Notes to the consolidated annual financial statements | NOTE 31

			Group						Company
The Telkom Pension Fund			2015 Rm		2014 Rm				2015 Rm		2014 Rm
The net periodic pension costs include the following components:
Interest cost on projected benefit obligations			18		20				18		20
Curtailment gain			–		(1)				–		(1)
Service cost on projected benefit obligations			4		6				4		6
Interest on plan assets			(20)		(24)				(20)		(24)
Net periodic pension gain recognised in profit and loss			2		1				2		1
The net periodic other comprehensive income includes the following components:
Actuarial gain from financial assumption changes			–		(82)				–		(82)
Asset ceiling in terms of IAS 19.64			(6)		96				(6)		96
Net periodic pension expense recognised in other comprehensive income			(6)		14				(6)		14
Cumulative actuarial gain			84		84				84		84
Pension fund contributions			(1)		(2)				(1)		(2)
The status of the pension plan obligation is as follows:
At beginning of year			194		262				194		262
Interest cost			18		20				18		20
Current service cost			4		6				4		6
Employee contributions			1		2				1		2
Benefits paid			(103)		(34)				(103)		(34)
Curtailment gain			–		(18)				–		(18)
Actuarial loss/(gain)			26		(44)				26		(44)
Benefit obligation at end of year			140		194				140		194
Plan assets at fair value:
At beginning of year			374		362				374		362
Interest on plan assets			20		24				20		24
Benefits paid			(103)		(34)				(103)		(34)
Contributions			1		1				1		1
Curtailment loss			–		(17)				–		(17)
Actuarial gain			28		38				28		38
Plan assets at end of year			320		374				320		374
Present value of funded obligation			140		194				140		194
Fair value of plan assets			(320)		(374)				(320)		(374)
Fund surplus			(180)		(180)				(180)		(180)
Asset ceiling in terms of IAS 19.64			152		145				152		145
Recognised net asset			(28)		(35)				(28)		(35)
Interest on plan assets			20		24				20		24
Actuarial gain on plan assets			28		38				28		38
Actual return on plan assets			48		62				48		62
Plan assets balance comprises:
Cash and cash equivalents			26		67				26		67
Equity securities			154		238				154		238
Property			5		–				5		–
Bonds			42		35				42		35
Foreign investments			93		34				93		34
Total			320		374				320		374
Sensitivity analysis
Increasing discount rate by 0.5%			(5)		(7)				(5)		(7)
Decreasing discount rate by 0.5%			5		6				5		6

Funding arrangements

The Telkom Pension Fund investment strategy has been implemented through the appointment of two asset managers with global balanced mandates. Within these mandates the manager is responsible for and has sole discretion of determining the asset allocation, i.e. the mix of the various asset classes used, based on their investment views. In addition a small additional allocation to a specialist manager in the Africa Equity and SA Cash asset classes was added to further diversify the portfolio and to provide return enhancement. The Telkom Pension Fund's total asset allocation is thus derived by combining the two balanced asset managers' portfolios with the Africa and additional cash allocation.

			Group						Company
Principal actuarial assumptions were as follows:			2015 Rm		2014 Rm				2015 Rm		2014 Rm
Assumptions regarding future mortality are based on mortality tables. The current longevities underlying the values of the liabilities in the defined benefit plan are as follows:
Males over 65			16.3		16.3				16.3		16.3
Females over 65			20.5		20.4				20.5		20.4
Discount rate (%)			7.3		9.2				7.3		9.2
Interest on plan assets (%)			7.3		9.2				7.3		9.2
Salary inflation rate (%)			6.4		7.7				6.4		7.7
Pension increase allowance (%)			4.9		6.2				4.9		6.2
The overall long-term expected interest on assets is 7.3%. This is based on the new IAS19R net interest requirement.
The assumed rates of mortality are determined by reference to the SA85-90 (Light) ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Funding level per statutory actuarial valuation (%)			100		100				100		100
The number of employees registered under the Telkom Pension Fund			51		71				51		71
The fund portfolio consists of the following percentages:
Equities (%)			48		64				48		64
Bonds (%)			13		9				13		9
Cash (%)			8		18				8		18
Foreign investments (%)			29		9				29		9
Property (%)			2		–				2		–
Total			100		100				100		100

The total estimated contributions to be paid to the pension fund by the employer for the year ending 31 March 2016 is R2.3 million.

The Telkom Retirement Fund

The Telkom Retirement Fund was established on 1 July 1995 as a hybrid defined benefit and defined contribution plan. Existing employees were given the option to either remain in the Telkom Pension Fund or to be transferred to the Telkom Retirement Fund. All pensioners of the Telkom Pension Fund and employees who retired after 1 July 1995 were transferred to the Telkom Retirement Fund. Upon transfer the government ceased to guarantee the deficit in the Telkom Retirement Fund. Subsequent to 1 July 1995 further transfers of existing employees occurred. As from 1 September 2009 all new appointments will belong to the Telkom Retirement Fund but will not be able to retire from the Telkom Retirement Fund at retirement age. These members would be required to purchase their pensions from an insurance company.

The Telkom Retirement Fund is a defined contribution plan with regards to in-service members. On retirement, an employee is transferred from the defined contribution plan to a defined benefit plan. Telkom, as a guarantor, is contingently liable for any deficit in the Telkom Retirement Fund. Moreover, all of the assets in the Fund, including any potential excess, belong to the participants of the scheme. Telkom is unable to benefit from the excess, in the form of future reduced contributions. The pensioner pool of the Telkom Retirement Fund only consists of pensioners and is funded through a liability driven investment strategy (LDI). Pensioner increases are subject to affordability targeting between 70% and 100% of CPI.

Telkom guarantees any actuarial shortfall of the pensioner pool in the retirement fund. This liability is initially funded through assets of the retirement fund.

The Telkom Retirement Fund is governed by the Pension Funds Act 24 of 1956. In terms of section 37A of this Act, the pension benefits payable to the pensioners cannot be reduced. If therefore the present value of the funded obligation were to exceed the fair value of plan assets, Telkom would be required to fund the statutory deficit.

The funded status of the Telkom Retirement Fund is disclosed below:

			Group						Company
The Telkom Retirement Fund			2015 Rm		2014 Rm				2015 Rm		2014 Rm
The net periodic retirement costs include the following components:
Interest cost on projected benefit obligations			972		855				972		855
Interest on plan assets			(972)		(855)				(972)		(855)
Net periodic pension expense recognised in profit and loss			–		–				–		–
The net periodic other comprehensive income includes the following components:
Actuarial (loss)/gain due to financial assumptions			(312)		1 128				(312)		1 128
Acturial loss due to demographic assumptions			(122)		(14)				(122)		(14)
Asset ceiling in terms of IAS 19.64			455		(1 011)				455		(1 011)
Net periodic pension expense recognised in other comprehensive income			21		103				21		103
Cumulative actuarial loss			(1 100)		(666)				(1 100)		(666)
Retirement fund contributions			617		601				617		601
Benefit obligation:
At beginning of year			10 951		10 704				10 951		10 704
Interest cost			972		855				972		855
Benefits paid			(902)		(799)				(902)		(799)
Liability for new pensioners			476		168				476		168
Past service cost			21		–				21		–
Curtailment loss			–		772				–		772
Actuarial loss/(gain)			1 369		(749)				1 369		(749)
Benefit obligation at end of year for defined benefit plan			12 887		10 951				12 887		10 951
The Telkom Retirement Fund
Plan assets at fair value:
At beginning of year			11 962		10 704				11 962		10 704
Interest on plan assets			972		855				972		855
Benefits paid			(902)		(799)				(902)		(799)
Asset backing new pensioners' liabilities			476		168				476		168
Curtailment gain			–		669				–		669
Actuarial gain			935		365				935		365
Plan assets at end of year			13 443		11 962				13 443		11 962
Present value of funded obligation			12 887		10 951				12 887		10 951
Asset ceiling in terms of IAS 19.64			556		1 011				556		1 011
Fair value of plan assets			13 443		11 962				13 443		11 962
Unrecognised net asset			–		–				–		–
Interest on plan assets			972		855				972		855
Actuarial gain on plan assets			935		365				935		365
Actual return on plan assets			1 907		1 220				1 907		1 220
Plan asset balance comprises:
Equities			3 092		6 579				3 092		6 579
Property			1 075		–				1 075		–
Bonds			5 377		–				5 377		–
Africa			807		–				807		–
Cash			269		–				269		–
Foreign investments			2 823		5 383				2 823		5 383
Total			13 443		11 962				13 443		11 962

Funding arrangements

The Telkom Retirement Fund pensioner portfolio's strategic asset allocation (SAA) is determined by an asset liability model (ALM) based on the Fund's unique liabilities, as determined by its member data and Fund rules. The SAA is a reflection of the Fund's targeted post-retirement interest rate (PRI), and the investment strategy is built around the target of providing consistent annual pension increases of between 70% and 100% of CPI.

			Group						Company
			2015 Rm		2014 Rm				2015 Rm		2014 Rm
Included in the fair value of plan assets is:
Office buildings occupied by Telkom			1 024		953				1 024		953
Telkom shares			17		10				17		10
The Telkom Retirement Fund invests its funds in South Africa and internationally. Twelve fund managers invest in South Africa and five of these managers specialise in trades with bonds on behalf of the Retirement Fund.
Principal actuarial assumptions were as follows:
Assumptions regarding future mortality are based on mortality tables. The current longevities underlying the values of the liabilities in the defined benefit plan are as follows:
Males over 65			16.3		16.3				16.3		16.3
Females over 65			20.5		20.4				20.5		20.4
Discount rate (%)			7.3		9.2				7.3		9.2
Interest on plan assets (%)			7.3		9.2				7.3		9.2
Pension increase allowance (%)			4.9		6.2				4.9		6.2
The assumed rates of mortality are determined by reference to the SA85-90 (Light) ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Funding level per statutory actuarial valuation (%)			100		100				100		100
The number of pensioners registered under the Telkom Retirement Fund			12 366		12 744				12 366		12 744
The number of in-service employees registered under the Telkom Retirement Fund			18 282		19 127				18 282		19 127
The fund portfolio consists of the following percentages:
Equities (%)			23		55				23		55
Property (%)			8		–				8		–
Bonds (%)			40		45				40		45
Africa (%)			6		–				6		–
Cash (%)			2		–				2		–
Foreign investments (%)			21		–				21		–
Total			100		100				100		100

The total estimated contributions to be paid to the Telkom Retirement Fund by the employer for the year ending 31 March 2016 is R621 million.

Medical benefits

Telkom makes certain contributions to medical funds in respect of current and retired employees. The scheme is a defined benefit plan. The expense in respect of current employees’ medical aid is disclosed in note 6.3. The amounts due in respect of post-retirement medical benefits to current and retired employees have been actuarially determined and provided for as set out in  note 29. Telkom has terminated future post-retirement medical benefits in respect of employees joining after 1 July 2000.

There are three major categories of members entitled to the post-retirement medical aid: pensioners who retired before 1994 (‘Pre-94’); those who retired after 2013; and the in-service members. The pensioners retiring post 2013 and the in-service members’ liability are subject to a rand cap, which increases as per board approval. During the current financial year the group settled its obligation with the post-1994 pensioners.

Eligible employees must be employed by Telkom until retirement age to qualify for the post-retirement medical aid benefit. The most recent actuarial valuation of the benefit was performed as at 31 March 2015.

Telkom has allocated certain investments to fund this liability as set out in note 16.2. The annuity policy of the cell captive investment is the medical plan asset. The group is entitled to a refund of the full surplus in the annuity policy once all the beneficiaries have been paid. As such the group has recognised the full asset.

			Group						Company
Medical aid			2015 Rm		2014 Rm				2015 Rm		2014 Rm
Benefit obligation:
At beginning of year			4 102		7 821				4 081		7 798
Interest cost			276		468				276		468
Service cost			4		62				4		62
Actuarial loss/(gain)			478		(863)				478		(863)
Transfer of Trudon as held for sale			(21)		–				–		–
Curtailment gain			–		(2 403)				–		(2 403)
Settlement (gain)/loss*			(221)		234				(221)		234
Benefits paid from plan assets			(204)		(210)				(204)		(210)
Contributions paid by Telkom*			(2 023)		(1 007)				(2 023)		(1 005)
Benefit obligation at end of year			2 391		4 102				2 391		4 081
Plan assets at fair value:
At beginning of year			2 728		2 493				2 728		2 493
Interest on plan assets			236		197				236		197
Benefits paid from plan assets			(204)		(210)				(204)		(210)
Contributions in respect of plan assets			–		85				–		85
Actuarial gain			55		163				55		163
Plan assets at end of year			2 815		2 728				2 815		2 728
Present value of funded obligation			2 391		4 102				2 391		4 081
Fair value of plan assets			(2 815)		(2 728)				(2 815)		(2 728)
(Asset)/liability as disclosed in the statement of financial position (refer to note 29)			(424)		1 374				(424)		1 353
The net periodic other comprehensive income includes the following components:
Acturial (loss)/gain due to financial assumptions			(259)		246				(259)		246
Actuarial (loss)/gain due to demographic assumptions			(164)		780				(164)		780
Net periodic pension expense and income recognised in other comprehensive income			(423)		1 026				(423)		1 026
Cumulative actuarial loss			(1 923)		(1 500)				(1 923)		(1 500)
Plan assets at fair value:
Interest on plan assets			236		197				236		197
Actuarial gain on plan assets			55		163				55		163
Actual return on plan assets			291		360				291		360
Plan asset balance comprises:
Cash and cash equivalents			310		246				310		246
Equity securities			1 154		1 336				1 154		1 336
Bonds			535		382				535		382
Foreign investments			816		764				816		764
Total			2 815		2 728				2 815		2 728

All equity securities and government bonds have quoted prices in active markets.

Funding arrangements

The general funding arrangements from the plan assets is to maximise long-term capital growth and long-term total return on Telkom's portfolio. The portfolios are managed as a segregated portfolio which includes international investments. The investment objective is to provide an absolute return, measured over a 36 month period, in excess of CPI-X plus 5% per annum. The funding arrangements of the plan assets driven by designated asset managers to manage Telkom's portfolios by applying a flexible approach, which includes holding equities, property fixed income or money market assets as part of the investment strategy, in variable weightings, at any point in time.

			Group						Company
Principal actuarial assumptions were as follows:			2015 Rm		2014 Rm				2015 Rm		2014 Rm
Assumptions regarding future mortality are based on mortality tables. The current longevities underlying the values of the liabilities in the defined benefit plan are as follows:
Males over 65			16.3		16.3				16.3		16.3
Females over 65			20.5		20.4				20.5		20.4
Discount rate (%)			7.3		9.2				7.3		9.2
Interest on plan assets (%)			7.3		9.2				7.3		9.2
Salary inflation rate (%)			4.9		7.7				4.9		7.7
Medical inflation rate (%)			6.9		8.2				6.9		8.2
The assumed rates of mortality are determined by reference to the SA85-90 (Light) ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Contractual retirement age			65		65				65		65
Average retirement age			60		60				60		60
Number of in-service members			1 697		1 830				1 697		1 830
Number of pensioners			4 281		8 640				4 281		8 640

Group and company

The valuation results are sensitive to changes in the underlying assumptions. The following table provides an indication of the impact of changing the significant assumptions below:

2015			Current assumption Rm		Decrease Rm		Increase Rm
Medical cost inflation rate			6.9%		(1.0%)		1%
Benefit obligation			2 391		(144)		164
Percentage change					(6.0%)		6.9%
Service cost and interest cost FY2016			280		(10)		12
Percentage change					(3.6%)		4.3%
Discount rate			7.3%		(0.5%)		0.5%
Benefit obligation			2 391		110		(101)
Percentage change					4.6%		(4.2%)
Service cost and interest cost FY2016			280		10		(11)
Percentage change					3.6%		(3.9%)
Post-retirement mortality rate			PA(90)Ultimate-1		(10%)		10%
Benefit obligation			2 391		(106)		109
Percentage change					(4.4%)		4.6%
Service cost and interest cost FY2016			280		(8)		8
Percentage change					(2.9%)		2.9%
2014
Medical cost inflation rate			8.2%		(1.0%)		+1%
Benefit obligation			4 081		(347)		411
Percentage change					(8.5%)		10.1%
Service cost and interest cost FY2015			530		(32)		38
Percentage change					(6.0%)		7.2%
Discount rate			9.2%		(0.5%)		0.5%
Benefit obligation			4 081		457		(380)
Percentage change					11.2%		(9.3%)
Service cost and interest cost FY2015			530		(1)		1
Percentage change					0%		0%
Post-retirement mortality rate			PA(90) Ultimate-1		(10.0%)		+10%
Benefit obligation			4,081		(157)		154
Percentage change					(3.8%)		3.8%
Service cost and interest cost FY2015			530		(14)		14
Percentage change					(2.6%)		2.6%

			Group						Company
			2015 Rm		2014 Rm				2015 Rm		2014 Rm
The fund portfolio consists of the following percentages:
Equities (%)			41		49				41		49
Bonds (%)			19		14				19		14
Cash and money market investments (%)			11		9				11		9
Foreign investments (%)			29		28				29		28
Total			100		100				100		100

Telephone rebates

Telkom provides telephone rebates to its pensioners who joined prior to 1 August 2009. The most recent actuarial valuation was performed as at 31 March 2015. Eligible employees must be employed by Telkom until retirement age to qualify for the telephone rebates. The scheme is a defined benefit plan.

The status of the telephone rebate liability is disclosed below:

				Group						Company
				2015 Rm		2014 Rm				2015 Rm		2014 Rm
Benefit obligation:
At beginning of year				375		422				375		422
Current service cost				3		4				3		4
Interest cost				33		31				33		31
Actuarial loss/(gain)				88		(56)				88		(56)
Curtailment loss				–		(1)				–		(1)
Benefits paid				(28)		(25)				(28)		(25)
Liability as disclosed in the statement of financial position (refer to note 29)				471		375				471		375
The net periodic other comprehensive income includes the following components:
Acturial gain due to demographic assumptions				5		6				5		6
Actuarial (loss)/gain due to financial assumptions				(93)		50				(93)		50
Net periodic pension income recognised in other comprehensive income				(88)		56				(88)		56
Cumulative actuarial gain				43		131				43		131
Sensitivity analysis
Increase in discount rate by 0.5%				(24)		(16)				(24)		(16)
Decrease in discount rate by 0.5%				26		18				26		18
Principal actuarial assumptions were as follows:
Assumptions regarding future mortality are based on mortality tables. The current longevities underlying the values of the liabilities in the defined benefit plan are as follows:
Males over 65				16.3		16.3				16.3		16.3
Females over 65				20.5		20.4				20.5		20.4
Discount rate (%)				7.3		9.2				7.3		9.2
Contractual retirement age				65		65				65		65
Average retirement age				60		60				60		60
The assumed rates of mortality are determined by reference to the standard published mortality table PA (90) Ultimate standard tables, as published by the Institute and Faculty of Actuaries in London and Scotland, rated down one year to value the pensioners.
Number of members				11 494		12 498				11 494		12 498
Number of pensioners				10 928		10 746				10 928		10 746

Telkom employee share plan

Telkom's shareholders approved the Telkom Forfeitable Share Plan (FSP) and the Additional Share Award (ASA) at the September 2013 Annual General Meeting. Two grants have occurred under this plan at 31 March 2015

The FSP is made up of Long Term Incentive Scheme (LTIP) and the Employee Share Ownership Plan (ESOP). In the FSP employees acquire shareholder rights immediately on the forfeitable shares (these include dividends and voting rights).

The ASA scheme is awarded to eligible participating members.This scheme is only applicable for the first grant of shares. If all conditions are met, the shares on this scheme will vest in the 2017 financial year.

The grant and vesting timelines for the LTIP are as follows:

Vesting financial year			Grant financial year
			2014		2015		2016
2017 Financial Year			50%		–		–
2018 Financial Year			30%		50%		–
2019 Financial Year			20%		30%		50%
2020 Financial Year			–		20%		30%
2021 Financial Year			–		–		20%

The grant and vesting timelines for the ESOP are as follows:

Vesting financial year			Grant financial year
			2014		2015		2016
2017 Financial Year			100%		–		–
2018 Financial Year			–		100%		–
2019 Financial Year			–		–		100%

In order for the vesting to occur the targets (including performance conditions) must be met. The targets are measured in each financial year after the grant date. In calculating the expense it is assumed that the probability of meeting the conditions is 100%.

The weighted average remaining vesting period for the shares outstanding as at 31 March 2015 is 2.8 years (2014: 2.8 years).

				Group						Company
				2015		2014				2015		2014
The following table illustrates the movement of the maximum number of shares that were granted to employees for the 2014 and 2015 grant:
Beginning of the year				7 101 388		–				7 101 388		–
Forfeited shares during the year				(1 036 691)		–				(1 036 691)		–
Granted during the year				4 872 132		7 101 388				4 872 132		7 101 388
Outstanding at end of the year				10 936 829		7 101 388				10 936 829		7 101 388
The fair value of the shares granted has been calculated by an actuary using the Black-Scholes-Merton model and the following values at grant date:				Grant 2		Grant 1				Grant 2		Grant 1
Market share price (R)				76.11		27.30				76.11		27.30
Dividend yield (%)				–		–				–		–
Share price volatility				35% p.a		35% p.a				35% p.a		35% p.a
Future risk free interest rate				6.7% p.a		8.5% p.a				6.7% p.a		8.5% p.a
The principal assumptions used in calculating the expected number of shares that will vest are as follows:
Employee turnover (%)				3.3		3				3.3		3
Meeting specified performance criteria (%)				100		100				100		100

The key performance indicators for the first grant are free cash flow targets and net promoter score targets. The second grant key indicators are headline earnings per share, free cash flow, return on equity, total shareholder return, customer loyalty measure and assurance and fulfilment measures.