Notes to the accounts
38 Pensions
(a) Current pension arrangements
The group operates a number of pension schemes in the United Kingdom and the USA, the assets of which are held in separate trustee-administered funds. The group’s current policy is to largely provide future retirement benefits through defined contribution arrangements. Consequently group personal pensions were established in 1997/98 for new and some existing employees and previous schemes closed and, with one exception, wound up.
The one older arrangement not wound up was the Liberty International Group Retirement Benefit Scheme (“the LI Scheme”), which was closed to new members, but continues to accrue future service benefits for those employees who were members at date of closure. It is a funded defined benefit scheme and is not contracted out of the State Second Pension (S2P).
In July 2007, Liberty International acquired a 50 per cent interest in the Earls Court & Olympia group (“EC&O”), whose results are being consolidated with Liberty International. EC&O has a hybrid pension scheme comprising an ongoing money purchase section and a final salary section which was closed to new members in 2000, but continues to accrue future service benefits for those employees who were members at date of closure. The final salary section is a funded defined benefit scheme which is contracted out of S2P.
The figures in this report relate to the full year for the LI Scheme and the six month period for EC&O.
(b) Pension costs
(i) The LI and EC&O Schemes – defined benefit schemes The retirement benefit liability recognised in the balance sheet is the present value of the defined benefit obligations, less the fair value of the Scheme assets, adjusted for past service costs. The defined benefit obligation and current service cost are calculated annually by an independent actuary using the projected unit method. Actuarial gains and losses are immediately recognised in the statement of recognised income and expense. The pension costs and balance sheet items for the year ended 31 December 2007 have been based on the results of the last valuation of the Schemes at 5 April 2007, suitably adjusted for different methodology, rolled forward to 31 December 2007 and adjusted for the different financial conditions applying at that time.
| Amounts recognised in income in respect of the Schemes |
2007* £m |
2006** £m |
|---|---|---|
| Current service cost | 0.9 | 0.8 |
| Interest cost | 2.7 | 2.1 |
| Expected return on Schemes’ assets | (3.3) | (2.5) |
| 0.3 | 0.4 | |
| Actuarial (gains) and losses immediately recognised in the statements of recognised income and expense | 2.6 | (0.7) |
* Full year for LI Scheme and half year for EC&O Scheme.
** LI Scheme only.
Whilst the actuarial gains and losses in respect of the Schemes are dealt with in the statement of recognised income and expense, the difference between the notional interest cost on the Schemes’ liabilities and the expected return on the Scheme’s assets is included in the group’s net interest cost. For the year ended 31 December 2007 this amounts to a credit of £0.6 million (2006 – £0.4 million). Of the current service cost for the year, £0.9 million (2006 – £0.8 million) has been included in administrative expenses.
| Amounts recognised in the consolidated balance sheet |
2007 £m |
2006 £m |
|---|---|---|
| Fair value of Schemes’ assets* | 59.0 | 46.9 |
| Present value of Schemes’ liabilities* | (59.2) | (46.5) |
| Pension asset/(liability) | (0.2) | 0.4 |
* The amounts attributable to EC&O at 31 December 2007 are assets of £10.0 million and liabilities of £11.2 million.
The pension asset is included in the balance sheet in provisions for liabilities and charges.
| Movements in the fair value of Schemes’ assets |
2007 £m |
2006 £m |
|---|---|---|
| At 1 January | 46.9 | 42.2 |
| EC&O assets at 30 June | 10.0 | – |
| Expected return on Schemes’ assets | 3.3 | 2.5 |
| Excess asset (losses)/gains | (1.8) | 1.5 |
| Employer contributions paid | 2.4 | 1.9 |
| Member contributions paid | 0.1 | 0.2 |
| 60.9 | 48.3 | |
| Benefits paid | (1.9) | (1.4) |
| Schemes’ assets at 31 December | 59.0 | 46.9 |
The weighted average assets allocations for the year end were as follows:
| Asset category: |
31 December 2007 % |
31 December 2006 % |
|---|---|---|
| Equities | 60 | 51 |
| Index-linked gilts | 18 | 20 |
| Property | 6 | 9 |
| Corporate bonds | 12 | 11 |
| Cash | 4 | 9 |
| Total | 100 | 100 |
| Movements in the present value of Schemes’ liabilities |
2007 £m |
2006 £m |
|---|---|---|
| At 1 January | 46.5 | 44.0 |
| EC&O liabilities at 30 June | 10.0 | – |
| Current service cost | 0.9 | 0.8 |
| Employee Contributions | 0.2 | 0.2 |
| Interest cost | 2.7 | 2.1 |
| Actuarial losses | 0.8 | 0.8 |
| 61.1 | 47.9 | |
| Benefits paid | (1.9) | (1.4) |
| Schemes’ liabilities at 31 December | 59.2 | 46.5 |
The main economic assumptions used to calculate the present value of the Schemes’ liabilities at 31 December were as follows:
|
31 December 2007 %(per annum) |
31 December 2006 %(per annum) |
|
|---|---|---|
| Discount rate | 5.6 | 5.1 |
| Rate of inflation | 3.2 | 2.8 |
| Earnings increases | 5.2* | 4.8 |
| Increases to pensions in payment | 3.2 | 2.8 |
| Increases to deferred pensions before payment: | ||
| left before 1 January 1985 | 3.2 | 2.8 |
| left after 31 December 1984 | 3.2 | 2.8 |
| Expected return on Schemes’ assets | 7.0 | 6.2 |
*4.7 per cent for EC&O members
|
2007 £m |
2006 £m |
|
|---|---|---|
| Actual return on Schemes’ assets in the year | 1.5 | 4.0 |
Mortality assumptions are based on standard tables provided by the Institute of Actuaries using insurance company data updated from time to time to reflect current trends. The standard tables currently used by the LI Scheme are the PA92(year of birth) medium cohort and those used by the EC&O Scheme are the PA00(year of birth) medium cohort tables. Both standard tables make allowance for future improvements in longevity based on the year of birth of each member.
To develop the expected long-term rate of return on assets assumption, the company considered the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected annual return for each asset class was then weighted based on the target asset allocation and asset values of each section to develop the expected long-term rate of return on assets assumption for the portfolio. This resulted in the selection of the 7.0 per cent assumption as at 31 December 2007.
Details of experience adjustments for the year to 31 December:
| 2007 | 2006 | 2005 | 2004 | 2003 | |
|---|---|---|---|---|---|
| Fair value of Schemes’ assets (£m) | 59.0 | 46.9 | 42.2 | 36.3 | 33.8 |
| Present value of Schemes’ liabilities (£m) | (59.2) | (46.5) | (44.0) | (36.9) | (34.0) |
| Surplus/(deficit) in the Scheme (£m) | (0.2) | 0.4 | (1.8) | (0.6) | (0.2) |
| Difference between the expected and actual return on Scheme assets: | |||||
| Amount (£m) | (1.8) | 1.5 | 2.6 | 0.8 | 1.8 |
| Percentage of Schemes’ assets | (3.1%) | 3.2% | 6.2% | 2.2% | 5.5% |
| Total gains and (losses): | |||||
| Amount (£m) | (2.6) | 0.7 | (2.6) | (0.5) | (3.1) |
| Percentage of present value of Schemes’ liabilities | (4.4%) | 1.5% | (5.9%) | (1.4%) | (9.1%) |
| Experience gains and (losses) on Schemes’ liabilities: | |||||
| Amount (£m) | (1.1) | 0.5 | (1.1) | (1.0) | 0.9 |
| Percentage of the present value of the Schemes’ liabilities | (1.9%) | 1.1% | (2.5%) | (2.8%) | 2.6% |
The group has no significant exposure to any other post-retirement benefit obligations.
The estimated amounts of contributions expected to be paid to the Schemes during 2008 is £2.5 million.
(ii) Defined contribution arrangements The pension charge in respect of the other schemes are the actual contributions paid. These amount to £1.0 million, (2006 – £0.8 million) in respect of the other UK pension schemes (including £0 for EC&O from acquisition) and £0.1 million (2006 – £0.1 million) for the US scheme.