1. The Scheme’s funding position has continued to improve, with the deficit reducing from £3.7bn at June 2023 to £2.7bn at June 2026, and the funding level increasing from 91.0% to 92.3%.

2. Payments agreed at the 2023 valuation will address £2.1bn of the deficit and will be substantially replaced by zero-coupon bonds shortly after this announcement. Payments scheduled directly to the BTPS totalling £30m will be brought forward and paid in FY27; the remaining FY28-FY31 scheduled contributions will be replaced with zero-coupon bonds with the same payment profile, issued by BT. BT will continue to make annual payments of £180m under the asset-backed funding arrangement established in 2021.

3. BT will need to provide £282m of additional funding to ensure the BTPS remains on track to reach full funding by 2030. The additional BT funding of £282m will be provided shortly through a zero-coupon bond maturing in 2033.

4. The above measures will substantially reduce the funding deficit, to around £0.3bn, which will be addressed by expected future investment returns to 2030. No further deficit contributions are expected to be required for BTPS to reach full funding.

5. The wider package of measures both improves the security of the Scheme and provides BT with greater corporate flexibility, reflecting the BTPS’s improved funding position, BT’s improved covenant, and additional security agreed as part of the valuation.  The wider package:

• provides £4bn of security, through a new charge over EE shares, giving the BTPS extra protection in the unlikely event of BT becoming insolvent;
• allows shareholder distributions of up to £1.5bn in FY27, increasing to £2.0bn by FY30, without triggering additional payments to BTPS;
• moves to a more objective test to determine if a refund is paid to BT; and
• establishes principles for addressing a deficit if one exists at a future triennial valuation.

Patricia Cobian, BT Group Chief Financial Officer, said: “This agreement supports our capacity to continue to invest in next-generation networks and transform BT. It reflects our disciplined approach to capital allocation, balancing long-term investment, our pension commitments, sustainable dividend growth and a strong balance sheet.”

Jill Mackenzie, Trustee Chair of the BTPS, said: “We are pleased with the progress made since the last valuation despite high levels of macroeconomic volatility and uncertainty. The deficit has reduced, security strengthened and we remain on track to achieve full funding by 2030.”

Further information

1. Funding position at 30 June 2026

1.1 The funding deficit at 30 June 2026 is £2.7bn and is detailed in the table below.

1.2 The discount rate at 30 June 2026 has been derived from prudent investment return expectations with regard to the yield on gilts, swaps and corporate bonds, reflecting the current investment strategy and how it will evolve over time.  The discount rate for the 2026 valuation is equivalent to 1.0% per year above the gilt yield curve averaged over the lifetime of the scheme.

1.3 The principal financial assumptions and average life expectancies for members at age 60 are summarised in the table below. 

¹ For the 2026 valuation, male pensioners were grouped into 4 categories by amount. The ‘lower’ pension bracket here represents a straight average of the two lowest brackets and the ‘higher’ represents a straight average of the highest two brackets.

2. Long-term plan

2.1 Since the 2023 valuation, the BTPS has continued to reduce its allocation to growth assets in line with the agreed long-term strategy. As at 30 June 2026, the BTPS held 74% of its assets in bond-like assets which aim to match benefit cashflows, and 26% in growth assets.

2.2 The bond-like assets include £0.9bn for BTPS’s interest in the Asset Backed Funding (“ABF”) arrangement established by BT in 2021, secured on EE Limited. This reflects the potential for ABF payments to stop sooner and therefore does not recognise the full value of the remaining annual payments of £180m scheduled until June 2033, which had a present value of £1.0bn at 30 June 2026.

2.3 The 2026 valuation maintains the long-term plan established in 2017, under which BTPS will gradually move towards a low-risk investment strategy, reducing the risk of the funding position falling behind plan. By 2034, the portfolio is intended to consist predominantly of bond and bond-like investments.

3. Funding the deficit

3.1 In 2017, BT and the BTPS established an objective to reach full funding by 2030. Each subsequent annual funding update indicated that the BTPS remained broadly on track to achieve this, while navigating regulatory headwinds and macroeconomic volatility.

3.2 At 30 June 2026, the BTPS had a funding deficit of £2,677m. This was behind plan primarily due to longevity and other demographic headwinds over the previous three years, partly mitigated by the scheme’s longevity hedges.

3.3 Payments under the 2023 plan will be reshaped. Payments totalling £30m will be brought forward and paid in FY27 to BTPS. Remaining FY28-FY31 scheduled contributions will be replaced with four zero-coupon bonds with the same payment profile, issued by BT Finance plc under its Euro Medium-Term Note Programme. BT will continue to make annual payments of £180m under the asset-backed funding arrangement established in 2021.

3.4 BT will provide £282m of additional funding, met through an extra zero-coupon bond maturing in 2033 with a par value of £420m.

3.5 The five zero-coupon bonds will be issued by BT Finance plc under its Euro Medium Term Note Programme shortly after this agreement, and in any case before the end of the financial year. The bonds will be issued to the BT-BTPS co-investment vehicle and will have the following maturity dates and par values:

• April 2027: £590m
• April 2028: £590m
• April 2029: £590m
• April 2030: £490m
• September 2033: £420m

3.6 This will substantially reduce the funding deficit, to around £0.3bn. No further deficit contributions are expected to be required for BTPS to reach full funding, as the remaining deficit is due to be met by investment returns above the prudent discount rate.

3.7 There is a £62m reduction (in present value terms) to on-going administration expense contributions, which will now end on 30 June 2032, two years earlier than under the 2023 agreement.

3.8 Payments from 1 July 2026 to fund the funding deficit at 30 June 2026 and on-going admin expenses, are shown in the table below.
 

¹ NPV as at 30 June 2026, calculated using the discount rate adopted for the 2026 funding valuation

3.9 To provide greater transparency and certainty, BT and BTPS have agreed principles for addressing a deficit in the event one exists at a future valuation. For a deficit of up to £2bn, BT and BTPS expect the recovery plan to comprise an initial payment of £300m shortly after agreeing the 2029 valuation, followed by annual payments of £600m until the deficit is cleared. These principles apply until 2040.

4. Co-investment vehicle

4.1 In 2021, BT and BTPS established a co-investment vehicle that allows contributions to be returned to BT if they are not required by the BTPS. This provides BT with protection against overfunding and greater confidence to provide funding upfront.

4.2 Refund assessments will move to a more objective test carried out between June 2032 and June 2040 based on BTPS’s funding position and subject to BT maintaining adequate financial strength.

4.3 In particular, the new 2033 bond issued to the co-investment vehicle will be returned to BT before maturity if it is not required by the BTPS at the June 2032 valuation.

5. Security on insolvency

5.1 BT has agreed to provide BTPS with an extra £4bn of security over EE Limited’s shares until 2040. This provides the BTPS with protection in the highly unlikely event of BT becoming insolvent, enabling an objective process to refund contributions from 2032. The payment on insolvency would be the lower of £4bn and the BTPS solvency deficit.

5.2 The provision of security is not expected to negatively affect BT’s credit rating.

6. Protections

BT will continue to provide the BTPS with certain protections to 2035.

6.1. Shareholder distributions

6.1.1 BT will provide additional payments to the BTPS by the amount that shareholder distributions exceed a threshold.

6.1.2 The threshold allows for shareholder distributions of £1.5bn in FY27, with 10% annual dividend per share growth for FY28 and FY29. This is up from £1.0bn for FY26 under the 2023 agreement.

6.1.3 Any additional payment triggered to BTPS will be capped at the level of the BTPS deficit at that time measured on a low dependency funding basis, currently around £0.3bn higher than the funding deficit.

6.1.4 BT has agreed to implement a similar protection at each subsequent valuation, with the terms to be negotiated at the time.

6.1.5 BT will consult with the Trustee if: it considers share buybacks for any purpose other than relating to employee share awards; it considers making any shareholder distributions in any of the next three years if annual normalised free cash flow of the group is below £1bn in the year and distributions within the year would be in excess of 120% of the above threshold; or it considers making a special dividend.

6.2. Material corporate events

6.2.1 The 2026 agreement removes payments being triggered from disposal of non-core business assets.

6.2.2 For network infrastructure related asset disposals of more than £2bn in total net cash proceeds over the next three years, BT will make additional contributions to the BTPS or the co-investment vehicle. The amount payable is the lower of BTPS’s deficit measured on a low dependency funding basis and one third of those net cash proceeds, although further payments may be required under legislation.

6.2.3 BT will continue to consult with the Trustee and use best endeavours to agree appropriate measures (which may include further payments) to protect BTPS where future corporate or third-party events could materially weaken BT’s ability to support the scheme financially.             

6.3. Negative pledge

6.3.1 The agreement maintains the negative pledge from BT, that future creditors will not be granted superior security to the BTPS in excess of £0.7bn, covering any member of the BT Group.

6.3.2 Business as usual financing arrangements are not included within the £0.7bn.

1. The funding deficit at 30 June 2023 is £3.70bn, down from £7.98bn at the 2020 funding valuation following £4.36bn of deficit contributions
2.  Annual contribution amounts remain unchanged, at £600m in each financial year until 31 March 2030, and a final payment of £490m before 30 April 2030. In addition, BT Group will continue to make payments of £180m each year under the asset-backed funding arrangement agreed at the 2020 valuation

The BTPS will continue to de-risk its investment strategy through to 2034, providing more certainty over outcomes, and is on track to be fully funded by 2030.

BT Group has agreed to continue to provide the BTPS with legal protections to 2035 as part of a long-term funding framework. The changes made to contractual protections for the BTPS at this valuation are consistent with our statutory obligations under the Pension Schemes Act 2021. The amendments agreed to the BTPS’s existing stabiliser mechanism provide greater certainty that BTPS will achieve full funding and increase the likelihood of a future refund to BT Group.

Simon Lowth, BT Group Chief Financial Officer, said: “I am pleased that the BTPS continues to deliver in line with the long-term plan, despite the uncertainty and headwinds observed since 2020. Building on the framework agreed at the 2020 valuation allowed for a swift conclusion of the 2023 valuation.

“The agreement allows us to deliver on our strategic initiatives such as investing in our networks and transforming our business. And it is consistent with our funding priorities of investing in value enhancing opportunities, supporting our pension funds, paying progressive dividends and maintaining a strong balance sheet.”

Otto Thoresen, BTPS Chairman, said: “The BTPS continues to be on track to fulfil its commitments to members, despite high levels of macroeconomic volatility and uncertainty.

“Our deficit is reducing, funding levels have improved and we remain on course to be fully funded by 2030.”

Further information

1. Funding position

1.1 Deficit at 30 June 2023

1.1.1 The funding deficit at 30 June 2023 is £3.70bn.

1.1.2 A summary of the funding position and principal assumptions is shown in the table below.

_{¹ Assumed to be 1% below RPI until 28 February 2030 and in line with RPI thereafter.}

1.1.3 Average life expectancies, for members 60 years of age, are as follows.

1.1.4 As noted at the 2020 valuation, we expected headwinds to the BTPS deficit from two Government announcements which took place after 30 June 2020:

1.1.4.1 The reform of the Retail Prices Index reduced the value of the Scheme’s assets by more than it reduced the value of its liabilities; and

1.1.4.2 Government’s intention to pay higher pension increases to members of public sector pension schemes which automatically flow through to the BTPS increased the Scheme liabilities.

1.1.5 The reduction in the BTPS deficit since 30 June 2020 reflects £4.36bn of deficit contributions made over the period. ~£1.2bn of headwinds from the above regulatory changes were mitigated through asset returns and a fall in life expectancy.

1.1.6 Hedging and risk-reduction implemented by the BTPS in recent years has effectively protected the BTPS against certain risks: the increase in real interest rates over the period has had limited impact on the funding deficit, despite the significant reduction in the size of both the assets and the liabilities.

2. Investment strategy and return expectations

2.1 The 2023 valuation maintains the gradual de-risking approach used for the 2017 and 2020 valuations, which assumed the BTPS would reach a low risk investment strategy by 2034, consisting predominantly of bond and bond-like investments. As at 30 June 2023, the BTPS held 71% of its assets in cash flow matched assets and 29% in growth assets.

2.2 The discount rate at 30 June 2023 has been set consistently with the 2017 and 2020 valuations. It is derived from prudent investment return expectations above a risk-free yield curve based on gilt and swap rates, reflecting the investment strategy over time. It is equivalent to using a flat discount rate of 1.0% per year above the risk-free yield curve, or 5.3% per year.

3. Funding

3.1 The £3.70bn funding deficit is on track to be eliminated by June 2030 through annual contributions from BT Group and payments from an Asset Backed Funding (“ABF”) arrangement.

3.2 An ABF arrangement, which was set up in 2021 as part of the last valuation agreement, pays £180m into the BTPS every year until June 2034. The stream of payments is financed through dividends from EE Limited, and shares in EE Limited provide security over the payment stream.

3.3 If the BTPS reaches full funding as calculated by the Scheme Actuary at any 30 June, subsequent payments to the BTPS from the ABF will cease.

3.4 The present value of the full payment stream was £1.2bn at 30 June 2023. The market value was £1.1bn at 30 June 2023 and was included in calculating the funding deficit. The £0.1bn difference reflects the possibility that the full payment stream will not be required.

3.5 BT Group received tax relief at inception of the ABF based on the original market value of £1.7bn, and will receive further tax relief if payments are made to the BTPS in excess of this amount.

3.6 Payments from 1 July 2023 to address the £3.70bn funding deficit are shown in the table below.

_{¹ Payments stop once deficit eliminated.   
² Excludes a £500m direct contribution and a £180m ABF payment made to the BTPS before 30 June 2023   
³ Direct payments are due by 30 April each year. £10m per year is payable to the BTPS. BT Group currently intends to the pay the balance into the co-investment vehicle.}

3.6 BT Group will continue to make annual contributions towards the cost of administering the BTPS (down from £30m pa at the 2020 valuation to £27m pa), and Pension Protection Fund levies (which have reduced substantially since the last valuation, from £30m in 2020 to around £4m in 2023).

4. Stabiliser mechanism

4.1 As part of the 2020 valuation, BT Group and the BTPS put in place a stabiliser mechanism, comprised of a co-investment vehicle and future funding commitments.

4.2 The co-investment vehicle provides BT Group with some protection against the risk of overfunding by allowing money to be returned if not needed by the BTPS, enabling BT Group to provide upfront funding with greater confidence.

4.3 The future funding commitment agreed triggers an additional stream of contributions should the deficit fall materially behind plan.

4.4 Co-investment vehicle

4.4.1 Payments made by BT Group into the co-investment vehicle will be invested as if part of the overall BTPS investment strategy. The value of the assets held in the vehicle will be included in the assets of the BTPS for the purposes of calculating the both the funding deficit and the IAS 19 deficit.

4.4.2 BT Group is eligible for future refunds if some of the co-investment vehicle funds are surplus to the BTPS’s requirements, unless the BTPS, acting prudently but reasonably, decides to defer or reduce these payments. The period over which this will be assessed has been changed from a single date, 30 June 2034, to a series of dates between June 2032 and June 2042, improving the likelihood of a refund for BT Group as outcomes are no longer dependent solely on market conditions at a single date. BT Group will receive tax relief if and when any funds are paid to the BTPS from the vehicle.  BT Group is taxed on the investment gains in the co-investment vehicle, which are subsequently tax deductible if paid to the BTPS.

4.5. Future funding commitment

4.5.1 In the potential scenario that the funding deficit falls behind plan, i.e. the recovery plan is no longer sufficient to meet the deficit, BT Group has agreed additional contributions which will automatically be payable.

4.5.2 An annual payment stream is switched on should two consecutive semi-annual reviews of the funding position show the funding deficit has fallen behind plan. The reviews will be carried out every June and December, with the first review to take place at 31 December 2023.

4.5.3 Annual payments of £150m (2020: £150m) commence if the deficit is £1bn behind plan before the 2026 valuation, increasing to £300m (2020: £200m) if the deficit is £2bn behind plan before the 2026 valuation. Payments which have been triggered will be published as part of BT Group’s financial statements.

4.5.4 The first payment is due within 12 months of the payments being switched on. Payments will stop once the semi-annual reviews show the deficit is back on plan. Payments can switch on again if the deficit position subsequently deteriorates. Any payments under this mechanism cease by 30 June 2034.

5. Protections

BT Group has agreed to continue to provide the BTPS with certain protections to 2035.

5.1. Shareholder distributions

5.1.1 For the next three years, continuation of the protection which provides additional payments to the BTPS by the amount that shareholder distributions exceed a threshold has been agreed. The threshold allows for 10% pa dividend per share growth based on dividends of 7.7p per share in FY23, adjusted to reflect the interim dividend declared at our half-year results.

5.1.2 BT Group has agreed to consult with the BTPS if it considers share buybacks for any purpose other than relating to employee share awards.

5.1.3 BT Group has agreed to consult with the BTPS before making any shareholder distributions in any of the next 3 years if both annual normalised free cashflow of the Group is below £1bn in the year and distributions within the year would be in excess of 120% of the threshold in 5.1.1; or before making a special dividend.

5.2. Material corporate events

5.2.1 If in any financial year BT Group generates net cash proceeds from disposals above a threshold, BT Group will pay extra contributions. The proceeds are net of acquisitions and the threshold is £750m until the 2026 valuation.

5.2.2 The amount payable is one third of the net cash proceeds.

5.2.3 BT Group will continue to consult with the BTPS if: it considers making acquisitions or disposals with a consideration of more than £1bn in any 12 month period; it considers making a Class 1 transaction which will have a material impact on the  BTPS; or it is likely to be subject to a takeover offer.

5.2.4 BT Group has also agreed to consult the BTPS should there be other corporate or third-party events which may have a materially detrimental impact on BT Group's covenant to the BTPS and use best endeavours to agree appropriate mitigation.

5.3. Negative pledge

5.3.1 Continuation of the protection that future creditors will not be granted superior security to the BTPS in excess of £0.5bn, to cover any member of the BT Group. Business as usual financing arrangements do not trigger this protection.

• Funding deficit at 30 June 2020 of £7.98bn

• Deficit repair plan consisting of two elements:

  • £2bn of deficit met through an asset backed funding arrangement over 13 years with annual cash payments of £180m pa, secured against the EE business

  • The balance being met over the existing 10 year period with annual cash contributions reducing from £900m initially down to £600m from 1 July 2024

• A new “stabiliser” mechanism that reduces the risk of future trapped surplus and provides more certainty that the BTPS will achieve its path to full funding by clarifying how future increased deficits would be funded

• Existing investment de-risking strategy maintained, allowing future investment returns to continue to play their role in eliminating the deficit while progressing over time to a low risk cash flow matched investment portfolio

• Agreement to protect the BTPS Trustee in the event of certain future corporate actions and taking into account BT’s obligations under pensions regulations

Simon Lowth, BT Chief Financial Officer, said: “I’m pleased to announce that we’ve concluded our triennial funding review with the Trustee, delivering a good outcome for BT and for all members of the BTPS with reduced risk for both sides. This agreement keeps us on track for zero funding deficit by 2030, whilst ensuring we have the financial capacity to drive our value-enhancing investment opportunities, including in our FTTP and 5G rollouts and modernisation programme.”

Otto Thoresen, Chairman of the BTPS Trustee, said: “The Trustee is pleased to have reached an agreement with BT on a funding solution which is fair and affordable.

 “Good progress has been made since the last full valuation in 2017. The deficit reduction plan is on track with the Scheme set to be fully funded by 2030.

“Throughout the valuation process, we’ve worked closely with BT developing and agreeing a solution which allows BT to invest whilst providing the Scheme with upfront funding and additional funding if the deficit increases.

“The agreement, together with the ongoing de-risking of the investment strategy, provides an enduring solution giving us greater confidence that we will achieve our objectives.”

BT and the BTPS Trustee have reached agreement on the 2020 triennial funding valuation of the BTPS (the “2020 valuation”) and how the deficit will be addressed (the “deficit repair plan”).

The funding deficit at 30 June 2020 has been agreed at £7.98bn, broadly in line with the projected position from 30 June 2017, when the deficit was £11.3bn. The key drivers for the reduction are £4.5bn of deficit contributions and lower assumed future life expectancies, partly offset by an allowance for the reform of RPI.

The deficit repair plan is made up of:

1. An Asset Backed Funding (‘ABF’) arrangement to meet £2bn of the deficit:

• Provides payments of £180m pa to BTPS over 13 years, secured on EE Limited shares

• Payments switch off if the deficit is eliminated earlier than expected

• On implementation, BT receives tax relief on £1.7bn fair value of arrangement (allowing for the possibility that payments may switch-off)

2. Payments between 1 July 2020 and 30 June 2023 of £2.7bn (further detail in table in section 3.1 below):

• £500m paid in March 2021

• £900m by 31 March 2022

• £800m by 31 March 2023

• £500m by 30 June 2023

3. Payments of £600m pa from 1 July 2023 to 30 June 2030 which BT can choose to pay either to the BTPS or to a new co-investment vehicle. This vehicle enables:

• funds not needed by the BTPS in 2034 to be returned to BT, reducing the risk of trapped surplus

• assets to be invested as if part of the overall BTPS investment strategy

4. Potential additional payments of up to £200m pa to the BTPS, if required, to meet any increase in the deficit above £1bn that arises at a future annual review. The payments will stop once the deficit at a future annual update has improved such that the remaining deficit repair plan is sufficient to meet the deficit. This provides more certainty to BT over the incremental cash impact in the event of any additional deficit.

The deficit repair plan was determined after considering developments since 30 June 2020, including RPI reform based on the Government’s decision in November 2020 and a Government consultation on changes to public sector pension schemes launched in October 2020.

BT has agreed to continue to provide the Trustee with legal protections to 2035 as part of a long-term funding framework.

The valuation documentation will be submitted to the Pensions Regulator within ten working days of its completion as required by legislation. BT and the Trustee will continue to monitor the funding position of the BTPS, with the next formal review expected to be undertaken in the normal way at the 2023 valuation.

Further information

1. Funding position

1.1 Deficit at 30 June 2020

1.1.1 The funding deficit at 30 June 2020 is £7.98bn.

1.1.2 A summary of the funding position and principal assumptions is shown in the table below.

 ¹ Assumed to be 1.0% below RPI until 30 June 2030 and 0.25% below RPI thereafter.

1.1.3 Average life expectancies, for members 60 years of age, are as follows.

1.1.4 The key drivers for the reduction are £4.5bn of deficit contributions and lower assumed future life expectancies, partly offset by an allowance for the reform of RPI. Due to hedging implemented by the Scheme in recent years, the fall in real interest rates over the period had limited impact on the deficit.

1.2 Developments since 30 June 2020

1.2.1 Government and the UK Statistics Authority announced the reform of the Retail Prices Index, which lowers the value of the Scheme’s assets by more than the reduction in value of its liabilities.

1.2.2 Government announced it is planning to pay higher pension increases to members of public sector pension schemes, which will automatically flow through to the BTPS, increasing the Scheme liabilities.

2. Investment strategy and return expectations

2.1 The 2020 funding valuation maintains the approach used for the 2017 valuation, which assumed the Scheme would gradually de-risk to a low risk investment approach by 2034, consisting predominantly of bond and bond-like investments. As at 30 June 2020 the Scheme held 63% of its assets in cash flow matched assets and 37% in growth assets.

2.2 The discount rate at 30 June 2020 has been set consistently with the 2017 valuation. It is derived from prudent investment return expectations above a risk-free yield curve based on gilt and swap rates, reflecting the investment strategy over time.

2.3 The risk-free yield curve has been updated to reflect the move in swap pricing from LIBOR to SONIA, leading to a discount rate of 1.41% per year above the risk-free yield curve in 2020, trending down to 0.83% per year above the risk-free yield curve in the long-term. The assumption is equivalent to using a flat discount rate of 0.9% per year above the risk-free yield curve, or 1.4% per year at 30 June 2020

3. Funding

3.1 Cash payments to the BTPS are shown in the table below.

¹ Payments stop once deficit eliminated. Payment stream will be acquired by BTPS in June 2021 and treated as an upfront contribution of £1.7bn from BT

² BT has option to make payments after 30 June 2023 to co-investment vehicle

³ £400m of each payment due by 30 June

⁴ £500m due by 30 June

⁵ £490m of each payment due by 30 June. £10m is payable to the BTPS, and BT has the option to pay remaining amounts into the co-investment vehicle

3.2 In addition, contributions towards the cost of administering the Scheme, PPF levies and providing future benefits for the remaining c.20 active members will continue to be made.

4. Asset Backed Funding (“ABF”)

4.1 An ABF arrangement will be set up to fund £2bn of the deficit. This will be structured as a Scottish Limited Partnership (“SLP”), with £180m pa payable annually in June. The stream of payments will be financed through proceeds from EE Limited, and shares in EE Limited will provide security over the payment stream. No impact is expected to the day to day operations of BT or EE as a result of implementing the structure.

4.2 If the BTPS reaches full funding as calculated by the Scheme Actuary at any 30 June, the payments to the BTPS will cease.

4.3 The ABF meets £2bn of deficit as all 13 payments are assumed to be made to the BTPS. However, the market value reflects the possibility that payments may switch-off. This leads to the BTPS recognising a £1.7bn asset initially, with a corresponding reduction in the funding deficit, and BT receiving tax relief on that amount. Tax relief on the balance of the payments comes through over time as payments are made to the BTPS.

4.4 The ABF arrangement has no impact on the gross IAS 19 deficit in the British Telecommunications plc consolidated accounts at inception, but will reduce the deferred tax asset recognised, as tax relief has been received up-front. Annual capital and interest payments will reduce the IAS 19 deficit.

5. Stabiliser mechanism

5.1 Co-investment vehicle

5.1.1 BT and the Trustee have agreed a new co-investment vehicle, which provides BT with some protection against the risk of overfunding by allowing money to be returned if not needed by the Scheme, enabling BT to provide upfront funding with greater confidence.

5.1.2 BT has the option to pay deficit repair plan payments after 30 June 2023 into the co-investment vehicle (which is a SLP separate to the SLP used for the Asset Backed Funding vehicle), which will be invested as if part of the overall BTPS investment strategy. The value of the assets held in the vehicle will be included in the assets of BTPS for the purposes of calculating the both the funding deficit and the IAS 19 deficit.

5.1.3 To the extent there is a funding deficit at 30 June 2034, the co-investment vehicle will pay funds to the BTPS. BT receives tax relief on funds paid at this point, rather than in the year when funds are paid from BT into the vehicle.

5.1.4 Any remaining funds in the co-investment vehicle are returned to BT in three annual payments in 2035, 2036 and 2037, unless the Scheme has subsequently moved into deficit or the Trustee, acting prudently but reasonably, decides to defer or reduce these payments.

5.1.5 As part of setting up the arrangements, we are working with HMRC to confirm the taxation position.

5.2. Future funding commitment

5.2.1 BT has agreed additional contributions which will be automatically payable in the event the deficit repair plan is no longer sufficient to meet the deficit.

5.2.2 Should an annual update of the funding position reveal that the Scheme has fallen more than £1bn behind plan, BT will commence additional payments between £150m pa to £200m pa. The first annual test will be at 30 June 2021.

5.2.3 The payments will stop once the deficit at a future annual update has improved such that the remaining deficit repair plan is sufficient to meet the deficit. Payments can switch-on again if the deficit position subsequently deteriorates. Any payments under this mechanism cease by 30 June 2034.

6. Protections

BT has agreed to continue to provide the Trustee with certain protections to 2035, or until the deficit calculated using the long-term discount rate, currently 0.83% per year above the risk-free yield curve, (the “Protections Deficit”) has reduced below £2bn. A £2bn deficit on this measure is currently broadly equivalent to a nil funding deficit.

6.1. Shareholder distributions

6.1.1 For the next three years, continuation of the protection which provides additional payments to the BTPS by the amount that shareholder distributions exceed a threshold. The threshold allows for 10% pa dividend per share growth based on dividends restarting at 7.7p per share in 2021/22.

6.1.2 BT has agreed to implement a similar protection at each subsequent valuation, with the terms to be negotiated at the time.

6.1.3 BT has agreed to consult with the Trustee if it considers share buybacks for any purpose other than relating to employee share awards.

6.1.4 BT has also agreed to consult with the Trustee before making any shareholder distributions in any of the next 3 years if both annual normalised free cashflow of the Group is below £1bn in the year and distributions within the year would be in excess of 120% of the threshold in 6.1.1; or before making a special dividend.

6.2. Material corporate events

6.2.1 If in any Financial Year BT generates net cash proceeds from disposals above a threshold, BT will pay extra contributions. The proceeds are net of acquisitions and the threshold is £0.75bn until the 2023 valuation, and £1bn thereafter (increased annually by CPI from 30 June 2020).

6.2.2 The amount payable is one third of the net cash proceeds, or the amount by which the Protections Deficit exceeds £2bn if lower.

6.2.3 BT will continue to consult with the Trustee if: it considers making acquisitions with a total cost of more than £1bn in any 12 month period; it considers making a disposal of more than £1bn; it considers making a Class 1 transaction which will have a material impact on the Scheme (acquisition or disposal); or it is likely to be subject to a takeover offer.

6.2.4 BT has also agreed to consult the Trustee should there be other material corporate or third-party events which may have a material detrimental impact on BT's covenant to the Scheme and use best endeavours to agree appropriate mitigation.

6.3. Negative pledge

6.3.1 Continuation of the protection that future creditors will not be granted superior security to the Scheme in excess of a threshold, to cover any member of the BT group. The threshold has been reduced from £1.5bn to £0.5bn. Business as usual financing arrangements do not trigger this protection.