BBC Pension Scheme STATEMENT OF FUNDING PRINCIPLES

BBC Pension Scheme STATEMENT OF FUNDING PRINCIPLES

funding principles. Introduction Statement of Funding Principles for the BBC Pension Scheme This statement has been prepared by the Trustees of the BBC Pension Scheme (the Scheme) to satisfy the requirements of Section 3 of the Pensions Act 004, after taking account of the advice of the Actuary. 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 provisions are calculated and how the Trustees expect to meet the statutory funding objective 3. 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 April 00, and supersedes the statement dated 3 May 008.. Technical Provisions Method The method chosen to calculate the technical provisions is known as the projected unit method 4, which is the same as that used for the 007 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 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. The Actuary is the actuary appointed under rule 5. of the Scheme and is currently Alison Blay FIA of Towers Watson Ltd. The Pensions Act 004 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 future service contribution rate relates to the cost of one additional year of accrual.

funding principles In setting the financial assumptions, the Trustees may assume that the Scheme will be able to capture part of the investment premium from returnseeking 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 00 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 noninvestment 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.

funding principles 3 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. 5. Arrangements for other parties to contribute to the Scheme There are no arrangements for persons other than Participating Employers 5 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 5 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. 5 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.

funding principles4 The effective date of this statement is the later of the two dates below. Signed on behalf of the BBC Pension Scheme Signature: Print name: Jeremy Peat Position: Chairman of the Trustees Date: 3 March 0 Signed on behalf of the BBC Signature: Print name: Lucy Adams Position: Director, Business Operations Date: 3 March 0 This statement of funding principles has been agreed by the Trustees of the BBC Pension Scheme, after taking account of actuarial advice from me: Signature: Alison Blay Position: Scheme Actuary Date: 3 March 0

funding principles 5 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 April 00: Financial assumptions In setting the discount rates, a notional portfolio of assets has been assumed comprising: 00% returnseeking assets in respect of liabilities for active members and deferred pensioners in the period prior to retirement (the preretirement discount rate ); and 0% returnseeking assets and 80% bonds in respect of liabilities for current and future pensioners (the postretirement discount rate ). % pa Price inflation (Retail Prices Index) 3.7 Price inflation (Consumer Prices Index) 3. Career Average Benefits 006 (CAB 006) revaluation 3.7 Career Average Benefits 0 (CAB 0) revaluation 3.0 Pension increases Old Benefits 3.7 New Benefits 3.5 CAB 006.4 CAB 0 3.0 Pay increases (including promotional allowance) allowing for benefit changes in 0.0 Discount rates preretirement 6.8 postretirement 5. The confidence levels associated with the pre and postretirement discount rates are around 65% and 69% respectively by reference to the Towers Watson Investment Model (measured over a 0 year period). Demographic assumptions as at April 00 See Schedule A to this Appendix. Funding strategy concerning discretionary benefits and discretionary increases Allowance is made for CAB 006 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 0 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.

funding principles6 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 illhealth 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 00m is included in the technical provisions in respect of administrative and other noninvestment 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 April 00 result in a recovery period of years, measured from the valuation date.

funding principles 7 Demographic assumptions In service specimen rates per,000 members at each age Old and New Benefits members Illhealth Withdrawal Rates Mortality Rates Retirement Rates Age Men Women Men Women Men Women 5 30 35 40 45 50 55 60 06 90 7 55 3 8 08 87 66 39 3 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 costneutral for retirements from April 05, active members who are expected to take early retirement before that date have been valued using the pre 6 April 00 terms, and those expected to retire after that date have been valued using the current costneutral terms. Career Average Benefits (006 and 0) members* Illhealth Withdrawal Rates Mortality Rates Retirement Rates Age Men Women Men Women Men Women 5 30 35 40 45 50 55 60 65 3 06 90 7 55 3 47 8 08 87 66 39 3 6 * There is no allowance for Career Average Benefits members to retire before age 65, other than due to illhealth, because it is assumed that early retirements are on actuarially neutral terms. 4 4 4 7 4 4 9

All members All members in service on or after Normal Retirement Age are assumed to retire immediately. Mortality assumptions for all members Base tables: The subset of the standard S series of tables, published by the CMI 6, 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 postretirement mortality Retiring in normal health Retiring on incapacity grounds 90% 50% Pensioners and Dependants 90% Deferred Pensioners 90% The above base tables and multipliers are applied at the valuation date with future mortality improvements from April 00, based on the CMI 009 Core Mortality Projection Model with a longterm rate of improvement of.5% pa for males and.0% pa for females. Overall, the allowance for future improvements in mortality for the 00 valuation is not less than the medium cohort projection with a minimum improvement of % pa (the previous statement of funding principles dated 3 May 008 refers). An allowance has been made for 40% of members to commute between 5% and 30% of their pension on retirement, by reference to the financial and demographic assumptions at April 00 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 % pa in future years for Old Benefits, New Benefits, and CAB 006 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 to the new CAB 0 for future service. If members opt out of their current, their past service benefits accrued to the date of change will be treated as if they become deferred pensioners in their current at the date of opting out. 6 The Continuous Mortality Investigation of the actuarial profession funding principles 8

funding principles 9 Assumptions: For the purpose of the 00 valuation, it has been assumed that around 40% of members opt to leave their current and join either LifePlan or the CAB 0. Around a quarter of those opting out are assumed to join LifePlan, and the remaining three quarters are assumed to join CAB 0. The proportions of active members assumed to opt out for the purposes of the 00 valuation, split by current, age group and options assumed to be chosen, are summarised in the tables below. Old Benefits Remain in current Move to LifePlan Move to CAB 0 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 Remain in current Move to LifePlan Move to CAB 0 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% 9% 6% CAB 006 Remain in current Move to LifePlan Move to CAB 0 All ages 94% 0% 6% Total Scheme membership Remain in current Move to LifePlan Move to CAB 0 Old Benefits 53% 0% 47% New Benefits 55% 9% 6% CAB 006 94% 0% 6% Total 6% 0% 9%

Calculation method: The technical provisions for active members have been calculated as at April 00 on an individual basis; assuming firstly that all members remain in their current and secondly that all members opt out (prior to moving to LifePlan or CAB 0 for future service). The individual values for each of these two scenarios have then been grouped according to the current 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 and age group. For example, suppose the total technical provisions for New Benefits members aged between 35 and 44 would be 00m if they all remained in their current, and would be 40m if they all opted out. Using the proportions in the table above, the actual technical provisions for this group are calculated as: 54% of 00m, plus 6% of 40m, plus 40% of 40m Hence the technical provisions for this group would be 8.4m. funding principles0

Produced by: Pension and Benefits Centre Telephone: 09 03 8 Fax: 09 03 408 Email: mypension@bbc.co.uk Website: bbc.co.uk/mypension August 0 find out more at bbc.co.uk/mypension TTCOC000956