The BAA Pension Scheme Newsletter Winter 2005/06

In thisissue

The timesthey are achangin’...

p2

Moving On

p4

Comingsoon to aletter boxnear you

p6

Frankreports

p8

Planningfor your lifeafter work

p10

ss ss

new and

improved!

We are pleased to introduce you to the new and improvedBAA Pension Scheme newsletter ‘Focus’.This newsletter is the first of a number of newcommunications you will receive in thecoming months. Our aim is to helpyou to understand more about theScheme and the different benefitsthat it offers you, as well as theongoing changes to pensionprovision being considered andintroduced by the Government.

•02

Changin’...

Over the past 30 years, many things havechanged, and not just fashions, or the latest puzzlecraze. In September 1975 interest rates stood at14%, which was bad news for mortgage payersbut good news for savers.

There are now over three and a half million moreof us than there were in 1975. And we are alsoliving longer - about 10 years longer on average, ifyou retire at age 60.

And talking of retirement, providing a pension alsocosts a lot more than it used to – more than twiceas much as it did in 1980 as the chart on the nextpage shows.

It’s changes like these that have brought the futureof pension provision to the top of the agenda forgovernments and scheme sponsors, not just in theUK but across Europe and the US.

In the UK, as we reported last year, this hasresulted in new pension legislation in the form ofthe Finance Act 2004 and Pensions Act 2004,including the sweeping changes to the currentpension taxation regime, which are due to comeinto effect from April this year.

You will already have received a letter outlining thesechanges and how they will affect you as a memberof the BAA Pension Scheme and we have included abrief reminder of these changes in this issue.

The times they are a

Changin’...

03 •

Details of the new Civil Partnership Act, whichgives same-sex partners the same pension rightsas married couples, have also been included.As well as the usual facts and figures, there isinformation on the new Annual Statement ofFunding and Frank Oldham, the Scheme Actuary,has answered some of the questions you mayhave about the financial health of the Scheme.

As always, we welcome your views on thiscommunication and, if you have any commentsor questions please let us know by writing to:BAA Pensions, Saxley Court, 121-129 VictoriaRoad, Horley, Surrey RH6 7AS. Or you can sendan email to: pensions@baa.com

Tony Ward, ChairmanOn behalf of the Trustees of the BAA Pension Scheme

What is your pension worth to you?Since the early 1990s interest rates have reducedsignificantly. This is considered a comprehensive changeto world markets rather than a blip. Together withincreased life expectancy, this means the cost of buyingpensions has increased.

This chart illustrates how the cost of buying a pension of£1,000 per annum has increased since 1980.

Moving on … a look back

0 £5,000 £10,000 £15,000 £20,000

1980 £8,500

£17,500

£19,500

2002

2005

1975 Today

Top food Spam Rocket salad

Top craze Top trumps Sudoku

Cost of 1 pint of milk 7p 35p

Basic rate of tax 35% 22%

Interest rates 14% 4.75%

UK population size 56 million 59.6 million

Life expectancy atage 60

Man: 17 years

Woman: 20 years

Man: 28 years

Woman: 31 years

Pensions Act 2004The main features of the Pensions Act were:

• The replacement of the Occupational PensionsRegulatory Authority (OPRA) with a new PensionsRegulator, from 6th April 2005. The Regulator haswider-ranging powers and responsibilities,including the promotion and improvement in theunderstanding of the good administration of ‘workbased’ pension schemes.

• The introduction of a Pension Protection Fund from6th April 2005, to help protect the benefits ofmembers of ‘defined benefit’ schemes, in the eventthat their scheme is discontinued where theemployer is insolvent and the scheme has a deficit.

• The introduction of a required level of Trusteeknowledge and understanding.

• Changes to funding requirements, with the aim ofensuring schemes have sufficient and appropriateassets to cover their liabilities. (We introduce thenew ‘Annual Statement of Funding’, which is partof the new funding regulations, on page 6 of thisnewsletter alongside the findings of the latestvaluation of the Scheme.)

In 2004 and 2005, the Government introduced

a number of changes to legislation, some of

which have already been introduced and some

are being introduced over the next few years.

We have covered some of these changes briefly

in previous newsletters, and you will have

received a detailed letter and leaflet covering

the tax simplification changes to the BAA

Pension Scheme. You will also be sent a new

Scheme Explanatory Booklet in the next few

months which will remind you of the benefits

offered to you through the Scheme and

incorporates all these changes.

The legislative changes introduce both new‘requirements’ and new ‘opportunities’. Here is abrief summary of these changes and how they affectyou as a member of the BAA Pension Scheme.

On•04

Moving

Improvements in PensionsOn

Finance Act 2004 - Tax simplificationThe provisions introduced by this part of the 2004Finance Act aim to sweep away the existing, complexweb of tax regimes for the various types of pensionscheme (company, personal and stakeholder) andreplace them with a single, simplified regime. Mostof these provisions take effect from 2006 andchanges to the BAA Pension Scheme, which havebeen agreed by the Company and Trustees, include:

• Changes to the calculation of the tax-free lumpsum that can be taken at retirement – mostmembers will now find they can take moretax-free cash than before.

• From April 2006 anyone leaving with more than3 months but less than 2 years’ service will be ableto opt for a full transfer value instead of simplyreceiving a refund of their contributions.

• The facility to make AVCs will be removed if youare not currently making them. (Although you willstill be able to purchase ‘Added Years’ ofPensionable Service – see page 10 formore details.)

• The minimum age at which you can retire in goodhealth and take a pension will be increased from50 to 55 from 6 April 2010.

• Tax relief on pension savings up to a ‘lifetimeallowance’ of £1.5m (broadly equivalent to apension of £75,000 a year). This limit is due to riseannually. A special additional tax charge will applyto pension savings above this limit.

• If the increase in the value of your pension,including contributions to AVCs and definedcontribution arrangements, comes to more than£215,000 in a year, tax will be due on the excess.This limit will increase annually and does not applyin the year before retirement.

• You will be able to contribute to several pensionarrangements at the same time within theconfines of the above rules.

Overall the changes are quite far-reaching. And, ifyou have pension benefits in another pensionarrangement(s) your other pension provider(s) will beable to give you more information about the specificchanges in relation to their pension arrangement.

If you require any further information or have anyquestions about the changes to the BAA PensionScheme, please contact the Pensions Helpline on01293 821 717, Monday to Friday 9.00am to 4.00pmor email pensions@baa.com

05 •

Civil Partnership ActThe new Civil PartnershipAct came into effect on6th December 2005. Underthe Act, same-sex couplesmay have their relationshiplegally recognised byregistering it as a Civil Partnership.As civil partners they will have, in mostrespects, the same legal rights and responsibilities asmarried partners.

Where existing law allowed, benefits were alreadyavailable to same-sex partners through the BAAScheme at the Trustees’ discretion.

As a result of the Act, the following rules and changesto rules came into force:

• The rules governing the payment of a spouse’spension to a partner to whom the member waslegally married at the time of their death, have nowbeen extended to include civil partners.

• Similarly the rules governing the provision ofchildren’s pensions have also been amended toinclude dependent children of a civil partner.

These changes will affect benefits payable on deathand all benefits provided by the BAA Pension Schemewill be exactly the same for registered civil partners asfor a spouse.

In addition, if a civil partnership is dissolved, pensionsharing will apply in the same way as on divorce.

•06

Coming Soon... to a letter box near you

One of the new requirements beingintroduced by the Government for‘defined benefit’ schemes, such as theBAA Pension Scheme (the Scheme), is anAnnual Funding Statement. The aim ofthe Statement is to keep membersinformed of the ‘financial health’(funding position) of their scheme on aregular basis. It is being issued as part ofthe Government policy to improvemember awareness and understandingof funding issues rather than becausethere is anything amiss with a scheme’sfunding position or the way it is run.

Full valuations of the Scheme are already carriedout every three years, with interim annual reviews,so that the Company and the Trustees can makesure the value of the Scheme’s assets andcontributions paid in keep pace with the cost ofmembers’ benefits. The new funding statementswill include details of these valuations. They willreport on the financial health of the Schemeassuming that it carries on, as expected, providingbenefits for both current and future members(known as an ‘ongoing valuation’). And they willalso include information about the ‘solvencyposition’ of the Scheme. This is what would

happen in the most extreme circumstances of theScheme winding up with the Company in financialdifficulties and unable to provide additionalfinancial support.

Calculating the valuations is not as simple as it maysound because many of the benefits won't need tobe paid for many years and their cost, as well asthe value of the Scheme’s assets, can vary fromtime to time depending on a number of factors.There are also a number of variable factors thatneed to be taken into account, such as members’expected earnings, inflation and investment returnsand average life expectancy. So the Trustees employan Actuary, Frank Oldham of Mercer HumanResource Consulting, to carry out these calculationsand recommend the contributions that theCompany should make to pay for future benefitsand to correct any shortfall in funding. The firstAnnual Funding Statements are required to beprovided to members by no later than 23rdSeptember 2006, although the exact timing hasbeen left up to individual schemes and theirtrustees so that they can fit them in with theirregular scheme valuations and funding reviews.The Trustees will be preparing the Annual FundingStatement for issue later this year, but we haveasked Frank to present the last valuation figures,calculated on 30th September 2004, and answer afew questions, explaining what they mean. You canfind these question and answers in ‘Frank Reports’if you turn to page 8.

07 •

on you

Giving you confidence inthe future of your pension

The first Annual FundingStatement will be sent to yourhome address later this year, andwill keep you informed of thefinancial health of the Scheme.

Keeping it all in checkAs you can read in the article“Running the Scheme” onpage 9, your Trustees havea number of duties andare responsible forrunning the Scheme inaccordance with therules. Some of theseduties call for highlyspecialised knowledge.The Trustees are not themselves expected to beexperts in everything they are responsible for, sothey seek professional advice to help themthrough the more complex parts of trusteeship.

Details of the current appointed professionaladvisers are shown below:

Scheme ActuaryFrank OldhamMercer Human Resource Consulting

AuditorsMazars LLP, Chartered Accountants

BankersBarclays Bank Plc

CustodianJP Morgan Chase

Investment ManagersCapital International LimitedFidelity Pensions Management LtdGoldman Sachs Asset ManagementState Street Global AdvisersUBS Global Asset Management (UK) Ltd

Investment Performance MeasurementThe WM Company

SolicitorsCMS Cameron McKenna LLP

•08

Frank reports:The good health of the Scheme and what the figures mean

Q Frank, what did the latest ongoingvaluation show?

A The last full actuarial valuation was carried out asat 30th September 2004 and the interim annualreview on 30th September 2005 showed therehas been little change in the valuation. As at30th September 2004, the ongoing valuationshowed that the assets of the Scheme exceededthe liabilities by £78.2m and the funding levelwas 105.2%. So the figures show the Scheme iscurrently more than well enough funded to paybenefits to existing and future members.

Q How does this relate to the FRS17valuation that is shown in theCompany accounts?

A The FRS17 Company Accounting Standard alsoinvolves a valuation of the Scheme’s assets andliabilities. This is a prescribed valuation thatcompanies must complete as part of theiraccounts to enable a like-for-like comparisonbetween company pension schemes. Therefore,it does not reflect pension scheme-specificconsiderations, such as investment strategy and

related assumptions. This means that the twovaluations are likely to differ and, as in the casewith the BAA Scheme, while a scheme may be insurplus according to the ongoing valuation, itmay be in deficit when valued using FRS17accounting measures. However, as the ongoingvaluation reflects the scheme profile andobjectives more closely, it is this valuation that isimportant to the Trustees, and that they use as abasis to help them to decide on the futureinvestment strategy and to recommendcontribution rates. It is also this scheme-specificongoing valuation that the Government believesis important for members to understand and somust be included in the Annual FundingStatement you will receive later this year.

Q What was the latest solvency valuation?

A If the Scheme had discontinued on the valuationdate of 30th September 2004, the assets wouldhave been approximately 69.5% of the amountnecessary to secure all the benefits accrued andin payment to date with an insurance company.

Q Should members be concerned aboutthese valuations?

A The valuations show that on an ongoing basis theScheme is in good financial health, so membersshould have no immediate concerns. As explainedin Tony’s introduction at the start of this newsletter,falling interest rates, poor investment marketconditions, increased life expectancy and changesto legislation have had a big impact on pensionschemes. So the Trustees are really pleased that theBAA Pension Scheme is currently well funded.

In fact, despite this healthy position, recognisingthat pensions are becoming more expensive toprovide, the Company agreed to significantlyincrease its contributions to the Scheme.

The level of solvency funding is also better thanthat of many UK pension funds at the moment.And members should also remember that,under new Government legislation, if theScheme were wound-up while the Companywas still solvent the Company would be legallybound to make up any shortfall in theScheme’s assets in full. In other words thesolvency position is a ‘worst case’ scenariowhere there are both insufficient assets in theScheme and in the Company. And in thatscenario, there is also the added protection ofthe Pension Protection Fund, introduced inApril 2005 and explained in more detail in lastyear’s newsletter, which acts as a safety net forthe members.

However, it should be remembered that bothof these valuations are a snapshot taken at thevaluation date, and the relationship between apension fund’s assets and its liabilities willinevitably vary over time. For most schemes,the continuing financial support andcommitment of the sponsoring company, ofthe sort demonstrated by BAA, will remain themost important safeguard for the long-termsecurity of members’ benefits.

09•

Frank Oldham – Scheme Actuary

Running the SchemeThe BAA Pension Scheme is run by BAA Pension

Trust Company, which is quite separate from BAA

plc. The directors of the trust company –

the Trustees – are responsible for managing the

Scheme in members’ best interests, in line with the

Trust Deed and Rules. They make sure that

contributions are collected, benefits are paid and

that the assets of the Scheme are properly invested

and all money is correctly accounted for. They make

decisions about individual members’ benefits, such

as who should receive death-in-service benefits, and

also decisions that affect the whole Scheme, such as

how much to invest in various stock markets.

Whether acting on behalf of a single member or

the whole Scheme, the Trustees must represent the

views of and act in the interests of the members

when dealing with the administrators, investment

providers and the employer (BAA). Some of the

Trustees are appointed by the Company and some

are nominated by the members of the Scheme.

(Turn over to page 11 for details of your

Scheme Trustees.)

•10

Most of us dream of a retirement filled with travel, comfort and some of theluxuries of life you never seem to have time to enjoy when you’re working.Your membership of the BAA Pension Scheme is a great step towards providing agood standard of living in retirement, but if you’re wondering if there’s more youcan do here are a few tips.

More pension optionsFrom April 2006, the ability to save towards yourretirement becomes more flexible allowing you tosave more in a year and in any number of approvedpension savings vehicles, such as Personal orStakeholder Pensions.

Always take adviceWhenever you are making investment decisions, youshould always think carefully and take independentspecialist advice. Your personal circumstances willmean some pension or savings products are notsuitable or that some are more suitable than others.As some carry an element of risk (ie if they fall invalue you may not get back all that you invested), youneed to understand this and be comfortable with itbefore you invest.

A financial adviser can help you by examining yourpersonal circumstances and your savingsaims and helping to draw up a plan.If you want to find out more aboutindependent advice, you could contactIFA Promotions, an organisation thatpromotes independent financial advice, byphoning its helpline on 0800 085 3250 or bylogging on to its website at www.unbiased.co.uk.

ReviewYour benefit statement is a good place to start toreview your pension savings, as it shows how yourbenefits in the Scheme are building up. Rememberyou’re also likely to get some State pension benefits.You can ask for a forecast of your likely State benefitsby completing form BR19 available at your local SocialSecurity or Pension Service Office or online at:

http://www.thepensionservice.gov.uk/atoz/

atozdetailed/rpforecast.asp

Once you have reviewed your current arrangementsyou may want to look at saving more.

Buying ‘added years’ of Pensionable ServiceIf you cannot complete 36 years’ Pensionable Serviceby the time you reach age 60, the BAA PensionScheme allows you to pay additional contributions inorder to receive ‘added years’ of Pensionable Service.You may pay for these added years either by monthlydeductions from your salary or by a one-off lump sumpayment. To find out how much it may cost you, youneed to complete a simple form, and should contactPensions for a copy or more information.

LIFE after workPlanning for your life

11•

Introducing Your TrusteesAs the Trustees are here to make sure that yourinterests are taken into account in the managementof the Scheme, we thought you might like to knowwho they are.

Chairman

Mr Tony Ward Services Director, BAAOBE

Company-appointed Trustees

Mr S Condie Planning and Surface Access Director,BAA (Member-nominated until 31 March 2005, Company-appointedthereafter)

Mrs M Ewing Chief Financial Officer, BAA

Mrs R Rowson Company Secretary, BAA

Member-nominated Trustees

Mr T Armstrong Airport Firefighter, Aberdeen AirportLtd (from 1 July 2005)

Ms L Gregory Employee Relations DevelopmentManager (from 1 April 2005)

Mr S F Killick, Airside Roads Duty Officer, HeathrowMBE Airport Ltd

Mr E Lomas Pensioner Representative

Secretary to the Trustee Company

Mr E W Hunt FPMI

Other Trustees during the year

Mr R Cato Chairman and Managing Director,Gatwick Airport Ltd (Company-appointed retired 31 March 2005),

Mr A Gilmour Airport Firefighter, Glasgow AirportLtd (Member-nominated, retired 16 May 2005)

Independent Trustee

The Law Debenture (BAA) Pension Trust Corporation plc

•12

Fact &FiguresFinancial Highlights

Income (£000)

Contributions from members £13,426

Contributions from Company £39,835

Transfers in £4,569

Investment Income £37,872

TOTAL £95,702

Spending (£000)

Pensions £41,986

Payments for leavers £1,570

Lump sums (on retirement or death) £8,687

Admin expenses and fees £5,576

TOTAL £57,819

What it’s all worth (£000)

Value of Scheme assets as at 30th September 2004 £1,574,823

Income – Expenditure £37,883

Change in market value of assets £268,160

Value of the Scheme as at 30th September 2005 £1,880,866

13 •

Membership, as at 30th September 2005

Investments

Looking back The Trustees overall strategy of investing 35% inUK Equities, 35% in Overseas Equities and 30% inBonds has been broadly maintained. Over the yearto 30th June 2005, returns from most of the majorareas of investment were strong, with investmentin the UK and overseas equities returning 18.7%and 12.4% respectively. Returns from bonds werealso good at around 10.8% in the UK, with index-linked bonds returning 10.1%. The Scheme’sreturn was slightly less than that of its benchmark(14.1% by comparison to 15.2%), held back bynegative stock selection, more particularly inGlobal Equities.

Moving forwardFor the twelve months to 30th September 2006,our overall expectation is that markets will moveahead at a relatively modest pace and our strategyis to spread our investments widely enough tobenefit from increases without taking undue,market, sector or stock-specific risks.

The statement of Investment Principles, which setsout the investment strategy, can be obtained onrequest from the Scheme Secretary.

Active members

Employees currentlycontributing to

the scheme

Deferredpensioners

Former employeeswith benefits inthe Scheme forwhen they retire

Pensioners

Retired members anddependants of members

who have died

UK Equities . . . . . . . . . . . . . . . . . . . . . .33.8%

Overseas Equities . . . . . . . . . . . . . . . . .33.4%

Corporate bonds . . . . . . . . . . . . . . . . . .9.7%

Index-linked bonds . . . . . . . . . . . . . . . . 7.2%

Gilts . . . . . . . . . . . . . . . . . . . . . . . . . . . .11.4%

Assets supporting currency exposure . 3.3%

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.2%

8963 (48.7%) 3037 (16.5%) 6405 (34.8%)

33.8% 33.4%

9.7%

7.2%

11.4%3.3%1.2%

•14

Webwatch onPensions

This site is part of theGovernment’s Department forWork and Pensions website(www.dwp.gov.uk). It is dividedinto several sections: one foryounger people planning ahead,one for those nearingretirement and one forpensioners. You can downloadleaflets and information whichexplain the different pensionoptions (personal, stakeholder,occupational) and getinformation on State pensionsand benefits – for example, youcan apply for a forecast of yourState retirement pension using aform available from the site.

With pensions almost continuously in the news, many people are trying to find outmore about how to save for retirement and about their pension options. Over the lastfew years the internet has become an important source for those searching for moreinformation on pensions. But, like much of the information on the internet,separating the wheat from the chaff can be difficult.

Here are four of the more useful websites, with short descriptions of their content.

www.thepensionservice.gov.uk – The Department for Work

and Pensions

If you are already aware ofsome pension issues and wantto know more, the ‘Yourpensions’ section of this site(look for the button on the lefthand side of the screen) offersnews and features onpension issues.

news.ft.com/yourmoney – The Financial Times

If you are already aware ofsome pension issues and wantto know more, the ‘Yourpensions’ section of this site(look for the button on the lefthand side of the screen) offersnews and features onpension issues.

www.news.ft.com/yourmoney – The Financial Times

This site helps you to findindependent financial advice.If you want to review yourpension and savings, gettingadvice from an independentfinancial adviser (IFA) can behelpful. The site contains asearch facility to find an IFA inyour area, and guides topensions, savings, investmentsand tax.

www.unbiased.co.uk – IFA Promotion

?Any Questions?If you would like to find out more aboutanything covered in this issue, or have anyquestions about your individual benefits youshould contact the Pensions team.

The Pensions team can also supply you withcopies of any of the Scheme’s official documents(for example, the Report and Accounts,Statement of Investment Principles or Trust Deedand Rules).

Write to:BAA PensionsSaxley Court121-129 Victoria RoadHorleySurreyRH6 7AS

Tel:01293 821717

Email:pensions@baa.com

15 •

Pensions jargon can make evensome of the straightforwardissues around pensions difficultto understand for the layperson. This guide to pensionsin plain English could help youto get to grips with some of thepension terms you come across.

www.plainenglish.co.uk/PensionsA-Z.html – Plain English Campaign

Designed & produced by MercerHR©7191_06