BBC Pension Scheme

STATEMENTOF FUNDINGPRINCIPLES

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1 Introduction

This statement has been prepared by the directors of BBC Pension Trust Ltd (the Trustees), having been advised by 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 BBC Pension Scheme (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.

2 Technical Provisions

Method

The method chosen to calculate the technical provisions is known as the projected unit method. 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.

1 “The Actuary” is the actuary appointed under rule 15.1 of the Scheme and is currently Alison Blay FIA of Watson Wyatt 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.

1 Introduction

This statement has been prepared by the directors of BBC Pension Trust Ltd (the Trustees), having been advised by 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 BBC Pension Scheme (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.

2 Technical Provisions

Method

The method chosen to calculate the technical provisions is known as the projected unit method. 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.

1 “The Actuary” is the actuary appointed under rule 15.1 of the Scheme and is currently Alison Blay FIA of Watson Wyatt 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.

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In setting the financial assumptions, the Trustees may assume that the Scheme will be able to capture part of the investment premium for 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 the advice from the Actuary and reach agreement with the BBC.

Details of the main financial and statistical assumptions (including sample rates) adopted 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 the 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 consider the advice of the Actuary and consult the BBC.

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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 would 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. 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.

The effective date of this statement is the later of the two dates below.

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.

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 would 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. 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.

The effective date of this statement is the later of the two dates below.

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.

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sAppendix 1

Technical Provisions

Having taken the advice of the Actuary, the Trustees and the BBC have agreed the following assumptions for the valuation as at 1 April 2007:

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 (the ‘pre-retirement discount rate’); and

30% return-seeking assets and 70% bonds in respect of liabilities for current and future pensioners (the ‘post-retirement discount rate’).

% pa Price inflation (Retail Prices Index) 3.0 Career Average Benefits revaluation 3.0 Pension increases - Old Benefits 3.0 - New Benefits 2.8 - Career Average Benefits 2.5 Pay increases (including promotional allowance)

- in the period to 1 April 2010 4.0 - in the period from 1 April 2010 5.0

Increases to Scheme earnings cap 3.0 Discount rates - pre-retirement 6.7 - post-retirement 5.3 The confidence levels associated with the pre- and post-retirement discount rates are 63% and 67%respectively with reference to the Watson Wyatt Global Asset Model (measured over a 10 year period).

Demographic assumptions as at 1 April 2007

See Schedule A to Appendix 1.

Financial assumptions as at 1 April 2010

In setting the post-retirement discount rate at the actuarial valuation due in 2010, a notional portfolio of assets will be assumed comprising 20% return-seeking assets and 80% bonds in respect of liabilities for current and future pensioners.

Demographic assumptions as at 1 April 2010

The allowance for future improvements in mortality for the actuarial valuation due in 2010 will 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.

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Appendix 1

Funding strategy concerning discretionary benefits and discretionary increases

Allowance is made for Career Average Benefits to increase up to retirement or death, if earlier, in line with the retail prices index.

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 voluntary early retirement terms currently offered under the provisions for Old and New Benefits are generally favourable to members. The Actuary has made an allowance for a number of active members to retire each year from age 50 onwards (age 55 onwards for those who reach age 50 after 2010) to take account of these favourable 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 for such members.

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

There is no funding shortfall in the Scheme as at 1 April 2007 and hence no recovery plan in place.

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sSchedule A to Appendix 1.

Demographic assumptions

In service – specimen rates per 1,000 members at each age O ld and N ew Bene�ts members

W ithdrawal Rates Mortality Rates Ill-health

Retirement Rates O ther Early

Retirement Rates* Age Men W omen Men W omen Men W omen Men W omen 25 30 35 40 45 50 55 60

97 82 66 50 28 - - -

116 98 79 60 35 - - -

- - - 1 1 2 3 -

- - - 1 1 1 2 -

- - - 1 1 2 5 -

- - 1 1 1 3 6 -

- - - - -

100 100

-

- - - - -

100 100

-

* Members born after 5 April 1960 are assumed not to retire before age 55

Career Average Bene�ts members

W ithdrawal Rates Mortality Rates Ill-health Retirement Rates

O ther Early Retirement Rates*

Age Men W omen Men W omen Men W omen Men W omen 25 30 35 40 45 50 55 60 65

112 97 82 66 50 28 - - -

134 116 98 79 60 35 - - -

- - - 1 1 2 3 6 -

- - - 1 1 1 2 4 -

- - - 1 1 2 5 11 -

- - 1 1 1 3 6 14 -

- - - - - - - - -

- - - - - - - - -

* 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 Base table re�ecting current mortality

experience Men W omen

Active members' post-retirement mortality*

Members Spouses

PMAC07MC+0.5 PFAC07MC+1

PFAC07MC+1 PMAC07MC+0.5

Pensioners Pensioners' mortality Spouses' mortality

PMAC07MC+0.5 PFAC07MC+1

PFAC07MC+1 PMAC07MC+0.5

Deferred Pensioners' post-retirement mortality Former members' mortality Spouses' mortality

PMAC07MC+0.5 PFAC07MC+1

PFAC07MC+1 PMAC07MC+0.5

* adjusted if retirement is on ill-health grounds

An allowance has been made in the technical provisions for future improvements in mortality after the valuation date for all members in line with the “medium cohort” projections. A further allowance has been included equal to half of the difference between: the value of the accrued liabilities assuming medium cohort projections:

with a minimum rate of improvement in mortality of 1% pa, and

with no minimum rate of improvement in mortality.

The further allowance is broadly equivalent to an increase in the accrued liabilities of 1%.

An allowance has been made for members to commute part of their pension on retirement by reference to the financial and demographic assumptions at 1 April 2007 and current commutation terms.

The age difference (husband - wife) is assumed to be 3 years.

The proportion of members assumed to be married 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.

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Produced by: Pension and Benefits CentreTelephone: 029 2032 2811Fax: 029 2032 2408Email: myPension@bbc.co.ukWebsite: bbc.co.uk/mypension July 2008