have more significance than it has in the past.

3.6 We have assumed that future price inflation, as measured by the Consumer Prices Index (CPI), will be 0.5% pa lower than RPI, ie 3.2% pa. Increases in the CPI can be higher or lower than RPI in any given period; however, on average, we would expect CPI to be around 0.7% pa below RPI if CPI continues to exclude certain housing costs. Assuming that CPI will be only 0.5% below RPI is therefore prudent. The main relevance of this assumption is for members who opt for the CAB 2011 section.

Real growth in earnings levels

3.7 Following the BBC’s benefit changes in 2011, the increase to pensionable salary will be limited to 1% pa for members remaining in the Old and New Benefits and CAB 2006 sections. Therefore we have assumed that pensionable salary growth is at 1% pa after April 2011 (including any promotional element).

3.8 For the purposes of the pre change results, it is necessary to make assumptions about the growth of pensionable salaries in the absence of the 1% pa limit. For the technical provisions in 2007, we assumed that earnings would increase at a general rate that was some:

1% pa greater than RPI until 31 March 2010

2% pa greater than RPI thereafter.

Having considered the BBC’s views, the Trustees have instructed us to assume that salary increases in the period to 1 April 2015 will be limited to RPI, with increases after that date reverting to the long-term assumption of 2% pa in excess of RPI.


31 March 2011

Rate of revaluation of Career Average Benefits

3.9 Each year the BBC and the Trustees jointly consider what, if any, increase to apply to the accrued pension for CAB 2006 (and CAB 2011) members who have not yet drawn their benefits. To date, such increases have been in line with RPI for CAB 2006, and the intention is to provide increases in line with CPI (with a limit of 4% pa) for CAB 2011, but this is not guaranteed. For the purposes of this valuation, the following assumptions have been made for the revaluation of Career Average Benefits, which reflect the above:

CAB 2006: 3.7% pa CAB 2011: 3.0% pa

Pension increases

3.10 Old Benefits – pensions are guaranteed to increase in line with the RPI up to a limit of 10% in each year. Pension increases have therefore been assumed to be granted at 3.7% pa, in line with the RPI assumption. In effect, the 10% limit is ignored, because it is assumed to apply infrequently, if ever. The same assumption has been made for deferred pensions before retirement.

3.11 New Benefits – pensions are guaranteed to increase in line with the RPI up to a limit of 5% in each year. In 2007 we assumed that New Benefits pensions would increase, on average, by slightly less than RPI, ie at 2.8% pa. We have retained this difference below RPI and have assumed that New Benefits pensions will increase by 3.5% pa. In effect, the 5% limit is assumed to apply in some future years, so that pension increases for New Benefits members will be below RPI over the longer term. The same assumption has been made for deferred pensions before retirement (subject to statutory minimum checks being applied).

3.12 CAB 2006 – pensions are guaranteed to increase in line with RPI up to a limit of 2.5% in each year. In the context of the RPI assumption of 3.7% pa, we have assumed that CAB 2006 pensions will increase at 2.4% pa. This assumption recognises that there may be years in which the increase in RPI, and hence the increase granted, is below 2.5%.

3.13 CAB 2011 – pensions are guaranteed to increase in line with CPI up to a limit of 4% in each year. In the context of the CPI assumption of 3.2% pa, we have assumed that CAB 2011 pensions will increase at 3.0% pa. This recognises that there may be years in which the increase in CPI exceeds 4%, and hence the increase granted may be restricted.

Discount rate for valuing liabilities

3.14 A key part of the valuation process is placing a present value on future projected pension payments. To do this, we “discount” the payments back to the valuation date. Discounting is the opposite of adding interest:

£100 invested at the start of the year grows to £110 after one year, if interest is added at the rate of 10% pa;

conversely, a payment of £110 due in one year’s time has a present value of £100 at the start of the year, if it is “discounted” at a rate of 10% pa.

The actual discount rate chosen for a valuation depends on several factors, which are discussed in more detail below.



3.15 The valuation of the Scheme at 1 April 2007 was carried out on a market based method, which takes assets at their market value on the assessment date and discounts the accrued liabilities by reference to discount rates consistent with market conditions at that date (after taking a margin for prudence) and with reference to the Scheme’s asset portfolio. This valuation has also been carried out using a market based method.

3.16 We have used a “dual discount rate” ongoing basis, which means we discount the liabilities using a different rate while benefits are in payment (the “post-retirement discount rate”) from that used while benefits have yet to commence (the “pre-retirement discount rate”). Discount rates are sometimes expressed in real terms, which means they are expressed as the difference between the full nominal rate and the assumed rate of retail price inflation.

3.17 For the post-retirement discount rate, we have assumed that the assets supporting pensions in payment are invested in a notional portfolio comprising 20% in return-seeking assets (including equities, property and alternative assets) and 80% in matching assets (comprising corporate bonds, index-linked gilts and fixed interest gilts, reflecting the Scheme’s bond holdings at the valuation date). The assumed allocation to matching assets post retirement in our model has increased from 70% at the previous valuation to 80% on this occasion. This is in line with the Statement of Funding Principles dated 13 May 2008, agreed as part of the 2007 valuation.

3.18 Approximately 60% of the accrued liability relates to pensions already in payment. Hence we are assuming that 60% of 80% (= 48%) of the total current assets will be in matching assets to support the current pensioners. This is somewhat higher than the current target bond holding of around 30%, which means that:

we are effectively assuming that the Scheme’s proportion of bond holdings is greater than it is in practice, with the reverse being true for equities; this is a prudent approach as returns from bonds are expected to be lower than returns from equities;

there is scope to increase the Scheme’s bond holdings to around 50% (ie to de-risk) without invalidating the model underlying the calculation of the technical provisions;

3.19 Having effectively already used all of the Scheme’s bonds in our model for setting the post-retirement discount rate, there are only return-seeking assets to generate returns pre retirement for actives and deferred pensioners.

3.20 This dual discount funding method builds up the funds required to enable the Trustees to switch the asset allocation gradually from its current target of 70:30 (return-seeking:matching) to 20:80 if they so wish, over the period from the valuation date to the date when the last current active member (or deferred pensioner) retires. This gives some degree of comfort that, when fully funded on this basis, the Trustees would be able to afford to switch to a more risk-averse investment policy in respect of pensions in payment. Funding on this type of approach represents greater security for members’ benefits.

Degree of confidence and the BBC’s covenant

3.21 In determining an appropriate discount rate for the technical provisions, a suitable reference point is our best estimate (or the median) expected returns from the Scheme’s assets over the next 10 years. These returns are the same as those used by Towers Watson for Asset Liability Modelling (ALM) exercises. For funding purposes, it is prudent to assume that the Scheme’s assets will achieve returns that are lower than the median.


31 March 2011

3.22 The degree of prudence can be expressed as the level of confidence that the notional investment portfolio might have of achieving the return assumed. By reference to the Towers Watson Investment Model, we have projected the range of likely investment return outcomes from the notional portfolios, over a 10 year period, and used the results to estimate the probability (or confidence level) that investment returns will be at least as great as the chosen discount rate assumptions. For example, in 2007 a 63% confidence level was associated with the pre-retirement discount rate of 3.6% pa (in real terms), and a 67% confidence level was associated with the post-retirement discount rate of 2.25% pa (in real terms).

3.23 When considering the discount rates to use for the 2010 valuation, the Trustees’ starting point was rates with the same degree of confidence as those used in 2007. By reference to the Towers Watson Investment Model and market conditions as at 1 April 2010 (and based on the notional portfolios described above for use in 2010), this meant the following rates:

2010 discount rates (at 2007 confidence levels) Nominal % pa

Real % pa

Pre retirement (63% confidence level) 7.0 3.2 Post retirement (67% confidence level) 5.3 1.5

These discount rates are lower in real terms than those used in 2007, which reflects the higher inflation expectations and the outlook for lower real returns from most asset classes in 2010.

3.24 There is a relationship between the degree of confidence underlying the discount rates and the covenant of the sponsoring employer (ie its ability and willingness to fund the scheme). The weaker the covenant, the more cautious (ie lower) the discount rate assumptions tend to be, leading to higher values for technical provisions. The reason for this is that if a sponsoring employer is very weak, the trustees need to be aiming for a very high degree of security and hence a relatively large fund, because the sponsoring employer may not be able to make further payments after some future date.

3.25 The Trustees took advice on the BBC’s covenant from Ernst & Young, which they have shared with me. The results of Ernst & Young’s analysis were that the BBC’s covenant had weakened from “strong” at the 2007 valuation to “tending to strong” for the 2010 valuation. Taking account of benchmarking data, and the weaker covenant, the Trustees have increased the confidence levels associated with the pre- and post-retirement discount rates to 65% and 69% respectively at the 2010 valuation.

3.26 By reference to the Towers Watson Investment Model, and the notional portfolios described above for use in 2010, this leads to the following discount rates:

2010 discount rates (allowing for weaker covenant) Nominal % pa

Real % pa

Pre retirement (65% confidence level) 6.8 3.0 Post retirement (69% confidence level) 5.2 1.4

3.27 To give an alternative view of the level of prudence in the discount rates, they may be considered in terms of the difference between the rates assumed and the return on gilts (which represents a very low risk rate of return).



3.28 The margin over the gilt return for the pre-retirement discount rate in paragraph 3.26 above is 2.3% pa (based on a gilt yield of 4.4% and allowing for compounding). Typically investors would expect a “risk premium” of between 2% pa and 4% pa for investing in return-seeking assets such as equities (rather than gilts). An equity risk premium of 2.3% pa is therefore close to the prudent end of the expected range.

3.29 The margin over gilts for the post-retirement discount rate in paragraph 3.26 above is 0.7% pa (allowing for compounding). Around half of the notional portfolio underlying the post-retirement discount rate consists of gilts. The additional assumed return of 0.8% pa is therefore assumed to be generated by returns on corporate bonds above those on gilts and by the 20% holdings in return-seeking assets.

3.30 The above assumptions for discount rates are, I believe, prudent ones in the context of the BBC’s covenant, which the Scheme may reasonably expect to achieve or exceed.

3.31 There might well be periods when actual investment returns fall well short of the funding assumptions. Inevitably such periods of lower than expected investment returns will result in financial strains for the Scheme. The Trustees have considered the possible variation around the expected outcome as part of the valuation and the ALM exercise that was carried out in conjunction with the valuation.

3.32 The assumed returns, and the degree of confidence which they represent relative to the median assumptions, reflect the investment strategy. If this strategy were to change, it would be necessary to review the returns assumed, which in turn could affect the resulting contribution requirement. For example, a reduction in equity investments might well warrant a lower assumed return, which would increase the immediate contribution requirement. However, as noted above, there is some scope to reduce the equity investments without necessitating a lower return assumption.

Expenses

3.33 An allowance of £100 million is included in the technical provisions in respect of administrative and other non-investment related expenses. With administration expenses (excluding the PPF levy) currently running at over £4 million a year, this reserve (with interest thereon) should be sufficient to meet administration expenses for over 20 years from the valuation date. In addition, the BBC is responsible for reimbursing the Trustees for the amount of the PPF levies.

3.34 It is assumed that investment management costs are to be met out of future investment income and so the valuation discount rates are net of such costs.


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Summary of 2010 assumptions

3.35 A summary of the financial assumptions adopted for the technical provisions as at 1 April 2010 is set out below:

2010 assumptions Nominal % pa

Real+ % pa

Main financial assumptions: Retail Price Inflation (RPI) 3.7 - Consumer Price Inflation (CPI) 3.2 (0.5) Discount rate for technical provisions - pre retirement 6.8 3.0 - post retirement 5.2 1.4 Earnings growth (including promotional allowance) for the pre change results

- in the period to 31 March 2015 3.7 - - in the period from 1 April 2015 5.7 1.9 Earnings growth (including promotional allowance) after benefit changes 1.0 (2.6) Rate of revaluation for CAB 2006 3.7 - Rate of revaluation for CAB 2011 3.0 (0.7) Pension increases - Old Benefits 3.7 - - New Benefits 3.5 (0.2) - CAB 2006 2.4 (1.3) - CAB 2011 3.0 (0.7)

+ relative to RPI, allowing for compounding


31 March 2011

Section 4: Demographic assumptions 4.1 The demographic assumptions are used to estimate when benefits will come into payment, for

how long they will be paid, and to whom. With the exception of mortality, the demographic assumptions are generally of less financial significance than the financial assumptions, in the context of the calculations for this valuation.

4.2 I have analysed the demographic experience of the Scheme over the period since the previous valuation as at 1 April 2007. On the basis of this analysis, I have reviewed the assumptions used in the funding plan. A description of the findings and the assumptions adopted on this occasion is set out in the following paragraphs and an illustration of the rates used is shown in the SFP in Appendix D.

Mortality

4.3 The mortality assumptions comprise two elements:

the ‘base tables’ – these should provide a prudent estimate of Scheme members’ life expectancies, as at the current date;

the allowance for future improvements – these should be based on the latest available data and projection methodologies.

Since the last valuation, new standard base tables and projections of future improvements have been published by the Continuous Mortality Investigation (CMI) of the actuarial profession.

Base tables

4.4 The new standard base tables relate to the experience of members of Self Administered Pension Schemes (SAPS); they are formally known as the “S1 series” and we also refer to them as the “SAPS tables”. Previous standard base tables related to the experience of life office annuitants, whose characteristics may not have been typical of pension scheme members, so the SAPS tables represent a more relevant set of assumptions for pension scheme funding valuations. Various subdivisions of the SAPS tables are available for use, to further improve the fit to a given scheme’s data.

4.5 As part of the valuation process, we have compared the actual experience of Scheme members dying with:

the mortality base tables adopted at the previous valuation; and

the standard SAPS “S1” tables.



We completed this analysis separately for male pensioners, female pensioners and female dependants (the group of male dependants is small and was therefore ignored). The analysis considered the amount of pension that ceases when a member dies, as the death of a member with a large pension is of more financial significance to the Scheme than the death of a member with a small pension. The results of our analysis were that the amounts of pension ceasing at death were higher than expected at the last valuation for all three groups, with the largest difference being for female pensioners.

4.6 We compared the Scheme’s data with the SAPS “S1” tables, to see which subset of the new tables provided the best fit to the data, and how to adapt the standard tables to improve the fit further. The results of this analysis were that the subset of the tables known as “All Pensioners Light” provided the best fit:

“All Pensioners” refers to pensioners who retired in both normal and ill health;

“Light” refers to pensioners with larger than average pension amounts in the full SAPS data set.

4.7 We then looked at two methods of adapting the standard SAPS tables to improve the fit further:

comparing the Scheme’s own experience of deaths with the SAPS experience; and

comparing the Scheme’s own pension amounts profile with the pension amounts profile underlying the SAPS “All Pensioners Light” tables (the rationale for this being the strong correlation between greater life expectancy and higher pensions).

4.8 Each comparison leads to a set of constant factors (or “multipliers”) that are applied to the “All Pensioners Light” tables, to improve the fit and also to introduce a margin for prudence into the base tables. Note that the first method fits a table based on deaths of Scheme members, whereas the second method fits a table based on Scheme members who are alive at the valuation date.

4.9 The results of the comparisons were that the life expectancies implied by the SAPS amounts analysis (ie the second method above) would be higher than under the first method of analysis, based on Scheme experience of deaths, and materially so in the case of female pensioners.

4.10 The Scheme is large enough to permit the base tables to be set by reference to its own experience. However the new SAPS amounts analysis provides a useful check on the assumptions. For male pensioners, the two methods provide broadly similar results and therefore the life expectancy derived from the Scheme experience analysis has been used without further adjustment.

4.11 For female pensioners, the Scheme experience analysis in isolation suggests a lower life expectancy than was anticipated at the last valuation. The same is true for female dependants, although the difference is smaller. For both categories, the SAPS amounts analysis suggests a higher life expectancy than was anticipated at the last valuation.


31 March 2011

4.12 This is the first occasion for many years on which the experience has not shown a pattern of continuing improvement. It was noted that the experience for female pensioners was being influenced by particularly high incidences of deaths in three individual months over the intervaluation period; this suggested an element of volatility that it would not be prudent to assume would recur in future.

4.13 On balance, it was decided to adopt base tables and associated multipliers that

are in line with the Scheme experience for males;

take account of both the Scheme experience and the alternative SAPS amounts analysis for female pensioners;

broadly reflect the Scheme experience for female dependants;

are the same for pensioners and dependants.

Allowance for future improvements

4.14 In 2009 the CMI published a new projection model (“CMI_2009”) for future improvements in mortality, which assumes that ‘current’ (recently observed) rates of change blend over time into a ‘long-term’ rate of change. The rationale behind this is that recent experience may be the best guide to future improvements over the short-term, whilst expert opinion and analysis of causes driving mortality changes may be a better guide over the long term.

4.15 For the 2010 valuation we have used the ‘core’ version of the CMI_2009 projection model, in which most of the parameters are fixed, leaving the Trustees to choose the long-term rate of improvement. Our current best estimate for future mortality improvements is in line with the CMI_2009 core projection model, subject to long-term improvements of 1.5% pa for males and between 1% pa and 1.5% pa for females.

4.16 The SFP agreed in 2008 states that the allowance for future improvements in 2010 would not be less than the “medium cohort” projection with a minimum improvement of 1% pa, unless there is compelling evidence that such an allowance would be overly prudent. Over the three years since the last valuation, we have seen some evidence that mortality rates for Scheme members are not improving in line with expectations. However, in our view, three years of experience for one pension scheme do not provide sufficient data on which to determine trends for long-term improvements.

4.17 The agreed allowance for future improvements in 2010 is in line with the CMI_2009 core projection model with long-term rates of improvement of 1.5% pa for males and 1% pa for females. In our view:

it is reasonable to have a greater allowance for males than for females;

the proposed long-term rates are sufficiently (but not overly) prudent by reference to current market research and national trends.

4.18 I confirm that, overall, the above allowance for future improvements is not less than the medium cohort projection with a minimum improvement of 1% pa.



Conclusions

4.19 The Trustees and the BBC have agreed to adopt the following post-retirement mortality assumptions:

Base tables: The SAPS (”S1”) All Pensioners Light tables with multipliers of 90% applied at the valuation date for both males and females

Future improvements: The CMI_2009 core projection model with long-term rates of future improvement of 1.5% pa for males and 1% pa for females applying from 1 April 2010.

4.20 The above base tables (in isolation) represent an overall weakening of the technical provisions, relative to the 2008 SFP (but see below).

4.21 The above allowance for future improvements (in isolation) represents a strengthening of the technical provisions, relative to the 2008 SFP. When combined with the base tables above, the overall impact on the technical provisions is broadly neutral compared to the anticipated mortality assumptions for 2010 set out in the 2008 SFP. This means that, overall, the funding plan in 2010 builds in the additional allowance for improved life expectancy that was anticipated in the 2008 SFP, but no more than that.

4.22 The life expectancy assumptions adopted in 2007 and 2010 are summarised in the table below. The middle column shows the assumptions that were expected to be made in 2010, by reference to the SFP dated 13 May 2008.

Life expectancy at age 60 Assumed 2007

Anticipated 2010

Assumed 2010

Males aged 60 26.5 27.0 28.2 Males aged 40 28.1 29.0 30.6 Females aged 60 29.1 29.8 28.8 Females aged 40 30.7 31.8 30.5

The differences between the “aged 60” and “aged 40” figures for each valuation illustrate the allowance for future improvements in life expectancy (at age 60).

4.23 We have used the above mortality assumptions for death in deferment and after retirement in normal health (members retiring on ill health grounds are assumed to have shorter life expectancies). The number of deaths of active members in service in the last three years was broadly in line with assumptions. We have retained the same assumptions as in 2007 relating to the deaths of active members whilst in service.

Early retirements

4.24 The early retirement terms in the Scheme changed with effect from 6 April 2010. Members retiring from deferred status (other than those with preferential terms from redundancy) are now subject to cost-neutral early retirement terms. Old and New Benefits members who take early retirement from active status before 6 April 2015 retain their previous early retirement terms on benefits accrued before 6 April 2010, but are subject to the cost-neutral terms on benefits accrued after that date. All retirements after 5 April 2015 (other than those on preferential terms from redundancy) will be on cost-neutral terms.


31 March 2011

4.25 The experience analysis showed that the number of members retiring exceeded expectations at ages 55 and above. For the purposes of the 2010 valuation, we have:

assumed that deferred pensioners will draw their benefits at age 60; as the voluntary early retirement terms are now cost neutral, the finances of the Scheme will be largely unaffected if members retire early;

retained the 2007 assumptions for the proportions of active members retiring early on voluntary grounds, namely that 10% of members will retire at each age from 55 to 59;

allowed for the generous terms available (for pre 6 April 2010 service) to active members who are assumed to retire before 6 April 2015;

allowed for the cost neutral terms available to active members who are assumed to retire after 5 April 2015.

4.26 The number of ill-health retirements in the last three years was relatively small and lower than the number assumed. We have decreased the ill-health retirement assumption by one-third. The effect of this change is to reduce the technical provisions and the future service contribution rate slightly.

Financial dependants

4.27 We have retained the same assumptions for the proportion of members assumed to have financial dependants as in 2007.

Allowance for commutation

4.28 When members retire, they can choose to exchange (or “commute”) part of their pension for a tax-free cash lump sum. The terms of exchange differ according to whether the member joined the Scheme before or after 1 April 1992. However, in either case, the value of each £1 pa of pension on the basis used for the technical provisions is greater than the value of the cash lump sum, and so reserves have been released from year to year as members have commuted pension.

4.29 For the calculations as at 1 April 2010, it has been assumed that 40% of members commute some Scheme pension, of whom pre 1 April 1992 joiners (with the 10:1 rate) commute around 25% of their pension and post 1 April 1992 joiners (with the 12:1 rate) commute around 30%. This is the same assumption as for the 2007 valuation.

New entrants

4.30 Following closure of the Scheme to new entrants on 1 December 2010, we have assumed that no new members will join.

Redundancy reserve

4.31 Members whose posts are transferred to Salford will be offered preferential early retirement terms if they choose to take redundancy rather than transfer. The BBC intends to meet the cost of each such augmentation on a case-by-case basis, but only in respect of the difference between the preferential terms on redundancy and the voluntary early retirement terms that existed prior to 6 April 2010.



4.32 As the early retirement terms generally available in the Scheme are now on a cost neutral basis, this means that a funding strain would arise in respect of the difference between:

the voluntary early retirement terms that existed prior to 6 April 2010, and

the current cost neutral terms.

4.33 Therefore, the BBC wishes the Trustees to recognise the funding implications in advance by including a reserve in the technical provisions, representing the difference in cost between the pre 1 April 2010 early retirement terms and the current (cost neutral) terms. This is mainly a timing issue, as it means that in effect the additional costs are being funded over the period of the recovery plan.

4.34 Based on an analysis of the eligible members, a reserve of £12 million has been included in the technical provisions for active members.

Withdrawals

4.35 The analysis showed that the number of withdrawals (ie early leavers with deferred benefits) exceeded expectations for males and females. Following the BBC’s benefit changes, a higher withdrawal rate is expected as more members are expected to opt-out of the Scheme. We have therefore increased the long-term withdrawal assumptions at each age by 10%, as set out in paragraph 4.38. It should be noted that, prior to the pension changes, it was prudent to understate the expected number of withdrawals. However, from April 2011 the opposite will be true. The assumptions for withdrawals will be reviewed at the next valuation, in common with all the demographic assumptions.

Assumptions regarding members opting out

4.36 During 2011, active members will need to choose whether to stay in their current section of the Scheme, or whether to opt out and move to CAB 2011 or LifePlan for future service.

4.37 The BBC and its advisers completed detailed analysis of the membership, to determine which of the various options are likely to be financially the most advantageous to individual members. In essence, the conclusion was that 70% of members would be expected to improve their pension position by opting out.

4.38 However, in practice, it is expected that fewer than 70% of members will opt out for various reasons, including the value that members place on the early retirement terms and AVC arrangements in the existing sections, and also inertia. The BBC proposed an assumption that 40% of members will opt out during 2011 and that, thereafter, the long-term rates of withdrawal will increase by 10%, subject to review at future valuations.

4.39 As requested, we carried out a high level review of the proposed assumptions. To put these assumptions in context, if the proportions opting out are underestimated, the technical provisions as at 1 April 2010 will be too low and the deficit will be understated. We estimate that, if 70% of members are assumed to opt out rather than 40%, the technical provisions would increase by around £140 million.


31 March 2011

4.40 At the funding assessment due as at 1 April 2012, it will become apparent whether the numbers opting out were higher or lower than assumed. If the deficit is higher than expected as a result, the Trustees will look to address this as part of the next round of funding discussions. If the deficit is lower than expected, it may be that the recovery period is shorter than is currently anticipated.

4.41 In our view, an assumption of 40% (together with a 10% increase in the long term withdrawal rates) is reasonable and may be expected to err on the side of prudence.

4.42 As mentioned above, if the proportion of members opting out on or before 31 December 2011 is in fact greater than 40%, any funding strain will be taken into account in the next round of funding discussions.


31 March 2011

Section 5: The funding position and future contribution requirements 5.1 This part of the actuarial valuation reviews the financial position of the Scheme relative to its

statutory funding objective. From this assessment we determine the level of BBC contributions required to meet the funding objective.

5.2 There are normally three stages to the assessment of the financial position relative to the funding objective:

First, we compare the Scheme’s assets with the value of the benefits earned in respect of service up to the valuation date (the technical provisions);

If this reveals a shortfall, a recovery plan to remove this shortfall with additional BBC contributions over a suitable period is required;

Finally, we calculate the cost of the continuing accrual of benefits for employed members after the valuation date, so that the funding plan remains on track.

Funding objectives

5.3 Having considered the support available for the Scheme from the BBC, the Trustees and the BBC have agreed the funding objective for the Scheme, and the method and assumptions for calculating the Scheme’s technical provisions. These are set out in the SFP, which is included as Appendix D for ease of reference.

5.4 The Scheme’s statutory funding objective is to have sufficient and appropriate assets to cover its technical provisions (ie the amount that the Trustees have determined should be set aside to meet the Scheme’s liabilities).

5.5 The funding objective has not changed since the last valuation.

Method and assumptions for calculating technical provisions

5.6 The funding method is to determine the discounted capital value of the prospective benefits arising from service completed before the valuation date, including allowance for prospective salary increases (where relevant) for active members in pensionable service at the valuation date. The joint contribution rate required in respect of the future service of active members represents the discounted capital value of the prospective benefits arising from one additional year’s pensionable service after the valuation date, again including allowance for prospective salary increases. This is the same method that was used for the last valuation and is commonly known as the Projected Unit method (although see paragraph 5.19):

“Projected” because of the allowance for future salary growth; and

“Unit” because the future service contribution rate relates to one future year’s accrual.

5.7 The assumptions for calculating the technical provisions are set out in Sections 3 and 4 of this report and the SFP.



5.8 As Scheme Actuary, I am required to certify that the technical provisions were calculated in accordance with section 222 of the Pensions Act 2004. My certificate for this purpose, which was signed on 23 March 2011, is included at Appendix E.

5.9 It should be noted that the technical provisions are not an estimate of the cost of securing the benefits if the Scheme were to wind up.

Past service – comparing assets with technical provisions

5.10 A comparison of the Scheme’s technical provisions in respect of service up to 1 April 2010 with the market value of the Scheme’s assets is as follows :

Valuation statement as at 1 April 2010 Pre change £m

Post change £m

Amount required to provide for the Scheme’s past service liabilities of: Employed members, in respect of service up to 1 April 2010 2,491.6 2,018.1 Deferred pensioners 1,496.2 1,496.2 Pensioners and dependants 5,671.5 5,671.5 AVCs 78.2 78.2 Expense allowance 100.0 100.0 Total value of accrued benefits (technical provisions) 9,837.5 9,364.0 Market value of assets 8,233.0 8,233.0 Past service shortfall (assets less technical provisions) (1,604.5) (1,131.0) Funding level (assets / technical provisions) 83.7% 87.9%

5.11 I confirm that, for the purpose of this comparison, the basis for valuing the Scheme’s assets is compatible with the basis for valuing its liabilities.

5.12 As can be seen from the table above

the Scheme’s technical provisions at 1 April 2010 are £9,364.0 million, leading to a shortfall of £1,131.0 million and a funding level of 87.9%;

the equivalent total value of accrued benefits as at 1 April 2010, before allowing for the benefit changes described in Section 2, is £9,837.5 million, leading to a shortfall of £1,604.5 million and a funding level of 83.7%.

5.13 The figures above compare with a surplus of £274.6 million, corresponding to a funding level of 103%, revealed at the 1 April 2007 actuarial valuation.


31 March 2011

5.14 The main factors contributing to this deterioration in the funding position are shown below (note that the values attributed to each change depend on the order in which they are applied):

£m Surplus at 1 April 2007 275 Interest on surplus 52 Lower than assumed investment returns -1,044 Effect on liabilities of changes in market conditions -793 Contributions lower than required -5 Salary growth higher than assumed -17 Membership profile different from assumed 77 Moving from 2007 mortality assumption to medium cohort

improvements with a 1% pa floor* -95 Moving from 2007-style post retirement discount rate to 2010-style* -241 Change in early retirement terms 271 Changes to mortality assumptions - base tables 128 - allowance for future improvements -125 Effect of assuming salary increases in line with RPI up to 1 April 2015 140 Change in discount rate to allow for weaker covenant -216 Introduction of Salford reserve -12 Shortfall at 1 April 2010 on pre change basis -1,605 Changes to benefit structure 474 Shortfall at 1 April 2010 on post change basis -1,131

* Changes to assumptions for 2010 valuation as set out in Statement of Funding Principles dated 13 May 2008.

5.15 It is advisable to monitor the Scheme’s finances on a regular basis because movements in the market value of assets can make the funding position volatile. The Trustees are required by law to obtain annual actuarial reports on developments affecting the Scheme’s assets and technical provisions in years when a formal actuarial valuation is not carried out. The first such actuarial report as at 1 April 2011 must be completed by 1 April 2012.

Recovery plan

5.16 As there was a shortfall of £1,131 million relative to the technical provisions at the valuation date, the Trustees and the BBC must agree a recovery plan. This specifies how and by when the statutory funding objective is expected to be met.



5.17 The Trustees and the BBC have agreed that additional contributions aimed at meeting the deficit by 1 April 2021 will be paid to the Scheme by the BBC, as set out in the table below:

Due date Amount 1 April 2011 £110 million 1 April 2012 £60 million 1 April 2013 £60 million 1 April 2014 £100 million 1 April 2015 £100 million 1 April 2016 £100 million 1 April 2017 £75 million 1 April 2018 £75 million 1 April 2019 £75 million 1 April 2020 £75 million 1 April 2021 £75 million

5.18 The balance of the funding shortfall is expected to be met by investment returns on the Scheme’s assets that are assumed to be greater than the prudent assumptions underlying the calculation of the Scheme’s technical provisions. If the other assumptions are borne out, the required rate of investment return to reach full funding on 1 April 2021, after the payment due on that date has been made, is 6.2% pa (or 2.4% pa in real terms relative to RPI). This is some 0.6% pa greater than the average discount rate assumption used to calculate the technical provisions. To illustrate the sensitivity of the outcome to this assumption, if the investment returns actually achieved were only in line with those underlying the calculation of the technical provisions (around 5.6% pa on average), the projected funding level on 1 April 2021 would be around 94%.

Future service contribution rate

5.19 The BBC contribution rate has been calculated as the average annual rate required, in addition to the member contributions payable, to meet the cost of the benefits expected to be earned over the three years following the valuation date. This is known as the Projected Unit method with a three year control period, and it allows for the expected ageing of the membership of each section over the period to the next valuation, now that the Scheme is closed to new entrants. On this basis, the rate will be sufficient, if the assumptions are borne out in practice, to cover the accrual of benefits in the period to the next valuation date, provided the age, sex, salary and membership profile of the employed members remains stable.

5.20 In the normal course of events, the average contribution rate would be expected to increase as members age, in the absence of new entrants to the Scheme. However, as the proportions of active members in each section change over time, the average joint contribution rate will also change and could decrease in the short term. In the longer term, the average contribution rate would be expected to increase.

5.21 We have calculated the average joint future service contribution rate on the assumptions underlying the technical provisions, allowing for the 1% pa limit on pensionable salary growth and the introduction of CAB 2011.

5.22 We have also calculated what the future service rate would have been, had there been no limit on pensionable salary growth and no changes to benefits, ie a “pre change contribution rate”. For the pre change contribution rate, members are assumed to remain in their current section of the Scheme.


31 March 2011

5.23 For the post change position, we have calculated the following contribution rates, all of which allow for the 1% pa limit to pensionable salary growth:

rates that relate to the actual membership profile of the Scheme at the valuation date (ie before any members elect to switch to CAB 2011);

rates that allow for the options that members are assumed to make over the period to 31 December 2011 (as summarised in the SFP in Appendix D); in effect these rates apply to the assumed membership profile at 1 January 2012.

5.24 The results of our calculations are set out in the following tables. In each case:

Members’ Added Years and AVC contributions are payable in addition to the rates shown in the tables;

BBC rates include the employer’s share of the cost of Added Years and the matching contributions under the AVC Plus arrangement, where applicable (for the rates based on the assumed membership profile, these have been estimated assuming that the proportion of Old Benefits members with Added Years and AVC Plus benefits remains stable);

All lump sum benefits on death are assumed to be paid from the Scheme; BBC rates for all sections include 0.1% of pensionable salaries in respect of the additional cost of providing lump sum death benefits to Life Assurance Members;

No allowance is included in the future service contribution rates for administrative expenses. PPF levy contributions are payable by the BBC in addition; the Trustees meet the levies initially and the BBC reimburses the cost.

Pre change position

Employer % of Pensionable Salaries


Old Benefits 32.8 7.5 New Benefits 20.1 7.5 CAB 2006 10.9 4.0 CAB 2011 n/a n/a Average 22.9 7.0

Post change position – actual membership profile at 1 April 2010



Old Benefits 23.7 7.5 New Benefits 11.6 7.5 CAB 2006 10.9 4.0 CAB 2011 n/a n/a Average 15.5 7.0



Post change position – assumed membership profile at 1 January 2012



Old Benefits 24.2 7.5 New Benefits 12.6 7.5 CAB 2006 10.9 4.0 CAB 2011 12.6 6.0 Average 14.5 6.5

5.25 The post change joint future service contribution rate is 22.5% of pensionable salaries, based on the membership profile at 1 April 2010. At the last valuation, the joint rate was 25.65%. The main factors contributing to the reduction are shown below (note that the values attributed to each change depend on the order in which they are applied):

% of Pensionable Salaries Joint contribution rate at 1 April 2007* 25.65 Changes to membership profile +0.65 Changes to early retirement terms -0.7 Changes due to market conditions +3.0 Changes to mortality and post-retirement discount rate assumptions anticipated in 2008 SFP +1.1 Changes to demographic assumptions -0.2 Changes to pre change salary growth assumption -1.5 Introduction of a 3 year control period (to allow for closure to new entrants) +0.8 Changes due to covenant strength +1.1 Joint contribution rate as at 1 April 2010* - pre change 29.9 Effect of assuming salary increases of 1% pa -7.4 Joint contribution rate as at 1 April 2010* - post change 22.5

* including estimated contributions under the matching provisions of the AVC Plus arrangement and the employer’s Added Years contributions


31 March 2011

Agreed rates of contribution

5.26 After detailed consideration, the Trustees and the BBC have agreed that contributions expressed as a percentage of pensionable salary will be paid in accordance with the following table:

Employer* Active members Old and New Benefits CAB 2006 CAB 2011 Until 31 March 2011 18.15% 7.5% 4% n/a From 1 April 2011 until 31 December 2011

15.5% 7.5% 4% 6%

From 1 January 2012 14.5% 7.5% 4% 6%


5.27 On or after 31 March 2011, at the request of the BBC and subject to the written agreement of the Trustees, the participating employers may instead all pay contributions in accordance with the following table, according to the sections of the Scheme to which individual members employed by those participating employers belong at the date concerned:



Old Benefits 24.2%* 7.5% New Benefits 12.6% 7.5% CAB 2006 10.9% 4.0% CAB 2011 12.6% 6.0%


5.28 The rates in the table above reflect the assumptions set out in the Statement of Funding Principles dated 23 March 2011 in relation to the proportions and ages of members who are assumed either to remain in their current section, or to opt into CAB 2011 in the period to 31 December 2011. In particular, the average age of members who are assumed to transfer to CAB 2011 is expected to be higher than for members who remain in New Benefits or CAB 2006.

5.29 Contributions are due no later than the 19th day of the calendar month following the month to which they relate. Members’ Added Years and AVC contributions are payable in addition to the above rates. No allowance is included in these rates for PPF levies, as these are reimbursed by the BBC once the levy invoices have been paid.

5.30 In accordance with Part 3 of the Pensions Act 2004 and Rule 3.4, the Actuary must certify that the contributions to be paid are not lower than those which the Actuary would have provided for if he or she, rather than the Trustees with the agreement of the BBC, had the responsibility for setting them. My statement to this effect was included in my Certificate to the Schedule of Contributions, which was signed on 23 March 2011.



5.31 On the assumptions used in 2010, including the assumptions for members to opt into CAB 2011 or LifePlan in 2011, and assuming that members in each section will be three years older on average, the future service contribution rates would be expected to increase after 1 April 2013 as follows:



Old Benefits 30.2* 7.5 New Benefits 16.2 7.5 CAB 2006 12.3 4.0 CAB 2011 14.7 6.0


The actual rates for each section, and the combined average rate, will depend upon the actual membership profile at the next valuation date.

Cash equivalent transfers

5.32 In accordance with the SFP, I am required to investigate whether the Scheme’s assets are sufficient to provide cash equivalent transfers, on the method and assumptions currently used, for all active members and deferred pensioners, without prejudicing the benefits of pensioners and other prospective beneficiaries (also measured on a cash equivalent basis). I confirm that, as at 1 April 2010, the Scheme’s assets were sufficient for this purpose.


31 March 2011

Section 6: The position of the Scheme on discontinuance 6.1 This section of the report considers what would happen to the Scheme on discontinuance.

This would occur, for example, if the BBC were to terminate its liability to contribute, or if the BBC were to go into liquidation.

6.2 If the Scheme were discontinued, employed members would become deferred pensioners with no entitlement to future service benefits. The Scheme would then have liabilities comprising:

the pensions payable to pensioners and deferred pensioners (and contingent pensions payable to their dependants);

future increases in the deferred pensions;

future increases to pensions whilst in payment; and

future expenses.

6.3 On discontinuance, the Trustees could seek to meet the Scheme’s liabilities either by winding up the Scheme or by continuing it as a closed fund. The appropriate approach would depend mainly on the financial position of the BBC, the level of the Scheme’s assets, whether the Scheme would be eligible for entry to the Pension Protection Fund (PPF), and whether a buy out of the liabilities (from an insurance company) would be possible in practice. In paragraphs 6.6 to 6.11 below, I consider a number of possible eventualities.

6.4 If the Scheme had wound up at 1 April 2010, legislation would impose a debt on the BBC (the “employer debt”) equal to the Scheme Actuary’s estimate of the full cost of securing all accrued benefits with an insurance company, allowing for expenses, less the value of the Scheme’s assets.

6.5 The amount of any such employer debt that would actually be paid would depend on the BBC’s ability to pay what could be a substantial sum of money. The outcome for the Scheme would then depend significantly on whether the BBC remained solvent or not, as follows.

Discontinuance when the BBC is solvent

6.6 If the BBC paid the employer debt in full, all of the Scheme’s benefits would be met. The Trustees might then either buy out the Scheme’s liabilities immediately or continue to run the Scheme as a closed fund.

6.7 If the Trustees decided to run the Scheme as a closed fund without winding up, the ability to provide members’ accrued benefits in full from the assets of the Scheme would depend on future experience, in particular the future investment returns achieved and the longevity of the members. Running the Scheme as a closed fund might be considered appropriate, for example, if the Trustees believe that this approach is likely to produce higher benefits for members or there are practical or financial restrictions on buying out the Scheme’s liabilities with an insurance company.



6.8 A decision to run the Scheme as a closed fund might well lead the Trustees to change their investment strategy for the Scheme. For example, the Trustees might reduce the equity content of the investment policy, choosing instead further exposure to financial instruments with lower volatility such as index-linked and fixed-interest bonds.

Discontinuance when the BBC is insolvent

6.9 If the BBC had become insolvent, any such employer debt due may have a low or nil rate of recovery. The Scheme would then have been assessed for possible entry to the PPF.

6.10 If the assets were insufficient to secure the PPF level of compensation with an insurance company, the Scheme would be likely to enter the PPF.

6.11 If the full PPF compensation was covered, the Scheme would be required to wind up and the Trustees could not choose to run it as a closed fund instead. If in practice the Trustees were unable to buy out the PPF level of benefits, the Scheme would be called a ‘closed scheme’ under the legislation, but must operate as if it were in wind-up, cutting back benefits where necessary to comply with the statutory priority order.

Pension Protection Fund

6.12 The Government introduced the PPF in April 2005 to ensure that members of private sector occupational defined benefit schemes receive compensation (the “PPF compensation”) if the scheme sponsor becomes insolvent. The level of compensation provided would not normally be at the full level promised by the Scheme. A summary of the current PPF compensation is provided in Appendix C.

6.13 The Trustees are required by Section 179 of the Pensions Act 2004 to submit routinely an assessment of the Scheme’s discontinuance position, based on assumptions specified by the PPF Board and accrued benefit entitlements similar in form to the PPF compensation. The results of the Section 179 valuation for the Scheme as at 1 April 2010 reveal that the Scheme’s assets covered approximately 111% of this measure.

6.14 As the level of cover for PPF compensation was more than 100% at the valuation date, the Scheme would have been required, on discontinuance with an insolvent employer at that date, to wind up as described in paragraph 6.11. In the absence of any recovery of the employer debt that would arise, members’ benefits would be covered to the extent shown under paragraph 6.18 below.

Estimate of the solvency of the Scheme

6.15 I am required by law to provide the Trustees with an estimate of the solvency of the Scheme. Normally, this means an estimate of the level of cover of accrued benefits if the Trustees were to secure (or buy out) the Scheme’s liabilities with an insurance company, on the premise that no further contributions would be available from the BBC.


31 March 2011

6.16 In order to determine the current estimate of the Scheme’s discontinuance liabilities, I have estimated the cost of securing deferred and immediate non-profit annuities with an insurance company at the valuation date. The key assumptions are:

discount rates equal to the redemption yield on appropriate British Government bonds (namely 0.7% pa in excess of retail price inflation) less 0.5% pa for non-pensioners and plus 0.1% pa for pensioners; and

mortality rates in line with those adopted for the calculation of the technical provisions, but with mortality improvements in line with the CMI_2009 core projection model subject to a long term rate of improvement of 1.5% pa for both males and females. No allowance has been made for discretionary benefits or commutation. I have also included a separate allowance for winding-up expenses amounting to £159 million, which has been calculated following the approach specified for PPF purposes.

6.17 This approach is in line with actuarial guidance which requires me to follow general principles that insurance companies are likely to use to determine ‘buy-out’ costs. The adjustments to the gilt yield described above represent an allowance for the risk that the benefits will not be met by the investments likely to be held by an insurance company and for the risk that it will not be possible to match the accrued benefits precisely. It should be noted that the figure quoted in paragraph 6.18 is an estimate of the position as at 1 April 2010 were the Trustees to have bought out the Scheme’s accrued liabilities at that date.

6.18 My estimate of the solvency of the Scheme at 1 April 2010 is that the assets of the Scheme would have met 62% of the cost of buying annuities to meet the accrued benefits at that date. The coverage for particular benefits depends on where they fall in the statutory priority order, for which four categories are identified in Appendix C. I estimate that 100% of the benefits in category 1, approximately 98% of the benefits in category 2, and no benefits in categories 3 and 4 would have been covered.

6.19 This figure is only an estimate of the position at the valuation date and should not be relied upon to indicate the position on a future winding up. Changes in market interest rates and in the supply and demand for annuities mean that no one estimate can be relied upon and the actual position at any particular point in time can be established only by completing a buy out.

6.20 The corresponding level of cover at the previous valuation was approximately 74%. The decrease in the estimated buy out cover is due mainly to the investment return achieved on the Scheme’s assets being lower than the rate that was assumed in the solvency calculations, and to the lower discount rates that have been used in 2010.

6.21 The solvency position of the Scheme is estimated to be 64% at the next valuation by reference to the assumptions described above, asset returns in line with the assumptions underlying the recovery plan and BBC contributions as set out in Section 5 above. On this basis, at the actuarial valuation due at 1 April 2013, I estimate that coverage will have improved to 100% of the benefits in categories 1, 2 and 3, and approximately 1% of the benefits in category 4.

Relationship between the technical provisions and the buy-out liabilities

6.22 If the statutory funding objective had been exactly met on 1 April 2010 (ie there had been no deficit), I estimate that the solvency of the Scheme would have been approximately 70%.


31 March 2011

Section 7: Sensitivity of the results 7.1 The assumptions used to determine the Scheme’s funding and discontinuance positions each

represent only one possible scenario of future events. To the extent that the actual experience turns out to be different from the assumptions, the financial position of the Scheme will be affected.

7.2 The results of the valuation are especially sensitive to the assumptions made regarding investment returns and longevity.

Sensitivity to investment returns

7.3 The assumed future investment returns are unlikely to be borne out precisely. The possible variation in outcomes is considerable, particularly given the substantial proportion of the assets expected to be invested in ‘return-seeking’ assets (eg equities) the value of which may not move in line with the value of the liabilities. The Trustees and the BBC should therefore be aware of the sensitivity of the results to future investment returns.

7.4 If future investment returns over the long term are lower than assumed then, other things being equal, the cost of providing the benefits will be higher than calculated in this valuation, which means that unless contributions are adjusted to reflect the experience, the funding position of the Scheme will fall short of the expected position.

7.5 To illustrate this we have considered the following examples:

If bond yields at the valuation date had been lower by 0.5% pa, with an appropriate reduction in the discount rate but with no change to the market value of assets; or

If the value of the return-seeking investments, such as equities and property fell by 20%, assuming no movement in the value of the other assets held, but allowing for an appropriate increase to the assumed discount rates for determining the technical provisions.

Technical provisions Actual position at 1 April 2010

Position assuming 0.5% pa fall

in bond yields

Position assuming 20% fall in equity

and property values

Funding level 88% 83% 78% Surplus/(Deficit) £m (1,131) (1,651) (1,952)

7.6 The sensitivity of the solvency position to the same changes in market conditions is illustrated below.

Estimated solvency position

Actual estimated solvency position

Position assuming 0.5% fall

in bond yields

Position assuming 20% fall in equity

and property values

Funding level 62% 55% 53% Surplus/(Deficit) £m (5,113) (6,666) (6,337)



7.7 The above illustrations are not intended to provide a lower limit to the possible funding levels. The Trustees have also considered the results of an Asset Liability Modelling study as at 1 April 2010, which illustrates a range of possible outcomes and the possible downside risks associated with the current and alternative investment strategies.

Sensitivity to mortality experience

7.8 The future financial position of the Scheme could also be susceptible to future variations in the mortality experience of its pensioners relative to the assumptions adopted for valuation purposes. By means of example, if I were to assume that the life expectancy of each Scheme member was one year longer than implied by the current ongoing funding assumptions, I estimate that the funding level compared to the technical provisions would fall from around 88% to approximately 85%, and the joint (post change) future service contribution rate as at 1 April 2010 would increase from 22.5% to approximately 23.1% of Pensionable Salaries.

7.9 Allowance for future improvements to future life expectancy could also be made by assuming a higher minimum rate of improvement in mortality rates. For example, if the mortality basis used in the calculation of the technical provisions included a long-term rate of improvement in mortality rates that is 0.25% pa higher (ie 1.75% pa for males and 1.25% pa for females), the Scheme’s funding level would fall by around 1%. This would add around 0.4 years to the life expectancy of a member currently aged 60 and around 0.8-0.9 years to the life expectancy of a member aged 60 in 20 years time.

7.10 Greater long-term rates of improvement would reduce the funding level further, the reduction being greater than linear.


31 March 2011

Appendix A: Summary of Scheme benefits The Scheme is a registered Scheme under the new tax regime for pensions. The main provisions of the Scheme for Old Benefits members, New Benefits members and Career Average Benefits members (CAB 2006 for joiners between 1 November 2006 and 30 November 2010, and CAB 2011 for those opting into that section between 1 April 2011 and 31 December 2011), as they applied at the valuation date (or date of introduction for CAB 2011), are summarised below. The Scheme has retained many of the pre-6 April 2006 limits on benefits and contributions. Old and New Benefits members are contracted out of the State Second Pension.

Old Benefits members (joiners before 1 October 1996)

Normal Retirement Date (NRD): 60th birthday for men and women

Pensionable Salary: Basic salary including London Weighting but excluding other non-consolidated allowances. Increases to Pensionable Salary from April 2011 are limited to 1% pa.

Final Pensionable Salary: Pensionable Salary, as above, earned in the twelve months immediately preceding retirement or leaving service.

Pensionable Service: Service as a contributing member (in years and days) plus any service credit granted, and any purchased added years.

Retirement at NRD: A pension equal to one-sixtieth of Final Pensionable Salary for each year of Pensionable Service.

Retirement before NRD, on grounds of ill-health:

An immediate pension calculated as for retirement at NRD but based on Pensionable Service uplifted to 24 years (subject to a maximum of the period which would have been completed by NRD), or to the period which would have been completed by NRD, depending on the severity of ill health.

Retirement before NRD, not on grounds of ill-health:

On voluntary early retirement, after age 55, a pension calculated as for retirement at NRD but reduced for early payment.

Lump Sum at Retirement: On retirement part of the pension may be exchanged for a lump sum.

Death after Retirement: A dependant's pension equal to two-thirds of the pension which would have been in payment at the date of death assuming no pension was commuted or surrendered at retirement. If death occurs within five years of the pension starting then a lump sum payment will be made equal to the balance of the pension payments for the five year period. Children's allowances are also paid.



Death in Service: A lump sum of 4 times Pensionable Salary at the date of death, plus a refund of member’s contributions accumulated with interest. A dependant's pension equal to two-thirds of the pension which the member would have received on retirement at NRD based on Final Pensionable Salaries at the date of death. Children's allowances are also paid.

Leaving Service: A pension payable from NRD based on Final Pensionable Salary and Pensionable Service at the date of leaving. In addition, the appropriate dependants' pensions are payable on death before or after retirement. If no dependant's pension is payable on death before retirement then a lump sum is payable equal to five times the member's deferred pension at date of death.

Pension Increases: Pensions in payment and deferred pensions are reviewed at each 1 April and are guaranteed under the Rules to be increased in line with the rise in the Retail Prices Index (RPI) up to a limit of 10% pa.

Contributions: Members' normal contributions are currently 7.5% of Pensionable Salary. Members may also pay additional voluntary contributions to purchase additional Pensionable Service. Further facilities exist to pay contributions to certain external providers. A matching contribution is made by the BBC in respect of certain allowances under the AVC Plus arrangements.

New Benefits members (joiners between 1 October 1996 and 31 October 2006)

Normal Retirement Date (NRD): 60th birthday for men and women.

Pensionable Salary: Basic salary including London Weighting but excluding other non-consolidated allowances. Increases to Pensionable Salary from April 2011 are limited to 1% pa.

Final Pensionable Salary: Pensionable Salary, as above, earned in the twelve months immediately preceding retirement or leaving service.

Pensionable Service: Service as a contributing member (in years and days) plus any service credit granted.

Retirement at NRD: A pension equal to one-sixtieth of Final Pensionable Salary for each year of Pensionable Service.


An immediate pension calculated as for retirement at NRD. With two or more years' continuous Pensionable Service, based on Pensionable Service uplifted by either half or all of the period between early retirement and age 60, depending upon the severity of ill health.


31 March 2011


On voluntary early retirement, after age 55, a pension calculated as for retirement at NRD but reduced for early payment.


Death after Retirement: A dependant's pension equal to half of the pension which would have been in payment at the date of death assuming no pension was commuted or surrendered at retirement. If death occurs within five years of the pension starting then a lump sum payment will be made equal to the balance of the pension payments for the five year period. Children's allowances are also paid.

Death in Service: A lump sum of 4 times Pensionable Salary at the date of death.

A dependant's pension equal to half of the pension which the member would have received on retirement at NRD based on Final Pensionable Salary at the date of death. Children's allowances are also paid.

Leaving Service: A pension payable from NRD based on Final Pensionable Salary and Pensionable Service at the date of leaving. In addition, the appropriate dependants' pensions are payable on death before or after retirement. If no dependant's pension is payable on death before retirement then a lump sum is payable equal to five times the member's deferred pension at date of death.

Pension Increases: Pensions in payment and deferred pensions are reviewed at each 1 April and are guaranteed under the Rules to be increased in line with the rise in the Retail Prices Index (RPI) up to a limit of 5% pa.

Contributions: Members' normal contributions are currently 7.5% of Pensionable Salary. Members may also pay additional voluntary contributions to certain external providers.



Career Average Benefits 2006 members (joiners between 1 November 2006 and 30 November 2010)


Pensionable Salary: Basic salary plus any other earnings that the BBC decides are pensionable, subject to a Scheme-specific earnings cap. Increases to Pensionable Salary from April 2011 are limited to 1% pa.

Pensionable Service: Service as a contributing member (in years and days).

Scale Pension: The Scale Pension accrues at the rate of 1.67% of Pensionable Salary received in each Scheme Year whilst in Pensionable Service. At the end of each subsequent Scheme Year, the accrued pension to date may, but need not, be increased prior to retirement in line with price inflation (to date this has been in line with RPI).

Scheme Year: The Scheme Year commences on 1 April and ends on the following 31 March.

Retirement at NRD: The Scale Pension is payable.


An immediate pension calculated as for retirement at NRD. With less than two years’ continuous Pensionable Service the Scale Pension will be reduced for early payment. With two or more years’ continuous Pensionable Service, the Scale Pension will be paid without reduction and may be enhanced (depending on the severity of ill health) by the additional Scale Pension that would have built up had Pensionable Service continued to NRD with Pensionable Salary unchanged, and had no further discretionary revaluation applied.


On voluntary early retirement, after age 55, the Scale Pension calculated as for retirement at NRD but reduced for early payment.


Death after Retirement: A dependant’s pension equal to half of the pension which would have been in payment at the date of death assuming no pension was commuted or surrendered at retirement. Children’s allowances are also paid.

Death in Service: A lump sum of 4 times Pensionable Salary at the date of death. A dependant's pension equal to half of the pension which the member would have received had he or she retired at the date of death with a fully enhanced ill health pension. Children's allowances are also paid.


31 March 2011

Leaving Service: If less than two years’ Pensionable Service has been completed, members will receive a refund of any contributions paid whilst not participating in the salary sacrifice arrangement, plus interest, less tax (or equivalent transfer value). Otherwise a pension payable at NRD based on the Scale Pension at the date of leaving. In addition, the appropriate dependants’ pensions are payable on death before or after retirement.

Pension Increases: Pensions in payment are reviewed at each 1 April and are guaranteed under the Rules to be increased in line with the rise in the Retail Prices Index (RPI) up to a limit of 2.5% pa.

Contributions Members’ normal contributions are currently 4% of Pensionable Salary (although the Rules provide for contributions up to 6% of Pensionable Salary). Contributions are normally made via a salary sacrifice arrangement.

Career Average Benefits 2011 members (Active members who opt for this section in 2011)


Pensionable Salary: Basic salary plus any other earnings that the BBC decides are pensionable, subject to a CAB 2011-specific earnings cap.

Pensionable Service: Service as a contributing member (in years and days).

Scale Pension: The Scale Pension accrues at the rate of 1.67% of Pensionable Salary received in each Scheme Year whilst in Pensionable Service. At the end of each subsequent Scheme Year, the accrued pension to date may, but need not, be increased prior to retirement in line with the rise in the Consumer Prices Index (CPI) up to a limit of 4% pa.

Scheme Year: The Scheme Year commences on 1 April and ends on the following 31 March.

Retirement at NRD: The Scale Pension is payable.


An immediate pension calculated as for retirement at NRD. With less than two years’ continuous Pensionable Service the Scale Pension will be reduced for early payment. With two or more years’ continuous Pensionable Service, the Scale Pension will be paid without reduction and may be enhanced (depending on the severity of ill health) by the additional Scale Pension that would have built up had Pensionable Service continued to NRD with Pensionable Salary unchanged, and had no further discretionary revaluation applied.


On voluntary early retirement, after age 55, the Scale Pension calculated as for retirement at NRD but reduced for early payment.




Death after Retirement: A dependant’s pension equal to half of the pension which would have been in payment at the date of death assuming no pension was commuted or surrendered at retirement. Children’s allowances are also paid.

Death in Service of an Active Member: A lump sum of 4 times Pensionable Salary at the date of death, less any cash sum the member has previously commuted from the Scheme or received as a death in deferment benefit from the Old or New Benefits section. A dependant's pension equal to half of the pension which the member would have received had he or she retired at the date of death with a fully enhanced ill health pension. Children's allowances are also paid.

Leaving Service: If less than two years’ Pensionable Service has been completed, members will receive a refund of any contributions paid whilst not participating in the salary sacrifice arrangement, plus interest, less tax (or equivalent transfer value). Otherwise a pension payable at NRD based on the Scale Pension at the date of leaving. In addition, the appropriate dependants’ pensions are payable on death before or after retirement.

Pension Increases: Pensions in payment are reviewed at each 1 April and are guaranteed under the Rules to be increased in line with the rise in the Consumer Prices Index (CPI) up to a limit of 4% pa.

Contributions Members’ normal contributions are currently 6% of Pensionable Salary. Contributions are normally made via a salary sacrifice arrangement.

Note: The above is an outline of the main provisions, as they applied at the valuation date, and does not override the more detailed provisions set out in the Trust Deed and Rules.


31 March 2011

Appendix B: The information supplied The information supplied to us for the purposes of the valuation is summarised below; the corresponding 2007 figures are shown for comparative purposes.

Membership data at this and the previous valuation date

1 April 2010 1 April 2007 Contributors Number 17,592 19,820 Total salaries+ £704.5m £745.2m Average salary £40,044 £37,599 Pensioners Number 18,772 17,355 Total annual pensions £255.9m £219.8m Average annual pension £13,634 £12,662 Widows and Widowers Number 3,683 3,513 Total annual pensions £35.37m £30.85m Average annual pension £9,603 £8,782 Children Number 236 230 Total annual allowances £1,003,400 £900,900 Average annual allowances £4,252 £3,917 Deferred Pensioners Number 19,043 17,829 Total annual deferred pensions* £79.50m £69.95m Average annual deferred pension £4,175 £3,923

+ Total salaries include full-time equivalent salaries for part-time members and are before application of the Scheme earnings cap.

* Deferred pensions are as at the valuation date; at 1 April 2007, the pensions in respect of the ‘BBC IT Scotland’ members and the ‘HR Outsourcing’ members are included.



Consolidated Revenue Account for period 1 April 2007 to 31 March 2010

£m’s £m’s Fund at market value at 1 April 2007 8,205.2 Income BBC’s contributions 585.3 Members’ contributions 57.1 Members’ Additional Voluntary Contributions 16.9 Investment income 650.5 Transfers into the Scheme 6.8 Total income 1,316.6 Expenditure Pensions 803.6 Lump sum retirement benefits 72.0 Lump sum death benefits 7.7 Lump sum AVC benefits 24.3 Payments in respect of members leaving the Scheme 25.3 Administration expenses 16.0 Investment expenses 96.7 Total expenditure 1,045.6 Realised and unrealised depreciation in investments 243.2 Fund at market value at 31 March 2010 8,233.0

Distribution of Assets including AVCs

According to the audited accounts supplied as at 31 March 2010, the total assets of the Scheme amounted to £8,233.0 million. The table below shows how these assets were invested, along with the distribution of the assets at 31 March 2007.

Market value as at 31 March 2010

Market value as at 31 March 2007

£m % £m % UK equities 2,077.1 25.2 3,021.7 36.8 Overseas equities 2,495.4 30.3 2,842.6 34.7 Fixed interest and index-linked bonds 1,826.1 22.2 1,036.7 12.6 Property 787.3 9.6 981.4 12.0 Futures and Alternatives 718.3 8.7 11.4 0.1 AVCs 78.2 0.9 76.9 0.9 Cash/Net current assets 250.6 3.1 234.5 2.9 Total 8,233.0 100.0 8,205.2 100.0

The market value at 31 March 2007 excludes the payment of £24.5 million by the BBC on 30 March 2007 (the payment is included as both cash and a debtor, the net effect of which on the assets is zero at 31 March 2007).


31 March 2011

Appendix C: Summary of relevant legislation Pensions Act 2004 (and associated regulations)

Prior to the 1 April 2007 valuation the Government enacted the Pensions Act 2004, which introduced new requirements on the funding of UK defined benefit pension arrangements and several other measures that affect the Scheme.

Scheme funding

The Pensions Act 2004 replaced the prescriptive statutory funding test (the Minimum Funding Requirement) with a scheme-specific standard for actuarial funding valuations with an effective date on or after 22 September 2005. The legislation was supplemented with regulations and Regulatory codes of practice. Central to the new funding regime are:

Statutory funding objective – this is a requirement that the Scheme has sufficient and appropriate assets to meet its technical provisions. The technical provisions mean the Actuary’s assessment, calculated on the scheme-specific assumptions determined by the Trustees, of the amount required to meet the Scheme’s liabilities as they fall due.

Statement of Funding Principles: this is a document prepared by the Trustees which must set out its policy for ensuring that the statutory funding objective is met. That is, it must in particular set out the Trustees’ choice of methods and assumptions for determining the Scheme’s technical provisions, after taking account of advice from the Actuary. The regulations require the Trustees to reach agreement with the BBC on the content of the Statement of Funding Principles.

The principal purpose of the actuarial valuation is to assess whether the Scheme meets its technical provisions at the effective date of the valuation, based upon the method and assumptions specified in the Statement of Funding Principles. The Actuary has to certify that the calculation of the technical provisions at the valuation was in accordance with the prescribed requirements.

It is important to note that the legislation does not require schemes to fund at a level sufficient to meet the buy out cost of the liabilities, or even the buy out cost of the ‘protected liabilities’ under the Pension Protection Fund. The Trustees are required, however, to obtain the Actuary’s estimate of the Scheme’s solvency position at the effective date of the valuation.

If the valuation reveals that the Scheme does not have sufficient assets to cover its technical provisions, the Trustees are required to prepare a recovery plan to bring the Scheme back to full funding (ie sufficient assets to cover the technical provisions) over a certain time frame. The recovery plan must be based upon advice from the Actuary and have regard to the nature and circumstances of the Scheme. It must also be agreed with the BBC.

On receiving the report on the actuarial valuation, the Trustees and the BBC must agree a schedule of contributions, which specifies the contributions to be paid to the Scheme by the members and the BBC and the dates by which they are required to be paid. This schedule must be agreed with the BBC and must be certified by the Actuary.



In addition, for the BBC Pension Scheme, the Actuary’s certificate must include a statement that the contributions to be paid are not lower than those which the Actuary would have provided for if he or she, rather than the Trustees with the agreement of the BBC, had the responsibility for setting them. This is a consequence of the interaction of the Pensions Act 2004 with the provisions of Rule 3.4, in which prior to the 2007 valuation the Actuary was responsible for setting the contribution rate.

Pension Protection Fund (PPF)

The Pensions Act 2004 introduced the Pension Protection Fund with effect from 6 April 2005. The PPF is intended to ensure that members of private sector occupational defined benefit pension schemes can be assured that they will receive a certain level of compensation if their employer’s business fails. That is, on an insolvency event of the employer a pension scheme will be assessed for possible admission to the PPF and if it meets prescribed criteria (in particular, but not limited to, the scheme having insufficient assets to secure the minimum level of benefits on a prescribed actuarial basis) then the PPF will absorb the Scheme’s assets and provide compensation to members currently as described below:

For non-pensioner members younger than normal pension age: a deferred pension equal to 90% of the pension built up to date, subject to a maximum amount and payable from normal pension date;

For non-pensioner members over normal pension age: the full deferred pension;

For pensioners younger than normal pension age who retired in normal health: 90% of the pension in payment subject to a maximum amount which varies by age;

For other pensioners and dependants the pension in payment;

Deferred pensions are increased in line with Retail Price Inflation* (capped at 5% a year or 2.5% for benefits accrued after 5 April 2009) between the assessment date and normal pension age;

Pensions built up before 6 April 1997 will receive no increases in payment. Pensions built up on or after that date will increase in line with Retail Price Inflation* (capped at 2.5% a year);

Survivor benefits are provided if they were provided under the Scheme Rules.

* expected to change to Consumer Price Inflation (CPI)

In the above, normal pension age is essentially the earliest age at which members can receive an unreduced pension under the scheme rules (which is age 60 for Old Benefits and New Benefits members and age 65 for CAB 2006 and 2011 members).

Consequently, the PPF does not in general provide compensation at the same level as the benefits provided by the Scheme.

The PPF is funded through a combination of scheme-based and risk-based levies on UK occupational defined benefit pension schemes; although in the event of it having insufficient funds to meet its liabilities it can decide to reduce the compensation payments. In order for the PPF Board to calculate levies for individual schemes, pension scheme trustees are required under Section 179 of the Pensions Act 2004 to submit routinely an assessment of their scheme’s discontinuance position, based on assumptions specified by the PPF Board and accrued benefit entitlements in a similar form to the compensation payments that would be provided by the PPF.


31 March 2011

The Government established the PPF Board to oversee the fund and also to collect annual levies from defined benefit schemes to finance its liabilities and its running costs. The government also introduced the Pensions Regulator, one of whose roles is to protect the PPF.

Statutory priority orders

Since 6 April 2005, on winding up a scheme, the scheme’s benefits must be secured in broadly the following order of priority (after allowing for expenses and any potential debts to third parties):

category 1 – benefits relating to certain pension annuities secured by the Scheme before 6 April 1997;

category 2 – the cost to the Scheme of securing the liabilities for pensions and other accrued benefits that would be payable by the PPF (if the Scheme were eligible for entry to the PPF);

category 3 – benefits in respect of defined benefit AVCs not already covered above (money purchase liabilities are to be excluded from the priority order and should therefore normally be secured in full);

category 4 – all other pensions and benefits provided by the Scheme, including pension increases (where these exceed those under the PPF).

Other

The Pensions Act 2004 introduced a number of other measures, including:

For benefits built up after 5 April 2005, the statutory minimum annual increase to pensions in payment is Retail Price Inflation subject to a cap of 2.5% a year. The rules of the Scheme currently provide a higher minimum increase to pensions in payment for Old Benefits and New Benefits members.

There were a number of measures relating to the pensions aspects of commercial transactions and business reorganisations.

There were minor modifications to the provisions covering contracted-out rights.

Finance Act 2004

In essence this Act and associated Regulations were intended to simplify the entire taxation framework for UK pensions. From 6 April 2006 the former Inland Revenue maximum limits on benefits payable from approved pension schemes were replaced by a system of tax “allowances” by the new HMRC. More specifically:

Members can receive any amount of benefit from a registered occupational pension scheme. However, if the benefits provided have a value higher than a specified amount (the ‘Lifetime Allowance’, £1.8 million for 2010/11) then the excess value over the Lifetime Allowance is subject to additional tax.

The value of benefits for the purpose of comparing with the Lifetime Allowance is calculated as 20 times the pension provided plus the face value of the cash sum provided. Benefits provided from money purchase arrangements are based upon the fund value.

Cash sums at retirement are restricted to 25% of the value of the member’s benefits.



If the assessed value of benefit accrual in and contributions to tax-advantaged pension arrangements for an individual exceed an Annual Allowance (of £255,000 a year for 2010/11), the excess is subject to a special tax charge.

Dependants’ pensions are not tested against the Lifetime Allowance, but lump sums provided to dependants are tested against the member’s unused allowance

The technical details of benefits that can be provided as ‘authorised benefits’ from a tax-advantaged pension arrangement were specified.

The statutory surplus test was abolished.

The minimum age at which members may retire early increased from age 50 to age 55 from 6 April 2010.

Transitional arrangements were introduced for cases where the new requirements would adversely impact a member’s benefits compared to pre-6 April 2006 limits.

Note that the restrictions on benefits and contributions that applied prior to 6 April 2006 have been retained within the Scheme.

Pensions Act 2008

For benefits built up after 5 April 2009, the statutory minimum annual revaluation to be applied to pensions in deferment is Retail Price Inflation subject to a cap of 2.5% pa over the whole period of deferment.

Change from RPI to CPI

In the Budget on 22 June 2010, the Chancellor announced that Consumer Price Inflation (CPI) would replace Retail Price Inflation (RPI) for the uprating of most social security benefits from April 2011. This change would also affect payments from second-tier state pensions and public sector pensions, and would apply to benefits already accrued as well as to future service.

Separately, the Government confirmed that the Basic State Pension will, from now on, be uprated by the higher of average earnings growth, CPI inflation1 and 2.5%.

On 8 July 2010, the Minister of State for Pensions confirmed in a written statement that various changes to practice and legislation would be implemented to achieve a similar effect in relation to minimum mandatory increases under occupational pension schemes (and also to PPF benefits).

The effect of these changes on the Scheme is minimal, as in most cases use of RPI for increases is “hard coded” into the Rules.

Finance Bill 2011 (pension tax relief) - draft

The Annual Allowance will be reduced to £50,000 from April 2011 and a flat factor of 16 will be used to value defined benefit (DB) rights. There will be an exemption from the charge where a member suffers from serious ill health.

1 Though RPI inflation will be used for the increase in 2011


31 March 2011

The LTA will be reduced to £1.5 million from 6 April 2012 and there are no plans for its automatic indexation. DB rights are expected to continue to be valued using a 20:1 factor.

Individuals with A-day protection (before 6 April 2006) will retain that protection by reference to £1.8 million. Individuals whose benefits are not currently protected will be able to retain a £1.8 million standard LTA if they opt-out fully from future pension provision and claim protection. Individuals who do not do so will be subject to the reduced LTA of £1.5 million even if their benefit value at 5 April 2012 exceeds that amount.

Increase in State pension age

Under the Pensions Act 2007, the SPA for both sexes was set to rise from 65 to 66 between 2024 and 2026. The DWP has confirmed that the SPA will rise to 66 for both men and women by 2020, which means the increase will now take place six years earlier than planned. The increase from age 65 to 66 will be phased in between December 2018 and April 2020, with the SPA rising by three months in every four.

For women, whose SPA is currently being increased from 60 to 65, the rate of increase will quicken from April 2016 so that the SPA reaches age 65 in November 2018.

The Government is also considering further increases to the SPA to address the challenges posed by increasing longevity, and will bring forward proposals in due course.

New flexibility for annuity purchase

From 6 April 2011, individuals with a lifetime pension income of at least £20,000 a year will be able to gain access to their money purchase pension funds under new rules from HM Treasury. There will be no cap on the level of withdrawals that these individuals can make – a process to be known as ‘flexible drawdown’. For individuals who do not have this level of income, the maximum withdrawal that they may make from their pension funds will be capped at 100% of the equivalent annuity that could be bought with the fund value. The amounts will be determined every three years prior to age 75 and annually thereafter, and there will be no minimum amount.

The effective requirement to buy an annuity by age 75 will be abolished, allowing individuals to defer annuity purchase indefinitely. Most of the rules preventing schemes paying individuals lump sum benefits after age 75 will also be removed, including payment of a tax-free lump sum on retirement.

Individuals who wish to have full access to their funds will need to provide evidence that they are in receipt of a minimum level of relevant income – known as the ‘minimum income requirement’ (MIR) - of at least £20,000 a year. Income from State Pensions, defined benefit (DB) pensions and annuities will count towards the MIR, as will income from certain overseas pension schemes in which individuals have benefited from UK tax relief. There will be no automatic indexation of the MIR, although the Treasury will review it at least every five years.



Where an individual wants to use flexible drawdown, no further pensions savings can be made in the tax year in which they declare that they have sufficient income to meet the MIR. Any pension contributions made in a subsequent tax year will be subject to the annual allowance charge, without benefiting from the £50,000 annual allowance.


31 March 2011

Appendix D: Statement of Funding Principles This appendix includes extracts from the SFP, which was signed by the Trustees on 23 March 2011.

Statement of Funding Principles for the BBC Pension Scheme

1. Introduction

This statement has been prepared by the Trustees of the BBC Pension Scheme (the Scheme) to satisfy the requirements of Section 223 of the Pensions Act 2004, after taking account of the advice of the Actuary1. It has been agreed with the British Broadcasting Corporation (the BBC). Together with the statement of investment principles it sets out how the Scheme’s technical provisions2 are calculated and how the Trustees expect to meet the statutory funding objective3.

Regular valuations are obtained by the Trustees to check whether the statutory funding objective has been met. The results of each valuation form the basis for decisions about future contributions to the Scheme, including whether a recovery plan is needed to restore funding to the level of the technical provisions.

This statement relates to the actuarial valuation as at 1 April 2010, and supersedes the statement dated 13 May 2008.

2. Technical Provisions

Method

The method chosen to calculate the technical provisions is known as the projected unit method4, which is the same as that used for the 2007 valuation. It aggregates the present capital value of prospective benefits on the effective date of the valuation for:

pensioners, deferred pensioners and their dependants, allowing for future increases in pensions in payment and prospective pensions; and

active members in respect of past service, allowing for increases in projected pensionable salaries up to their assumed exit date and for pension increases thereafter.

Assumptions

In addition:

the discount rates used to calculate the capital value of future cashflows will be prudent estimates of the investment returns expected to be achieved on a notional portfolio of assets supporting the liabilities;

the remaining financial assumptions, in particular future price inflation, will take into account information available in respect of financial markets at the effective date of the valuation; and

1 “The Actuary” is the actuary appointed under rule 15.1 of the Scheme and is currently Alison Blay FIA of Towers Watson Ltd. 2 The Pensions Act 2004 defines “technical provisions” as the amount required to make provision for a pension scheme’s liabilities, as assessed under an actuarial valuation. 3 The “statutory funding objective” is that every pension scheme should have sufficient and appropriate assets to cover its technical provisions. 4 The projected unit method is so called because it allows for all projected increases in benefits, and because the f uture service contribution rate relates to the cost of one additional year of accrual.



statistical assumptions will have regard to an analysis of recent changes in the Scheme membership as well as relevant statistics applicable to similar pension schemes, and the views of the Trustees and the BBC about how these may change in future.

In setting the financial assumptions, the Trustees may assume that the Scheme will be able to capture part of the investment premium from return-seeking assets held by the Scheme. They acknowledge that the additional return is not guaranteed, and it may be necessary to request further contributions if investment performance is worse than expected.

Taken together, the assumptions adopted at a particular date will be prudent and consistent with the Trustees’ chosen level of confidence that the technical provisions will prove adequate to meet accrued benefits as they fall due, without the need for further contributions.

In choosing the assumptions the Trustees will take account of advice from the Actuary and reach agreement with the BBC.

The main financial and statistical assumptions (including sample rates) adopted for the 2010 valuation are shown in the appendix to this statement.

Funding strategy concerning discretionary benefits and discretionary increases

No allowance has been made for advance funding of discretionary benefits or increases, other than as detailed in the appendix.

Expenses

Investment management costs are assumed to be met out of future investment income. The valuation discount rates are therefore net of such costs. Administrative and other non-investment expenses are met from the Scheme, excluding pension protection fund levies. A reserve is included in the technical provisions in respect of administration expenses.

3. Eliminating a shortfall

Any funding shortfall identified by an actuarial valuation will be eliminated as quickly as the BBC can reasonably afford, by payment of additional contributions over an agreed recovery period and taking into account the expected returns on the assets held by the Scheme. When determining a recovery plan the Trustees will take into account the following factors:

size of the shortfall;

the risk that the value of the Scheme’s assets may deteriorate further against the technical provisions and against the solvency liabilities of the Scheme; and

strength of the BBC’s covenant, its business plans and any contingent security it can offer.

If there is a recovery plan in place, the period over which the shortfall will be met will be included in the appendix to this statement.

4. Frequency of actuarial valuations

In the normal course of events the Trustees will request valuations at intervals of three years. In the intervening years the Actuary will provide a report on the estimated financial position of the Scheme relative to the statutory funding objective.

The Trustees can request a formal valuation at any date. Before doing so they will seek advice from the Actuary and consult the BBC.


31 March 2011

5. Arrangements for other parties to contribute to the Scheme

There are no arrangements for persons other than Participating Employers1 and active members to contribute to the Scheme.

6. Paying funding surpluses to Participating Employers

Scheme rules limit the circumstances in which surplus can be transferred to Participating Employers. In broad terms, it can only happen on winding up, after members' benefits have been secured in full with an insurance company, and subject to the power the Trustees have to augment benefits up to Scheme limits.

7. Cash equivalent transfers

At each valuation the Trustees ask the Actuary to advise them whether the Scheme’s assets are sufficient to provide cash equivalent transfers, based on the method and assumptions currently used, for all active members and deferred pensioners without prejudicing the benefits of pensioners and other prospective beneficiaries (also measured on a cash equivalent basis). Provided the Actuary is able to give them such an assurance, it is their policy not to reduce cash equivalent transfers paid to members.

8. Dates of review of this statement

This statement will be reviewed and if necessary revised:

within 15 months after the effective date of each actuarial valuation; or

within a reasonable period after the pensions regulator has used its powers to: modify future accrual in the Scheme; stipulate how the Scheme’s technical provisions are to be calculated; determine the length of a recovery plan; or impose a schedule of contributions. At the effective date of this statement the pensions regulator had not used any such powers against the Scheme; or

at any other time the Trustees judge it to be necessary.

1 “Participating Employers” means the BBC and any associated employer that has entered into a covenant with the Trustees to observe and perform the provisions of the BBC Pension Scheme. Participating Employers are listed in the Scheme’s annual report and accounts.



Appendix

Technical Provisions

Having taken into account the advice of the Actuary (which will be summarised in the formal report), the Trustees and the BBC have agreed the following assumptions for the valuation as at 1 April 2010:

Financial assumptions

In setting the discount rates, a notional portfolio of assets has been assumed comprising:

100% return-seeking assets in respect of liabilities for active members and deferred pensioners in the period prior to retirement (the ‘pre-retirement discount rate’); and

20% return-seeking assets and 80% bonds in respect of liabilities for current and future pensioners (the ‘post-retirement discount rate’).

% pa Price inflation (Retail Prices Index) 3.7 Price inflation (Consumer Prices Index) 3.2 Career Average Benefits 2006 (CAB 2006) revaluation 3.7 Career Average Benefits 2011 (CAB 2011) revaluation 3.0 Pension increases - Old Benefits 3.7 - New Benefits 3.5 - CAB 2006 2.4 - CAB 2011 3.0 Pay increases (including promotional allowance) allowing for benefit changes in 2011

1.0

Discount rates - pre-retirement 6.8 - post-retirement 5.2

The confidence levels associated with the pre- and post-retirement discount rates are around 65% and 69% respectively by reference to the Towers Watson Investment Model (measured over a 10 year period).

Demographic assumptions as at 1 April 2010

See Schedule A to this Appendix.

Funding strategy concerning discretionary benefits and discretionary increases

Allowance is made for CAB 2006 accrued pensions to increase up to retirement or death, if earlier, in line with the Retail Prices Index, subject to a minimum of 0% in each year.

Allowance is made for CAB 2011 accrued pensions to increase up to retirement or death, if earlier, in line with the Consumer Prices Index, subject to a minimum of 0% and a maximum of 4% in each year.


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Active members can retire voluntarily before normal retirement age with the consent of the BBC. The reductions applied to their pensions are determined by the Trustees and the BBC, having consulted the Actuary. The Actuary has made an allowance for a number of active members to retire each year from age 55 onwards to take account of these terms - see schedule A attached to the appendix. Old and New Benefits deferred pensioners are assumed to retire at age 60, but an additional allowance is included for the value of the favourable early retirement terms available to some members who were made redundant.

A member may be given an ill-health pension with the consent of the BBC, based on suitable medical evidence as to his or her state of health. This is on enhanced terms and the allowance made by the Actuary in her calculations is based on the experience of the Scheme.

Expenses

An allowance of £100m is included in the technical provisions in respect of administrative and other non-investment related expenses. The BBC is responsible for paying the pension protection fund levies.

Eliminating a shortfall

The funding payments to meet the shortfall identified as at 1 April 2010 result in a recovery period of 11 years, measured from the valuation date.



Schedule A to Appendix – Demographic assumptions as at 1 April 2010

Demographic assumptions

In service – specimen rates per 1,000 members at each age

Old and New Benefits members

Withdrawal Rates Mortality Rates Ill-health Retirement Rates

Age Men Women Men Women Men Women 25 30 35 40 45 50 55 60

106 90 72 55 31

- - -

128 108 87 66 39

- - -

- - - 1 1 2 3 -

- - - 1 1 1 2 -

- - - - 1 2 4 -

- - - 1 1 2 4 -

There is no allowance for the Old and New Benefits members to retire before age 55, other than due to ill health. Ten percent of members at age 55 and above are assumed to take early retirement each year. As the Scheme’s early retirement terms are changing to cost-neutral for retirements from 1 April 2015, active members who are expected to take early retirement before that date have been valued using the pre-6 April 2010 terms, and those expected to retire after that date have been valued using the current cost-neutral terms.

Career Average Benefits (2006 and 2011) members*

Withdrawal Rates Mortality Rates Ill-health Retirement Rates

Age Men Women Men Women Men Women 25 30 35 40 45 50 55 60 65

123 106 90 72 55 31

- - -

147 128 108 87 66 39

- - -

- - - 1 1 2 3 6 -

- - - 1 1 1 2 4 -

- - - - 1 2 4 7 -

- - - 1 1 2 4 9 -

* There is no allowance for Career Average Benefits members to retire before age 65, other than due to ill-health, because it is assumed that early retirements are on actuarially neutral terms.

All members

All members in service on or after Normal Retirement Age are assumed to retire immediately.


31 March 2011

Mortality assumptions for all members

Base tables: The subset of the standard “S1” series of tables, published by the CMI1, relating to the experience of Self Administered Pension Schemes, for All Pensioners with higher pension amounts (ie the “Light” tables) have been used for males and females, with the following multipliers:

Active members' post-retirement mortality Retiring in normal health Retiring on incapacity grounds

90% 150%

Pensioners and Dependants 90% Deferred Pensioners 90%

The above base tables and multipliers are applied at the valuation date with future mortality improvements from 1 April 2010, based on the CMI 2009 Core Mortality Projection Model with a long-term rate of improvement of 1.5% pa for males and 1.0% pa for females. Overall, the allowance for future improvements in mortality for the 2010 valuation is not less than the “medium cohort” projection with a minimum improvement of 1% pa (the previous statement of funding principles dated 13 May 2008 refers).

An allowance has been made for 40% of members to commute between 25% and 30% of their pension on retirement, by reference to the financial and demographic assumptions at 1 April 2010 and current commutation terms.

The age difference between members and adult dependants (male - female) is assumed to be 3 years.

The proportion of members assumed to have an adult dependant depends on age at retirement. It is 80% for males and 70% for females at age 60 for current pensioners and 93% for males and 80% for females at age 60 for active members and deferred pensioners. These assumptions include an allowance for pensions to be paid to discretionary dependants.

Assumptions regarding pension scheme changes

Background: Following consultation with members, the BBC is limiting pensionable salary increases to a maximum of 1% pa in future years for Old Benefits, New Benefits, and CAB 2006 members. Current scheme members in service may opt to leave the Scheme and join LifePlan (a separate defined contribution scheme) at any time. They also have a limited period in which to move from their current section to the new CAB 2011 section for future service. If members opt out of their current section, their past service benefits accrued to the date of change will be treated as if they become deferred pensioners in their current section at the date of opting out.

Assumptions: For the purpose of the 2010 valuation, it has been assumed that around 40% of members opt to leave their current section and join either LifePlan or the CAB 2011 section. Around a quarter of those opting out are assumed to join LifePlan, and the remaining three quarters are assumed to join CAB 2011.

1 The Continuous Mortality Investigation of the actuarial profession



The proportions of active members assumed to opt out for the purposes of the 2010 valuation, split by current section, age group and options assumed to be chosen, are summarised in the tables below.

Old Benefits section

Remain in current section

Move to LifePlan

Move to CAB 2011 section

Under 45s 46% 0% 54% 45 – 54 year olds 54% 0% 46% 55 and over 66% 0% 34% Total Old Benefits 53% 0% 47%

New Benefits section


Move to LifePlan


Under 35s 43% 57% 0% 35 – 44 year olds 54% 6% 40% 45 – 54 year olds 66% 0% 34% 55 and over 94% 0% 6% Total New Benefits 55% 19% 26%

CAB 2006 section


Move to LifePlan


All ages 94% 0% 6%

Total Scheme membership


Move to LifePlan


Old Benefits section 53% 0% 47% New Benefits section 55% 19% 26% CAB 2006 section 94% 0% 6% Total 61% 10% 29%

Calculation method: The technical provisions for active members have been calculated as at 1 April 2010 on an individual basis; assuming firstly that all members remain in their current section and secondly that all members opt out (prior to moving to LifePlan or CAB 2011 for future service). The individual values for each of these two scenarios have then been grouped according to the current section and age group, using the same age groupings as in the tables above. Finally, the proportions assumed to select each of the three future service options, as set out in the above tables, have been applied to the grouped liabilities for the relevant scenario, taking account of the current section and age group.


31 March 2011

For example, suppose the total technical provisions for New Benefits members aged between 35 and 44 would be £100m if they all remained in their current section, and would be £140m if they all opted out. Using the proportions in the table above, the actual technical provisions for this group are calculated as:

54% of £100m, plus

6% of £140m, plus

40% of £140m

Hence the technical provisions for this group would be £118.4m.


31 March 2011

Appendix E: Statutory certificate Actuarial certification for the purposes of regulation 7(4)(a) of the Occupational Pension Schemes (Scheme Funding) Regulations 2005

Name of scheme: BBC Pension Scheme

Calculation of technical provisions

I certify that, in my opinion, the calculation of the Scheme’s technical provisions as at 1 April 2010 is made in accordance with regulations under section 222 of the Pensions Act 2004. The calculation uses a method and assumptions determined by the Trustees of the Scheme and set out in the Statement of Funding Principles dated 23 March 2011.

A J Blay Fellow of the Institute and Faculty of Actuaries 23 March 2011

Towers Watson Limited Watson House London Road Reigate Surrey RH2 9PQ UK


31 March 2011

Appendix F: Glossary This glossary describes briefly the terminology of the new regime for funding defined benefit pension schemes, as introduced by the Pensions Act 2004. Defined terms are in italics.

Actuarial report: this is a financial check carried out by the scheme actuary in between actuarial valuations to estimate the level of coverage of the technical provisions. This financial check is carried out using more approximate methods than for an actuarial valuation. The estimates are based upon the assumptions set out in the Statement of Funding Principles.

Actuarial valuation: this is a financial check carried out by the scheme actuary that assesses whether the assets are sufficient to meet the funding target. It also determines the contributions required to meet the target both in respect of benefits built up to date for all members and the benefits that are building up to employed members. The calculations are based upon a number of assumptions.

Discount rate: this is the investment return assumed to be achieved on the scheme's assets in the future. The lower the investment return assumed the more cautious the assumption.

Dual discount rate: this is an approach that takes into account a notional rebalancing of a scheme's investment policy in response to changes in the scheme membership. For example it could allow for return seeking investments (such as equities) being exchanged for liability matching assets (such as bonds) as members retire. In practice it means that different discount rates are used in the period before and after retirement.

Employer covenant: this is the ability and willingness of the sponsoring employer to support the scheme; under the new funding regime the Trustees are required to take this into consideration in making funding decisions.

Funding target/objective: this is a policy to achieve, by the end of a specified period, the minimum amount of assets expected to be sufficient to pay benefits built up to date as they fall due over the lifetime of the scheme. It is usually based on a scenario that requires assumptions to be made about the future.

Pension Protection Fund (PPF): established by the Pensions Act 2004, this provides compensation to members of an occupational scheme in the event that the scheme is wound up with insufficient assets and the employer is insolvent.

Recovery plan: this will be drawn up where an actuarial valuation discloses that the assets held are less than the technical provisions. It is a formal agreement between the Trustees and the employer that sets out the steps to be taken with the aim to ensure there are sufficient assets to cover the technical provisions at the end of an agreed period.

Schedule of contributions: this is a document that sets out the agreed contributions payable into a scheme by members and the employers and the dates by which such contributions are to be paid. It includes, but is not limited to, contributions agreed under a recovery plan.

Statement of Funding Principles: the Trustees are responsible for preparing and maintaining this document (with the agreement of the employer and taking account of the advice of the actuary). It sets out the Trustees’ policy for ensuring that the statutory funding objective is met and in particular the method for determining the assumptions for calculating the technical provisions.



Statement of Investment Principles: the Trustees are responsible for preparing and maintaining this document. It sets out the policy for investing the Scheme’s assets.

Statutory funding objective: every pension scheme is subject to the statutory funding objective, which is to have sufficient and appropriate assets to cover its technical provisions. The Trustees may establish other funding objectives in addition to the statutory funding objective.

Statutory Priority Order: this sets out the order in which the assets of a scheme should be applied in securing the benefits of different members in the event of a wind-up. In broad terms it requires that, after allowing for expenses, a scheme first secures benefits that are in line with those that would be provided by the Pension Protection Fund with any remaining assets then being used to secure any other benefits.

Summary funding statement: the Trustees must issue a statement to members following each actuarial valuation and each actuarial report to disclose the Scheme’s funding position and certain other information.

Technical provisions: this is the amount of assets required to make provision for the accrued liabilities of the Scheme. Over the lifetime of the Scheme, this amount is expected to be sufficient to pay all of the benefits built up to date as they fall due, based upon the method and assumptions set out in the Statement of Funding Principles.

The Pensions Regulator: the statutory body established with the aim to ensure the security of members’ benefits and reduce the claims for compensation from the Pension Protection Fund. As part of this role it monitors the funding plans of all occupational defined benefit schemes and has wide ranging powers to ensure these are adequate.

Wind-up: a particular method of discharging a scheme's liability to pay benefits. It typically arises where the employer no longer provides financial support to the scheme (for example if it becomes insolvent) and would usually involve using the scheme's assets to buy a policy with an insurance company that pays as much of the scheme's benefits as possible in accordance with the statutory priority order.

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