Hi, good afternoon, everyone. Welcome to our pensions teach-in session, for those of you in the room, welcome to One Braham. To start with the elephant in the room, we're hosting this in advance of the triennial valuation date of the BT Pension Scheme, which is tomorrow, and clearly the outcome will depend on market conditions tomorrow, and future negotiations with the BT Pension Scheme. We won't be commenting or signaling where we think the outcome of those negotiations will end up. Of course, I'm sure you're all aware that the last funding deficit on the 2020 valuation was just under GBP 8 billion, and that the BTPS disclosed the roll forward value in their June 2022 accounts of GBP 4.4 billion. If we just move on to people speaking today, three of us presenting today. Those of you with good memories will recall that this is the same team that presented to you in the depths of COVID-19 in 2020. My name is Neil Harris. I look after corporate finance for BT, and I'll be joined by my colleagues, Shan Abdullah and Paul Rogers, who lead our pensions team. Our agenda today, we wanna take you through four key areas of our pension schemes. We will recap on the key features of the BT Pension Scheme. We will explain its strategy, including the risks it's taking, as well as the risks it isn't taking. We'll explain how BTPS has managed its position in a very volatile year. We'll recap through the building blocks we have for the forthcoming, 2023 funding valuation. We're assuming there's various levels of pension knowledge in the room and online today, and therefore, we propose to talk through all the slides first to try and build a base of knowledge and then open up to Q&A at the end. In terms of the key messages we are hoping to import on you today, the first is an understanding of two key measures of our pension obligations. That's the IAS 19 deficit and our funding deficit, and to understand the similarities and the differences between them. Secondly, we want to leave you with an understanding of the BTPS's investment strategy through to 2034, and then on until the last pension is paid. Also an understanding of the benefits that we expect this strategy to produce relative to alternative strategies it could be following. Thirdly, an appreciation of the scale and experience of BTPS and how this helps it navigate through market volatility. Lastly, we want to give you an understanding of how the infrastructure we built in the 2020 valuation, how it might be deployed as part of the 2023 valuation, and that's specifically picking up on the protections we now have against future pension surpluses and the contingent contributions we have in place for further deficit volatility. With that, I will hand over to my colleague, Shan Abdullah. Thanks, Neil. I'm Shan Abdullah. I'm a pensions actuary. I joined BT's Pensions Risk Team back in 2013. Outside of BT, I also act as a trustee. Before joining BT, I was a consultant advising large pension schemes on investments, funding, and strategy. Today, I'll be providing an overview of our pension obligations and the journey that we're on. To start off with, BT has both defined benefit, or DB, and defined contribution, or DC, retirement plans. Benefits for DB plans are determined by the plan rules, typically dependent on things like age, year of service, and pensionable pay. Importantly, they are not determined by the actual value of contributions made by the company and members. As a result, we're exposed to risks such as the investments underperforming, and we may need to make additional contributions in the future, deficit contributions. We recognize these obligations net of any assets held to meet those benefits on the balance sheet. For DC plans, our obligations are to provide a pre-agreed level of contributions, which the members can invest towards their retirement. We therefore have no further exposure to investment or other risks. Our main plans are in the U.K. The BT Pension Scheme is one of the U.K.'s largest DB plans and forms 97% of our retirement liabilities. The EE Pension Scheme, with liabilities over GBP 0.5 billion, is also a large DB plan across the industry and forms 2% of our retirement liabilities. Outside of the U.K., we operate a number of other retirement arrangements, which are both DB or DC in nature, in line with local markets. Our largest DC plan is in the U.K., the BTRSS, where 65,000 employees are currently building benefits. The rest of the presentation will focus on the BT Pension Scheme as it forms the majority of our liabilities. Turning to slide eight, we look at a brief overview of the governance of the pension scheme. Similar to most DB funds, the BT Pension Scheme is managed by an independent trustee, who has a number of duties and powers provided by legislation. There are nine trustee directors appointed by BT. Their duties include acting in the best interest of beneficiaries. Legislation provides the trustee with a number of powers, including setting the investment strategy after consultation with BT, and setting the actuarial assumptions to be used for assessing the funding position and the resulting contributions that will be paid, and this requires BT's agreement. Day-to-day functions, such as administration and managing the investments, are carried out by the scheme's primary service provider, BTPSM. BTPSM recently rebranded to Brightwell after expanding to provide their services to third parties. Of course, the operation of the pension scheme is overseen by the pensions regulator, who's there to ensure that employers and the pension scheme fulfill their duties to scheme members. Turning to slide 9, we illustrate the current projection of benefits which will be paid out from the scheme over the next 60 years. This projection requires a large number of assumptions, the key ones being how benefits will increase with inflation and how pensions will be paid out to members and their dependents. The top line shows benefit payments are expected to increase until reaching a peak around 2026 for members retiring, and then reduce gradually as the membership reduces. Our liabilities are the present value of these benefit payments. The bottom line shows these liabilities and how they reduce over time, broadly halving over the next 20 years. The projection is derived using our accounting assumptions, which are best estimate in nature, and using different assumptions will lead to a different projection for those cash flows and therefore a different estimate of the liabilities. For example, if inflation is higher than assumed, then the cash flows out of the scheme each year will be higher, increasing our liabilities. The scheme invests its assets in such a way that our investments will also increase in value where inflation to be higher than assumed, and we'll look at this in a bit more detail later. If members were to live longer than we assume, then the cash flows will be paid out for longer, expanding the chart to the right, again, increasing our liabilities. Alternatively, if we expect an increase in deaths over time, for example, due to the aftereffects of the COVID-19 pandemic, cash flows will be paid out for a shorter period, contracting the chart to the left and reducing our liabilities. We monitor our liabilities primarily through two lenses: funding and IAS 19. IAS 19 is calculated based on the IFRS standard, which is quite formulaic. It determines our balance sheet, and it is also used by rating agencies for their metrics. Under this approach, the overall assumptions reflect BT's best estimate. The discount rate used ignores the scheme's planned investment strategy and assumes that the scheme will be invested in a portfolio of double A-rated corporate bonds. By contrast, the funding approach is used to determine our cash payments at each triennial valuation. In valuing the liabilities, we reflect the scheme's current and planned future investment strategy. The assumptions overall are set prudently as required by legislation. The level of prudence is not defined in the legislation and is reviewed by BT and the trustee as part of each triennial valuation. Typically this prudence results in the funding deficit being higher than the IAS 19 deficit. The surplus or deficit in the scheme is the difference between the liabilities and the fair value of assets. When measuring both the IAS 19 and the funding deficits, the assets include the value of bonds which have been issued by BT, which the BTPS invests in, as these are tradable in the market. At the 2020 valuation, BT agreed to meet GBP 2 billion of the deficit through an asset-backed funding arrangement, or ABF for short, which provides annual cash flows secured on the EE business. The fair value of the ABF is the present value of future expected cash flows from the ABF to the pension scheme. This is included in the asset when assessing the funding deficit, similar to the way you would value a corporate bond. Payments from the ABF to the BT Pension Scheme do not affect the funding deficit when they're paid, as they've already been accounted for up front. The fair value of the ABF is not included in the assets of the BT Pension Scheme when assessing our IAS 19 deficit, because it's not a transferable asset issued by the Group. Therefore it gets consolidated within our Group accounts. Every time an annual cash flow is made from the asset-backed funding arrangement to the pension scheme, these cash flows are treated as deficit contributions at the point that they're made, and they reduce the IAS 19 deficit. Turning to slide 11, we'll look at how the BTPS invests its assets. The scheme adopts a diversified investment strategy with around a third of the assets invested in growth assets, and these are designed to generate positive investment returns over the long term. This includes investments in global equity markets, but also more bespoke and less liquid asset classes. Taking a few examples, the property portfolio looks to invest in things like office buildings, industrial parks, and retail complexes. An example of this is the investment in the King's Cross estate, which is the largest urban regeneration program in Europe, regenerating a 67 acre site, and includes tenants such as Google. Taking another example, the non-core credit portfolio looks to invest in credit opportunities such as bonds and emerging market debt, which is designed to deliver equity-like returns but with less risk. Over the last decade, this investment has delivered on this objective. Finally, taking mature infrastructure as another example. This portfolio looks to invest in real assets such as bridges, roads, and energy generation. An example of this is the investment in Fallago Rig, one of the largest onshore wind farms in the U.K. That wind farm generates enough clean electricity to power 86,000 homes and avoids more than 100,000 tons of CO2 annually. The allocations reflect the trustees' views on a range of areas, including the balance between returns and risk exposure, the extent to which assets should be reallocated to offset movements in the liabilities from changes in interest rates and inflation, and the extent to which assets should provide cash flows to meet benefit payments. An example of how this works can be seen in the changes over the last year. At 31 March 2023, we had a lower allocation to equity markets than we have had previously. The gilt market volatility in September last year reduced the value of the bond investments held by the Scheme. The Scheme was overweight in growth assets. The assets were rebalanced to bring the balance between the growth asset and the matching asset back in line with the long-term plan. In parallel, the overseas growth assets, which were relatively immune to the U.K. market volatility and also happened to be the most liquid part of the growth assets, were sold to ensure all of these competing requirements were met. This approach was carried out in line with the Scheme's liquidity policy and ensured that less liquid assets, such as infrastructure and property, didn't need to be sold at a discount. While some of the assets aren't valued on a daily basis, a full valuation of all of the assets takes place every 30 June. This is carried out in line with the latest market guidelines, for example, RICS for property and IPEV for private equity. Around 40% of the assets are in unquoted investments, where there isn't a quoted price in an active market, and therefore there's a bit of judgment needed to value them. The majority of these unquoted assets are invested through funds, through larger, more established managers, those funds operate their own controls and audit processes for the entire fund. The rest of the unquoted assets are investments held directly by the Scheme, these are externally valued by an independent third party. Across all of the valuations, Brightwell carry out their own controls to ensure the fund manager's valuations are appropriate, this controls framework is audited by BDO. Finally, for the Scheme accounts prepared every 30 June, the Scheme's auditors, currently KPMG, carry out their own testing over the valuations to ensure that they are reasonable. A similar process is carried out for the BT Group accounts every 31 March. The key difference being that 85% of the assets are valued as at 31 March, with the rest, around GBP 6 billion, having a valuation that is no more than 3 months old. As part of their controls, Brightwell consider if market movements over that 3-month period indicates that the latest valuation is no longer appropriate, and if this is the case, an adjustment is made to that valuation, which we disclose separately in our accounts. At 31 March 2023, no adjustment was required to those latest available valuations. While this is a time-consuming and resource-intensive process, it gives us confidence in the value of the assets. On slide 13, we look at how the investment strategy has evolved and the journey that we're on. The strategy is to run on the Scheme so that all future benefits are met from the Scheme rather than, say, being insured. The BTPS started a journey following the 2017 valuation to gradually de-risk to a predominantly bond-like portfolio by 2034, when the majority of the Scheme will be comprised of pensioners. At the time, 46% of the portfolio was held in growth assets, over the last two valuation cycles, this has been gradually reduced in line with the agreed plan. This journey allows investment returns to continue to play a role in eliminating the deficit, while progressing over time to a portfolio where income and capital repayments from the assets can meet the member benefits, member benefit payments as they fall due. While we don't know precisely what the exact investments will be, held in 10 years' time, as market conditions may change significantly over the period, it's important to note that the long-term bond-like portfolio will continue to generate returns, deploying the Scheme's assets in an efficient way, which balances the cost to BT with the certainty of paying benefits. As we continue on our journey, the allocation to each individual asset class will vary over time for a range of reasons, such as views on future returns, opportunities that arise, or the need for liquidity. Moving to a different strategy, for example, moving all of the investments to a bond-like asset portfolio today, would reduce the returns generated from the assets in the future, increasing the deficit and therefore increasing our deficit contributions. Our liabilities are naturally exposed to external changes in external factors. Some of these factors have a mechanical impact, such as interest rates and inflation, while others are indirect and reviewed as part of each valuation, for example, changes in credit spreads. These factors can also impact the scheme's assets. The chart is a very simplified illustration, showing a range of scenarios which are expected to occur with a 5% likelihood, and how these scenarios could mechanically impact the assets and the funding liabilities. For example, a 1.2% fall in long-term interest rate expectations, and therefore bond yields, would reduce the discount rate used to calculate the liabilities, increasing the liabilities by nearly GBP 10 billion. The bond assets held by the scheme would increase by just over GBP 5 billion, leaving a significant exposure on the deficit. To reduce this gap, the scheme uses derivatives. Under the same scenario, the interest rate derivatives held by the scheme would increase in value by around GBP 4 billion, reducing the net exposure on the funding deficit to less than GBP 1 billion. This approach for using derivatives, which is managed by the Brightwell team, has helped us on our journey over the last decade, where the deficit could have been significantly higher over the period of sustained low interest rates. It's important to note that the way the BTPS uses derivatives is not for speculating on the market. Instead, it's used as a risk management tool to reduce risks we're already exposed to, and to provide more certainty over the funding deficit, and therefore our funding, therefore our deficit contributions. As part of that risk management tool, the scheme carefully considers new risks which are introduced by using derivatives. For example, the need to post collateral and the plans around these risks materializing. Given our exposure to risks on our journey to 2034, we may be a little ahead or a little behind in any given year. The stabilizer mechanism, introduced at the 2020 valuation, gives us more certainty over this journey, and Paul will cover that in a bit more detail in his next section. To recap, the BT Pension Scheme is a defined benefit pension scheme which forms around 97% of our liabilities. It uses a diversified strategy to invest in liquid and illiquid assets, which de-risks over the period to 2034. The journey allows for investment returns to continue to play a role in eliminating the deficit, while progressing over time to a portfolio where income and capital repayments from assets can meet the member benefit payments as they fall due. We use two measures to evaluate the pensions deficit, IAS 19 and funding. The funding measure drives the trustees' investment decisions and cash contributions that we make. With that, I'll hand over to Paul. Thank you. Thanks, Shan. I'm Paul Rogers, the Pensions and Insurance Director at BT, and I've worked here since 2011, and I'm a pensions actuary by background. Firstly, I'm gonna start by looking at experience over the last year. The chart on slide 17 looks back to the year 2000. It shows market expectations for interest rates and inflation, and in this case, we show average rates over the following 15 years based on government bond pricing. Focusing on the dark line for interest rates, you'll see a broadly stable period for around 10 years at the start of the period. This is followed by a downward trend following the financial crisis at the time when the U.K. government was carrying out QE. We saw a gradual trend upwards in rates from 2020, followed by a very sharp rise after the government's mini budget in late September 2022. This very sharp and significant rise occurred in a matter of days, which led to big movements in asset values. As Shan mentioned earlier, in common with many U.K. pension funds, the BTPS uses derivative instruments to reduce the risk of interest rate movements, and this means that when rates rise, the scheme is required to post collateral, such as gilts and cash. Conversely, when rates fall, the scheme will receive collateral. We stayed in close contact with the pensions scheme during the period of gilt market instability, and we're pleased with the actions taken and the responsiveness of the BTPS during this time. The BTPS has a robust approach to liquidity management and met all its collateral requirements, despite the unprecedented market movements, and this was without the need for any recourse back to BT. Shortly after the period when gilt markets had stabilized in October 2022, the BTPS published its annual report, where it noted that the funding position hadn't worsened over that period. We remain supportive of the BTPS continuing to use derivative instruments to reduce risk in the scheme and maintaining liquidity buffers in accordance with guidance from the Bank of England and the pensions regulator. Turning to the movement in our IAS 19 position over the year, the assets and liabilities reduced by around a third. This reflected a higher discount rate, leading to lower liabilities, and reductions in the value of bonds as interest rates increased. I'll go into the movements over the year in more detail on the next slide, but a key reason for the increase in that deficit is the large change in interest rates over the year. As we've mentioned earlier, we aim to be largely hedged to interest rates and inflation on the funding basis, but the outcome of using a different approach for accounting is that we're overhedged on the IAS 19 measure. As interest rates rose over the period, this led to the deficit increasing. On slide 19, we show how the pension position can be estimated if you make use of some of the sensitivities in our annual report. Clearly, these estimates will never be completely accurate due to the complex nature of the assets held in the scheme and the actual membership experience over the year, neither of which can be captured by simple rules of thumb. However, this can give a good directional indication. This analysis on this slide is looking at IAS 19, and if we move from the left of the chart and the starting deficit of GBP 1.1 billion, the first point to consider is interest on those liabilities, which can be estimated based on the liabilities and the interest rate at the start of the year. Deficit contributions can then be deducted, which were GBP 1 billion over the year, including payments from the ABF. The sensitivities in our accounts can then be used to estimate the impact of a change in market conditions. We saw rates going up by 2%, giving an expected GBP 3 billion increase in the deficit. Credit spreads were largely unchanged, so had little impact over the year, and then we see a change in expected long-term inflation, which added GBP 0.3 billion to the deficit. Asset returns need to be estimated, which is one of the trickiest areas to approximate. If we strip out interest rate changes, which are already considered under item 2 in the chart and allow for a risk-free return on our matching assets, suggests at least GBP 0.4 billion of bond returns over the year. Using an equity market index to estimate growth, asset returns gives a GBP 0.2 billion increase in deficit. There was then a reduction in our mortality assumption, which is, again, harder to predict, but can potentially be estimated from movements in industry data. For this chart, we're showing a movement based on published information from the CMI, an organization run by the U.K. Actuarial Profession, where some of their data and publications suggested roughly a half a year of life expectancy reduction. Putting all this together indicated a deficit of GBP 3.6 billion versus the GBP 3.1 billion we published. This did give a gap of GBP 500 million, but that does represent less than 1% of the asset values at the start of the year, which is really reflecting some of the approximations in this approach, particularly around estimating those asset returns. Recapping on the last year, the IAS 19 deficit increased largely due to higher interest rates, and I mentioned before, we aim to be broadly hedged on the funding basis, but this means we're over-hedged on an IAS 19 basis. Whilst there've been very large market movements, the BTPS continues to be well managed and has navigated the difficult market conditions well. Now look ahead to the actuarial valuation, and as Neil mentioned earlier, this will focus on the process rather than the potential outcome. Slide 22 shows how the funding deficit has reduced progressively since 2017 in line with our plan. As shown by the chart, the deficit has fallen largely as a result of deficit payments over the period, showing we've been on track largely on track through the period shown. At the Trustees' last annual update at thirty of June 2022, the estimated deficit was GBP 4.4 billion. As I mentioned on the earlier slide, in October 2022, once gilt markets had stabilized, the Trustee noted there hadn't been any worsening at that point. If I turn to slide 23, we show some of the items involved in the valuation process that we'll be working through with the Trustee. One of the first points is collecting the membership data and checking that information. We'll be going through a review of the strength of BT covenant with the Trustee and looking at that in some detail. We need to negotiate the appropriate assumptions to use for the valuation. Before agreeing to the future contri. Then we will agree the future contributions that we need to make to the scheme and any associated legal protections. We've concluded recent valuations in the first half of the calendar year, following the valuation date, which is well in advance of the formal 15-month statutory deadline. We hope to conclude this valuation in a similar timeframe to previous valuations. Slide 24 gives a recap of where we were back at the last valuation, where we agreed a funding deficit at 30th of June 2020 of GBP 8 billion. This was met through 2 elements, GBP 2 billion by an asset-backed funding arrangement, which was secured against the business. The remainder met over a 10-year period, with annual cash contributions that are reducing to GBP 600 million from FY 2024. A stabiliser mechanism was introduced at the time to give certainty to both parties, reducing the risk of trapped surplus and proactively dealing with any increase in deficit between valuations. Give a little more detail on slide 25 of the features agreed at the 2020 valuation, which we see as providing a good base as we approach the 2023 valuation. Starting with our asset-backed funding vehicle, this provides a stream of payments to the BTPS and is treated as an asset by the scheme. This funding will remain in place, and if the pension scheme reaches full funding, payments will cease, reducing the risk of trapped surplus for us. Moving on to the co-investment vehicle put in place. The majority of our scheduled deficit contributions after thirties of June 2023 can be paid to this vehicle. These total GBP 4.2 billion, representing the next 7 years of scheduled contributions of around GBP 600 million per annum. Once contributions are paid in, the assets in this vehicle will be invested by the BTPS as if part of the overall portfolio. We plan to start using this vehicle from FY 2024. This provides a benefit to us, as the contributions can be refunded to us after 2034 if the money isn't needed by the BTPS. On the third area of the slide, we also agreed future funding commitments to help deal with any new deficits proactively. This involves an annual test to check if we're ahead or behind plan. If we are behind, we pay extra contributions each year of up to GBP 200 billion. This helps provide certainty for both parties and takes early action rather than needing to wait for a new full valuation. To date, this yearly test hasn't triggered any extra payments. Finally, pension legislation and regulations in the U.K. provide significant protection to pension schemes and their members, and in recognition of this, we've agreed protections with the Trustee for actions needed after certain corporate activity. This helps give clarity on the potential impact of transactions, although any significant activity would also be reviewed in isolation at the time. I hope that gives a good indication of the process we'll be following at this valuation. We view the previous valuation outcome as a solid platform for the 2023 valuation, and we aim to conclude the valuation on similar timescales to recent valuations. With that, and with a wish for no extreme movements in markets over the next 24 hours or so, I'll hand back to Neil. Thank you, Paul. Thank you, Shan. If I'll just recap the key messages that we are hoping you take away with you today before opening the floor to Q&A. The first message is that, you know, the principal difference between the IAS 19 deficit and the funding deficit is the assumed level of prudence. Secondly, that BTPS is following a run-on strategy that is reducing investment risk over time, and that we expect this strategy to minimize the cost to BT. However, we monitor developments in the external market, and this strategy might change over time. The third point was that BTPS is large and experienced and navigates volatile markets well. You'll have seen from Paul's slides that the funding deficit has reduced since 2017 in line with that strategy. Fourthly, we expect the 2023 valuation to substantially build on the foundations of the 2020 valuation, using both the co-investment vehicle to and the ABF to minimize the risk of future surpluses and to continue with the contingent contributions to deal with any new deficits opening quickly in a way that it works for both BT and BTPS. Having recapped that, I'd like to invite Paul and Shan back up onto the stage, and we can open the floor to Q&A. I think we'll start in the room first, and then move on. Appreciate it if you could state your name and your organization. Everyone always says, "Ask one question." I'm sure you will ignore that, but I have a very short memory, so I only promise to answer the first one. Okay. It's me on this side. Thanks. Robert Grindle from Deutsche Bank. Please, thanks for the presentation. Exciting times for pensions. Please, could you kindly say something about the moving parts within the valuation of the covenant, within the BT's covenant on the scheme, within the actuarial update? Thanks. Yes. I mean, as a general comment, we think that the BTPS and its advisors is very supportive of the BT strategy. They are a long-term investor, and they can see the long-term value that we are creating through our network-first strategy. Therefore, since we had a similar strategy for 2020, we wouldn't expect a different approach at the 2023 valuation. Paul, I don't know if you would add anything to that? No, I think the only thing to say is it is a detailed review, that they will look at all the CFUs, they will look at all elements of the business. Yeah, as Neil says, they're supportive. Nick Lyall of SocGen. Can I just a little bit like Robert's question, please? On the actuary's obviously got to deal with a lot of assumptions on inflation, a lot of volatility on inflation as well. Could you talk a little bit about how you might think of that? Does he just simply look at yield curves, or does he bake in more into prudence? Just then, secondly, as you mentioned, sneaky second question, the caps on inflation, right, on inflation, things like the payouts within the pension scheme, is that taken into account in the sensitivities in the report and accounts, or do we have to think of different numbers? It's not just a linear progression as inflation goes up, presumably. If I can just make a general comment. I think the first one on inflation, I think, is that we are substantially hedged against inflation on a funding basis. I think that you need to look at the medium-term outlook for inflation. That is what drives movements in the deficit. I think the short-term, in-year number is relatively small. Then, for a detailed answer, I'll pass it over to Shan, who can answer both of your questions, I'm sure. Let me start with the first one. In terms of how the actuary will be thinking about the assumptions, they will start with what is the market saying around interest rate expectations, inflation expectations, looking at both the gilt market or gilt assets and swap assets. However, the future investment returns from the scheme are going to be measured prudently, and that will be one starting point, and then everything else is looked at in the round. Do you mind just repeating your second question, so I answer it afterwards? Caps and collars in there. Yeah. It was just, yeah, just about the inflation effect on the payouts themselves being possibly capped versus, the asset movements. Does that mean that the relationship in the report and accounts that you talk about doesn't work linearly? As inflation goes up to, you know, absorb, you know, really high levels. The sensitivities that we publish in the accounts are long-term sensitivities, and they already look at remote scenarios. What we've seen in the markets, yes, short-term inflation has been quite high, but over the longer term, that inflation expectation has been less volatile. Were long-term inflation expectations to increase significantly beyond the sensitivities that we've shown, the impact of caps and collars would start to play more of a role, and then the sensitivities may not necessarily accurately represent the actual outcome. They represent a good starting point for assessing what the impact on the deficit will be. Yes. Hi, it's James Ratzer from New Street Research. This is one question, but it's a little bit kind of hypothetical and open-ended. Would you be interested to talk through some of the implications on the pension scheme if BT was to do any corporate activity with Openreach? You know, in particular, what's the buyout deficit, would you think, at the moment on the pension scheme? You know, what would happen if BT were to sell, let's say, a minority stake in Openreach, a majority stake, or maybe even just do a demerger of Openreach? I know this is all a bit hypothetical, but in those kind of different scenarios, how might we expect the pension trustees to react? Yeah, multipart question there. I mean, in terms of the buyout deficit, I think you can. The latest public information on that is in the BTPS annual report. I think the number, which was June 2022, and I think the number there is around about GBP 13 billion, so about GBP 9 billion over the funding deficit. That's, again, we haven't spoken about that. That's an indication of a fully de-risked strategy there. In terms of the BTPS approach, I think there's two things. There's the regulation that requires them to make sure they protect the members' interest, and there's also the new law that requires the directors of BT to consider the impact of any corporate actions on the pension scheme. I think, you know, from the pension scheme's perspective, you know, they value long-term assets. They value long-term infrastructure, assets such as Openreach, and therefore, if they had different access to those cash flows from Openreach, you know, they probably would have to consider whether they were comfortable maintaining the same level of investment in growth assets in the scheme. It could lead to an increase in the deficit, and therefore a, you know, reduction in equity value for BT. Paul, I don't know if you would add more to that? No, I think that captures it well. Does that include, assume, a minority disposal, for example? Would that just be treated as just a normal disposal for BT, where there's a rule about what contributions you then need to pay in the event of any M&A disposal? Again, I think it comes, Digital Communications Review 2016, I think there's a published statement that the BT Pension Scheme had there. And they say that, you know, not having a direct claim on an asset owned by BT plc, which is the pension scheme sponsor, that in itself disadvantages them. I think minority and majority, you have to go through the same hurdles. Clearly, there's a materiality point, there's a how well are we funded, when are we talking about, but I think, yeah, a minority doesn't make it easier than a majority stake. Thank you. Thanks. It's Andrew Lee from Goldman Sachs. Just had a question on the regularity of the checks that you make on the funding deficit. 'Cause in the past, obviously, we've spent, as analysts and investors, nervous times ahead of a triennial review that, which had a great deal of event risk, that we might see some blowout in the deficit or not. Obviously, you've put in place more regular checks now. I think you've spoken today about annual checks on the funding deficit that happen every June. You also had a comment from the trustee in October 2022, saying nothing's really changed. From our perspective, when would we hear, or, how quickly would we hear if the deficit... How quickly would you know, and how quickly would we hear if the deficit had blown out? Let's say there was a dramatic change in the next 4 or 5 months, you know, when are we gonna find out about that? Therefore, how much risk should we apply to our expectations of the deficit when we hear about it, you know, early next year? I think there are a couple points. I think Paul explained the process through which we go, which I think the first one is starting with longevity assumptions, and therefore, that's a key factor that needs to be agreed, and mortality needs to be agreed. Assets need to be valued, including, you know, growth assets, some of which are quoted, some of which are not. I think, as Shan mentioned, the other thing that needs to be agreed is effectively the credit spread in the discount rate, which, you know, has to take in to affect all of the portfolio and what returns it expects to be made. I think we roll forward valuations, and they're effectively keeping some of those assumptions the same. I think the triennial process is where we have to revalidate all of those assumptions. I think the timescale that Paul gave, you know, sometime in the first half of calendar 2024 is a normal timescale when we have a view on what's the outcome of all those assumptions. Sorry, maybe I didn't ask the question correctly, our understanding was that during the period between triennial reviews, if the deficit had moved by more than GBP 1 billion, there's a letter that was written by the trustees, and as you say, there's an additional contribution of up to GBP 200 million. Yeah, how regularly can we hear, or how quickly can we hear if you have seen that material shift that would incur a, you know, a letter from the trustees or the GBP 200 million increase? Yes, all right. The- Yeah, there's two processes. The triennial. There's the annual process, which use these roll forward assumptions, and we would probably, by the time the BTPS publishes its annual report, so it reports on a June year end. By the time it publishes that in, say, September or October, we would know whether or not that contingent contribution has been triggered. That would be, you know, this autumn. That would be on a roll forward basis. In the triennial valuation year, the revalidation of those roll forward assumptions, whether they need to be changed, that would be in the first 6 months of calendar 2024. Sorry to push in, for a final question, can you just explain the October 2022 deficit, you know, point that the BTPS made, right, the trustee made. How come that, deficit calculation was made when you'd just given a June 2022 deficit valuation? What was the kind of process by which that updated commentary around the deficit was made? Paul, do you want to answer that? Yeah, I mean, I think. Yeah. At the time they were publishing their annual report, the asset and liability figures had moved since the year-end date by of the order of GBP 10 billion. I think they felt the need that given those significant movements since the date of signing, they needed to make some comment on the extreme market movements. That was something they wouldn't normally do. They wouldn't normally comment on the funding position at that point. Given that extreme gilt market volatility, and actually when they were releasing, was right in the middle of or just after the markets had stabilized. I think at that point, they felt they should include a comment just to reassure members that things hadn't worsened at that point. Hi, it's Polo Tang from UBS. Just have one question about Thames Water because I think the BT Pension Scheme has a stake worth around about GBP 300 million-GBP 500 million in the asset. Obviously, just looking at the press, it appears that there's a risk that Thames Water could be nationalized. How should we think about the impact in terms of the pension deficit? Can you remind us how frequently the private investments are marked to market? In terms of the Sam will be able to talk you through the mark-to-market process. In terms of the overall investments, I don't think we comment on the investments, the specific investments held and at what value we hold them. I think we can say that Thames Water is not a material amount of the overall BT assets, and as we go through 30 June, we will, you know, update our mark-to-market value of that asset, depending on things, how things happen, you know, over the coming weeks. Sam, do you want to remind us how the valuation process works? Ultimately, I think the key date that we're looking at is 30 June, because that will drive the funding valuation, and it's also the scheme's year end. At that point, all of the assets are valued as at that date. It will take into account, as part of that independent valuation, what the market's expectation for the Thames Water asset is. Thanks. Hi, thank you. Carl Murdock-Smith from Berenberg. Just in terms of liability management, you talked a lot about the use of swaps. I was just wondering, do you use gilt repos as well? If you do, what's the quantum of that? Because I'm not sure it's clear in the BTPS annual report. Thanks. Paul, is that one you can answer? I mean, we do use both instruments. It is something that there's no sort of particular policy on that. It is using the appropriate derivative instrument for the risk reduction we're seeking to achieve. You're right, there is no public detail on that, and it will vary over time, but it will be managed within an overall plan of sort of hedging rates that we're trying to achieve. Okay. Thanks. Jakob Bluestone from Exane. I was hoping you could comment a little bit on changes in regulation coming up. I think this autumn, there's a change in the pension regulation, where there's sort of a change in principle that you basically need to prioritize paying down deficits as soon as affordable. Does that change anything around how you think about the deficit repair plan? Could that change in regulation spur having to close the deficit faster? I'll let Paul answer the specific regulation point. I think the point as to the context of this is that, you know, we have a shared vision of 2034 de-risking plus run off from then with the BT Pension Scheme. That both sides can see the benefits, and we are, you know, committed to that. The interpretation of legislation within that comes from a place of sort of shared understanding between BT and the BTPS. Paul, do you want to comment? On the regulatory piece, I mean, there was a long-awaited new code on funding and some potential new legislation on funding. At the moment, that remains very much awaited, and we've had recently the DWP Select Committee producing their report on LDI, which it did, didn't really, that report didn't add sort of any new requirements for our pension scheme. One of the points they did make was that perhaps the new funding, the move to a new funding regime, should perhaps be relooked at, and another impact assessment carried out. I think we expect that any new funding rules are a long way away. Indeed, as Neil says, I think we have an approach that works. I think when we looked at the draft of the funding code, we felt it was it. We fitted within the constraints of that anyway. At the moment, we're still on the standard funding rules we operated under last time. Can I just ask a follow-up? Earlier, you mentioned the buyout premium above the deficit. I mean, is there a level where you think a buyout is possible, or is that just too big a number? Yeah. I mean, in terms of the buyout, we challenge ourselves that we are following the best path. I think if you saw from Shan's perspective, the reduction in growth assets through to 2034, there's a significant amount of return assumed in there. Over and above that, there's still an assumed level of return over and above the buyout rate you would get from 2034 onwards. There's two components of the buyout deficit. Clearly, as you move forward, the difference between the deficit basis reduces, and clearly because we hedge on a funding basis and not a buyout basis, the difference between the funding and the buyout basis can move as well. I would say we certainly monitor the differences, we monitor the market in terms of scale, and we project forward to say, "What about in 5 years' time? What about in 10 years' time?" You know, and there is a possibility that, yeah, a point in the future, it might price in. Thank you. Thank you. My name is John Karidis. I work for Numis. Given what you said about the buyout deficit, it sounds like the covenant is worth about double the deficit as of the end of June 2022. Could I invite you again, basically ask Robert's question again, to be more specific about how you calculate the covenant? If you can't sort of be specific, could you, in a scenario, for example, that Openreach loses 10% of its business today, in contrast to what consensus expects, what would happen to the deficit as a consequence of that? I mean, I think Paul can talk you through the covenant process, as we said, you know, we, the pension scheme's advisors, review our business plans, they challenge our business plans, they look at downside cases to come up with, you know, the covenant value for BT. They then challenge themselves to look at the buyout basis or the solvency deficit as what proportion of their enterprise value or does that be? You know, the thing that they're most concerned with is corporate actions, but clearly, business has downside, and they would look at evolving business plans to determine what the deficit should be. Ultimately, you know, under the pensions regulation, the pension can only be something that's affordable to the company. It's a sort of a variable constraint, if you like, and rather than a fixed constraint. Paul, I don't know if you can just talk through that. Yes, pretty good summary. I mean, there is no sort of formulaic method that the pension schemes are required to use to look at covenant. There is judgment involved in there, and I think it will look at a range of factors, and as Neil says, it's the business prospects over the long term it will be looking at, rather than, say, a particular specific event on one day here or there, that they're focused on. Right. If I may, in that 50-pager you referenced back in 2016, submitted to Ofcom by the BTPS, it mentioned that Openreach made up about a third of the covenant of BT Group, in part because of its utility type of business. Is that still the case to your knowledge? I mean, we haven't seen the latest valuation by the pension scheme's advisors. I, as we mentioned earlier, I think they place significant weight on infrastructure assets, real assets, giving rise to long-term returns because it matches the pension obligations that they have to pay to their members. It wouldn't surprise me that Openreach is a significant proportion of that. Question comes back to, you know, what is the level of deficit in the scheme, and how important is BT relative to that level of deficit? We are aiming through to 2034 for the BTPS to be low dependency on BT. That's what this plan is designed to give. At a point where BT, you know, the BTPS has a low dependency on BT, you know, the assessment will change and could potentially get better. Forgive me, is it right to say that the covenant's value equals the buyout value, less GBP 4.4 billion, as of June 2022? If we want to figure out how much it's worth, the covenant today, or as of the 30th of June 2022, that covenant is worth GBP 9 billion in round numbers? No, the way I would look at it, I'll let Paul comment on it. When we talk about the covenant, we work out, we reference what the BT Pension Scheme thinks the enterprise value of BT is, as in how much value is there to support the pension obligations. It then compares that value to its basis, effectively on a solvency basis or a buyout basis. It says, how many excess assets are there? The closer, or if you have fewer assets than solvency, then they're very concerned. If you have a lot more value than solvency, they're less concerned. The buyout versus the funding is the assumed discount rate. The buyout basis is rather than having our assets invested in growth-seeking assets and/or quality corporate bonds rather than gilts, what's the difference in the deficit just if we moved our entire portfolio into gilts broadly today? They're slightly different bases, that, I think the numbers you're quoting, Paul. Yes, I think it's not as scientific as the way you sort of outlined. I mean, I think one of the questions they'll be asking is: can the pension scheme, can the BT covenant support the risk we're running in the asset strategy today? You know, we think it can. Can it support the investment risk in the long term? Again, yes, the pension scheme, and we think it can. I think we're... it's not quite the way you described, but yeah. Thank you. Hi there, it's Steve Malcolm from Redburn. Just a question on the assets. Just looking at slides 12 and 13, I'm struggling to reconcile the asset breakdown with the 40% of private assets that you disclose. Can you help us understand how much of the 40% of private assets are debt and how much are equity? Within the equity, you know, roughly how leveraged you think those equity investments are? Sorry, a sort of third part to the one question. You know, give us a sort of helping hand on how liquid you think those private assets are. You know, if you decide in the event of an Openreach sale or something that you had to de-risk and move out of private assets, practically, you know, how easy is it to do that? I suspect it's quite difficult, right? I think Sam can talk to the composition of the assets to maybe clarify that. In terms of, you know, the pension scheme is a long-term investor, therefore, you know, illiquidity premium is a nice return for it to make. That's why we have this shared vision through 2034 to minimize the circumstances where there might be a, you know, an unexpected need to realize an asset. I think, as Paul explained during the mini budget crisis, this whole liquidity ladder, we certainly the BTPS monitors all the sources of liquidity, and we were nowhere near needing to sell illiquid assets, you know, at distressed prices. In terms of the composition of the portfolio, Sam? So that the detail around that composition is set out in our annual report. It sets out exactly of each of those asset classes that we disclose, how much is unquoted and how much is quoted. I'll refer you back to our annual report for all of that detail. In terms of your question around the leverage within the growth assets, the scheme does employ equity derivatives to help manage the downside risk, and some of that detail is coming through in the sensitivities. That's a limited portion of the growth asset portfolio. In terms of the liquidity within the unquoted assets, they are, yes, illiquid, but ultimately, this is a 60-year pension plan that we're trying to make sure that the assets are efficiently allocated across that 60-year period. Okay, thanks. Yes, I don't know if we're allowed second questions, but I think we've obviously talked quite a bit about the covenant, but I don't think we've talked about Crown Guarantee. One thing I've never quite understood is: why is the BT covenant ever really a relevant number in a sense? Why aren't the trustees going, ''Well, if something goes wrong at BT, they can't meet the obligations. We can always just fall back on the Crown Guarantee.'' Why is that not more strongly emphasized in the calculation and approach the trustees take? I think the simplest answer to that is, I think under state aid rules, we are not allowed to rely on that for the purposes of the negotiations. I think that otherwise, that would constitute unfair competition for our competitors. I think in all our dealings, we have to ignore the Crown Guarantee, and we can't attribute any value to that. Clearly, the pension trustees know that's out there, and therefore, they are also always concerned in any sort of corporate events to make sure that that guarantee, you know, remains available. And that, you know, could influence, you know, structures that work and don't work. The straight answer to the question is, we're not allowed to under state aid rules. Well, thank you for that. I think... Are we wrapping up now, or we're going to the online? Wrapping online. Well, super. Thank you very much, everyone. Thank you for your questions. Please follow up with Mark and his team if there's any further comments. We hope we've achieved our objectives of building your understanding today. Thank you. Thank you.