21. Pension benefits

The Group's UK pension arrangements include defined benefit and defined contribution sections. The Group also provides unfunded retirement benefits to some plan members whose benefits would otherwise be restricted by the lifetime allowance. Pension assets are held in separate trustee administered funds which have equal pension rights with respect to members of either sex and comply with the Employment Equality Regulations (2006). Further information on the Group's pension arrangements is given in the Remuneration Report.

The defined benefit section was closed to new members in 2000 and over recent years the Group has taken steps to manage the on-going risks associated with it:

  • In 2010, most pensions in payment were subject to a buy-in contract with an insurance company. This was followed up in 2012 by a further buy-in contract for pensions that had come into payment since 2010;
  • From November 2012, the future accrual of benefits for remaining employee members is based on pensionable earnings frozen at that time, rather than final earnings. Those employees receive either additional contributions to the defined contribution section, or a salary supplement. This change resulted in an accounting gain last year of £42.1m which was included in the income statement as an exceptional item;
  • To enable the conversion of the buy-in to buy-out, in 2013 a new Plan was established for existing employee members whose pensions are not insured through the buy-in contracts, and the associated assets and liabilities were transferred across. It is intended that the pensions and matching insurance contracts held by the original Plan will be converted to buy-out, and the original Plan can then be dissolved.

The following table summarises the principal risks associated with the Group's defined benefit arrangements:

Investment RiskThe present value of defined benefit liabilities is calculated using a discount rate set by reference to high quality corporate bond yields. To the extent that the return on plan assets is lower than the discount rate, the pension surplus may reduce and a deficit may emerge.
Interest Rate RiskA fall in bond yields would increase the value of the liabilities. This would be only partially offset by an increase in the value of bond investments held.
Inflation RiskAn increase in inflation would increase the value of pension liabilities.
Longevity RiskThe present value of the defined benefit liabilities is calculated having regards to a best estimate of the mortality of plan members. If members are expected to live longer, this will increase the liabilities.

The buy-in contracts represent approximately 24% of the total pension liabilities and provide a partial hedge to the risks described above.

The components of the net benefit expense recognised in the consolidated income statement are as follows:

20142013
New 2013
Plan
£m
Original
Plan
£m
Unfunded £mTotal
£m
Funded
£m
Unfunded £mTotal
£m
Current service cost2.04.70.37.07.90.58.4
Interest on benefit obligation5.319.20.424.924.10.424.5
Interest on plan assets(6.6)(21.8)(28.4)(28.4)(28.4)
Administration costs0.21.21.4
Curtailment gain on
pensionable pay freeze*
(39.3)(2.8)(42.1)
Settlement loss on
buy-in/buy-out*
6.36.3
Net benefit expense/(credit)0.93.30.74.9(29.4)(1.9)(31.3)

*Included as exceptional items in the prior year income statement (see Note 6)

Actual return on plan assets23.726.149.868.368.3

The expected average duration of the original Plan is 13 years and the new 2013 Plan is 26 years.

Changes in the present value of defined benefit pension obligations are analysed as follows:

20142013
New 2013
Plan
£m
Original
Plan
£m
Unfunded £mTotal
£m
Funded
£m
Unfunded £mTotal
£m
Opening obligation534.78.5543.2495.69.4505.0
Current service cost2.04.70.37.07.90.58.4
Interest cost5.319.20.424.924.10.424.5
Curtailment gains(39.3)(2.8)(42.1)
Employee contributions0.10.10.20.2
Benefits paid(0.8)(11.1)(11.9)(12.4)(12.4)
Transferred to new 2013 Plan391.3(391.3)
Actuarial losses
— financial assumptions25.90.40.727.056.31.057.3
— experience4.3(1.8)2.5(4.2)(4.2)
— demographic assumptions3.51.04.56.56.5
Closing pension benefit obligation431.5155.99.9597.3534.78.5543.2

Changes in the fair value of defined benefit pension assets were as follows:

20142013
New 2013
Plan
£m
Original
Plan
£m
Unfunded
£m
Total
£m
Funded
£m
Unfunded
£m
Total
£m
Opening assets608.8608.8540.1540.1
Employer contributions7.414.822.218.918.9
Employee contributions0.10.10.20.2
Benefits paid(0.8)(11.1)(11.9)(12.4)(12.4)
Transferred to new 2013 Plan482.5(482.5)
Settlements (buy-in contract)(6.3)(6.3)
Interest income on assets6.621.828.428.428.4
Return on plan assets greater than discount rate17.14.321.439.939.9
Administrative costs(0.2)(1.2)(1.4)
Closing pension benefit assets512.6155.0667.6608.8608.8

The fair value of plan assets was as follows:

20142013
New 2013
Plan
£m
Original
Plan
£m
Total
£m
%Total
£m
%
Equities340.3340.351.0296.848.7
Bonds106.9106.916.0100.716.5
Gilts35.035.05.235.65.8
Property23.423.43.521.13.5
Insurance contracts142.9142.921.4146.924.1
Other (cash deposits)7.012.119.12.97.71.4
512.6155.0667.6100.0608.8100.0

The fair values of the above equity and debt instruments are determined based on quoted prices in active markets.

The net defined benefit pension asset/(liability) is analysed as follows:

20142013
New 2013
Plan
£m
Original
Plan
£m
Unfunded £mTotal
£m
Funded
£m
Unfunded £mTotal
£m
Total assets512.6155.0667.6608.8608.8
Benefit obligation(431.5)(155.9)(9.9)(597.3)(534.7)(8.5)(543.2)
Net pension asset/(liability)81.1(0.9)(9.9)70.374.1(8.5)65.6

The most recent full actuarial valuation was undertaken as at March 2013. The IAS 19 valuation of the defined benefit obligation was undertaken by an independent qualified actuary as at January 2014 using the projected unit credit method. The principal actuarial assumptions used in the valuation were as follows:

20142013
Original PlanNew 2013 PlanPensionersNon-pensioners
Discount rate4.15%4.40%4.25%4.75%
Inflation – RPI3.40%3.35%3.30%3.45%
Inflation – CPI2.40%2.35%2.30%2.45%
20142013
Pensioner
aged 65
Non-pensioner aged 45Pensioner
aged 65
Non-pensioner aged 45
Life expectancy at age 65 (years)
Male22.624.822.624.8
Female25.027.325.027.3

The key sensitivities in the calculation are the discount rate and the inflation assumption. A decrease of 0.25% in the discount rates used would increase the gross liabilities by approximately £35m, which would be partly mitigated by an increase of approximately £4.8m on the insurance assets. An increase of 0.25% in the inflation assumption would increase the gross liabilities by £24m, offset by an increase of approximately £2.4m on the insurance assets.

Members of the defined benefit section contribute 3% or 5% of pensionable earnings whilst the employer contribution rate is 17.5%. Members of the defined contribution section contribute 3% or 5% of pensionable earnings which is matched by the employing company. Contribution rates are expected to remain the same for the year ahead.

Total employer contributions of £32.5m (2013: £24.3m) were made during the year, including special contributions of £15.0m (2013: £11.0m), £9.1m (2013: £5.4m) in respect of the defined contribution section and £1.2m in respect of Automatic Enrolment contributions which commenced in February 2013.

An amendment to IAS 19 Employee Benefits was published in June 2011 and became effective during the current year. This affects the accounting for defined benefit pension schemes and has been applied this year.

The main change is that instead of using an assumed return on pension assets, the income statement charge is calculated by applying the discount rate to the net pension surplus or liability. If applied retrospectively, the effect of the amendment on last year would have been to increase pension costs in the income statement by £2.6m and to increase actuarial gains in the statement of comprehensive income by an equivalent amount. There is no impact on the balance sheet. As the impact is not material, prior year figures have not been restated and remain as reported last year.