Note 7 – Pensions and other post-retirement benefits
- Lattice Group Pension Scheme
- Electricity Supply Pension Scheme
- Crown Castle UK Pension Scheme
- US defined benefit pension schemes
- SSAP 24 valuation assumptions
- Pension cost, prepayment and provisions for liabilities and charges
- US healthcare and life insurance - retirees
- FRS 17 Retirement Benefits
Substantially all the Group’s employees are members of defined benefit pension schemes. In the UK, the principal schemes are the Lattice Group Pension Scheme, the Electricity Supply Pension Scheme and the Crown Castle UK Pension Scheme.
Lattice Group Pension Scheme
The Lattice Group Pension Scheme provides final salary defined benefits for employees who joined Lattice Group plc prior to 31 March 2002. A defined contribution section was added to the scheme from 1 April 2002 for employees joining Lattice Group plc from that date. The scheme is funded with assets held in a separate trustee administered fund. It is subject to independent valuations at least every three years, on the basis of which the qualified actuary certifies the rate of employers’ contributions, which, together with the specified contributions payable by the employees and proceeds from the scheme’s assets, are expected to be sufficient to fund the benefits payable under the scheme.
The latest full actuarial valuation was carried out by Watson Wyatt LLP at 31 March 2003. The projected unit method was used and the principal actuarial assumptions adopted were that the annual rate of inflation would be 2.5% and that future real increases in pensionable earnings would be 1.5%. Investments held in respect of pensions before they become payable would average 5.05% real annual rate of return and investments held in respect of pensions after they become payable would average 2.7% real annual rate of return and that pensions would increase at a real annual rate of 0.05%. The aggregate market value of the scheme’s assets was £10,141m and the value of the assets represented approximately 92% of the actuarial value of benefits due to members calculated on the basis of pensionable earnings and service at 31 March 2003 on an ongoing basis and allowing for projected increases in pensionable earnings. The actuarial valuation carried out at 31 March 2003 showed that based on long-term financial assumptions the contribution rate required to meet future benefit accrual was 23.7% of pensionable earnings (20.7% employers and 3% employees). This contribution rate will be reviewed when the next independent actuarial valuation is carried out, which will be no later than 31 March 2006. The ongoing contribution rate does not include an allowance for administration expenses. These contributions are reviewed annually. From 1 April 2004 the rate used for the recovery of administration costs was 1.6% of salary. From 1 April 2005 the rate was 2.6% of salary. Employers are currently, therefore, paying a total contribution rate of 23.3%. The actuarial valuation revealed that the pre-tax deficit was £879m (£615m net of tax) in the defined benefit section on the basis of the funding assumptions adopted by the actuary. An interim annual assessment of the Lattice Scheme was conducted at 31 March 2004. This assessment showed that the deficit has decreased in the defined benefit section on the basis of the funding assumptions adopted by the actuary.
It has been agreed that no funding of the deficit identified in the 2003 actuarial valuation will need to be provided to the scheme until the outcome of an interim actuarial assessment at 31 March 2007 is known. At this point, the Group will pay the gross amount of any deficit up to a maximum amount of £520m (£364m net of tax) into the scheme. Until the 31 March 2007 actuarial valuation has been completed, the Group has arranged for banks to provide the trustees of the Lattice Scheme with letters of credit. The main conditions under which these letters of credit could be drawn relate to events which would imperil the interests of the scheme, such as Transco plc, a Group undertaking, becoming insolvent or the Group failing to make agreed payments into the fund.
Electricity Supply Pension Scheme
The Electricity Supply Pension Scheme provides final salary defined benefits on a funded basis. The assets of the scheme are held in a separate trustee administered fund. The scheme is divided into sections, one of which is the Group’s section. It is subject to independent valuations at least every three years, on the basis of which the qualified actuary certifies the rate of employers’ contributions, which, together with the specified contributions payable by the employees and proceeds from the scheme’s assets, are expected to be sufficient to fund the benefits payable under the scheme.
The latest full actuarial valuation was carried out by Hewitt Bacon Woodrow at 31 March 2004. The projected unit method was used and the principal actuarial assumptions adopted were that the annual rate of inflation would be 2.9% and that future real increases in pensionable earnings would be 1.0%. Investments held in respect of pensions before they become payable would average 3.8% real annual rate of return and investments held in respect of pensions after they become payable would average 2.8% real annual rate of return and that pensions would increase at a real annual rate of 0.1%. The aggregate market value of the scheme’s assets was £1,110m and the value of the assets represented approximately 80.4% of the actuarial value of benefits due to members calculated on the basis of pensionable earnings and service at 31 March 2004 on an ongoing basis and allowing for projected increases in pensionable earnings. The results of the actuarial valuation carried out at 31 March 2004 showed that, based on long-term financial assumptions, the contribution rate required to meet future benefit accrual was 19.1% of pensionable earnings (13.1% employers and 6% employees). This contribution rate will be reviewed when the next independent actuarial valuation is carried out, which will be no later than 31 March 2007. The actuarial valuation revealed a pre-tax deficit of £272m (£190m net of tax) on the basis of the funding assumptions adopted by the actuary.
It has been agreed that no funding of the deficit identified in the 2004 actuarial valuation will need to be provided to the scheme until the outcome of the actuarial valuation at 31 March 2007 is known. At this point, the Group will pay the gross amount of any deficit up to a maximum amount of £68m (£48m net of tax) into the scheme. Until the 31 March 2007 actuarial valuation has been completed, the Group has arranged for banks to provide the trustees of the National Grid Scheme with letters of credit. The main conditions under which these letters of credit could be drawn relate to events which would imperil the interests of the scheme, such as National Grid Company plc, a Group undertaking, becoming insolvent or the Group failing to make agreed payments into the fund.
Crown Castle UK Pension Scheme
The Crown Castle UK Pension Scheme provides final salary defined benefits for service up to and including 30 June 2003 and a career averaged pension for service after 1 July 2003 on a funded basis. The scheme was closed to new entrants on 1 August 1997. The assets of the scheme are held in a separate trustee administered fund. It is subject to independent valuations at least every three years, on the basis of which the qualified actuary certifies the rate of employers’ contributions which, together with the specified contributions payable by employees and proceeds from the scheme’s assets, are expected to be sufficient to fund the benefits payable under the scheme.
The latest full actuarial valuation of the scheme was carried out by Deloitte Total Reward and Benefits Limited at 31 December 2002. This valuation has been used to calculate the charge in accordance with SSAP 24. The attained age method was used and the principal actuarial assumptions adopted were that the annual rate of inflation would be 2.5% and that future real increases in pensionable earnings would be 1.5%. Investments held in respect of pensions before and after they become payable would average 4.25% real annual rate of return and pensions would increase in line with inflation. The aggregate market value of the scheme’s assets was £15m and the value of the assets represented approximately 84% of the actuarial value of benefits due to members calculated on the basis of pensionable earnings and service at 31 December 2002 on an ongoing basis and allowing for projected increases in pensionable earnings.
The results of the actuarial valuation carried out at 31 December 2002 showed that, based on long-term financial assumptions, the contribution rate required to meet future benefit accrual was 25.9% of pensionable earnings (18.4% employers and 7.5% employees). This contribution rate will be reviewed when the next independent actuarial valuation is carried out, which will be no later than 31 December 2005.
US defined benefit pension schemes
Substantially all the Group’s US employees are members of defined benefit plans. The assets of the plans are held in separate trustee administered funds. The latest full actuarial valuations of these plans were carried out by Hewitt Associates LLC at 1 April 2004. The aggregate market value of the assets relating to the Group’s US defined plans at 31 March 2004 totalled US$1,945m and the actuarial value of the assets represented approximately 87% of the actuarial value of the benefits that had accrued to members, after allowing for future salary increases. These valuations were used to calculate the pension cost for the year ended 31 March 2005 (in compliance with SSAP 24). The valuations have been updated using assumptions and market values at 31 March 2005. The projected unit method was used for the updated valuations and the principal actuarial assumptions adopted were: that the real annual rate of return on investments would average 4.25%; that real annual increases in salary would average nil for New York schemes and 1.5% for other US schemes; that inflation would average 3.25%; and that nominal increases in pensions would be nil. There are no formally agreed contribution rates for the US plans.
SSAP 24 valuation assumptions
Further valuations of the Lattice Group Pension Scheme, using the attained age method, and the Group’s section of the Electricity Supply Pension Scheme, using the projected unit method, were carried out at 31 March 2004 to calculate the charge in accordance with SSAP 24. The results of these valuations were that the regular cost, as a percentage of salary, was 24.5% for the Lattice Group Pension Scheme and 10.7% for the Electricity Supply Pension Scheme. The scheme deficits were £220m and £225m respectively.
Pension cost, prepayment and provisions for liabilities and charges
The costs recorded relating to the Group’s pension plans were as follows:
| |
2005 £m |
2004 £m |
2003 £m |
|---|---|---|---|
| Defined contribution scheme costs | 2 | 2 | 1 |
| Defined benefit regular pension costs | 114 | 106 | 136 |
| Charge/(credit) related to variation from regular pension cost, of which a £2m credit related to the partial release of a pension provision in 2005 (2004: £2m; 2003: £2m) |
26 | 42 | (20) |
| Pension costs charged to operating profit | 142 | 150 | 117 |
| Notional interest charged/(credited) to net interest | 37 | 56 | (3) |
| Total pension costs for the year | 179 | 206 | 114 |
Included in debtors at 31 March 2005 was a pension prepayment of £38m (2004: £19m).
Included within provisions for liabilities and charges at 31 March 2005 was a pension and other post-retirement benefits provision of £512m (2004: £464m) – see note 22.
US healthcare and life insurance – retirees
In the US, the Group provides healthcare and life insurance to eligible retired US employees. Eligibility is based on certain age and length of service requirements and in some cases retirees must contribute to the cost of their coverage. The latest full actuarial valuations were carried out at 1 April 2003. These valuations have been updated using assumptions and market values at 31 March 2005. The principal assumptions adopted were a discount rate of 5.75% and that medical costs would increase by 10.0% per annum, decreasing to 5.0% by 2010 and remain at this rate thereafter. The cost of providing healthcare and life insurance to retired US employees for the year ended 31 March 2005 amounted to £14m net of amounts capitalised and amounts deferred as regulatory assets (2004: £31m; 2003: £37m).
FRS 17 Retirement Benefits
On 20 November 2000, the Accounting Standards Board introduced a new accounting standard, FRS 17 ‘Retirement Benefits’, replacing SSAP 24. FRS 17 is fully effective for periods beginning on or after 1 January 2005, though disclosures are required in the financial years prior to its full implementation. Disclosures showing the impact on the Group’s profit and loss account and balance sheet, together with other disclosures required by FRS 17, are set out below.
The disclosures have been prepared by updating the results of the aforementioned valuations by independent qualified actuaries using the projected unit method of valuation on the basis of the following assumptions:
| 2005 | 2004 | 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| UK Pensions % |
US Pensions % |
US Other post- retirement benefits % |
UK Pensions % |
US Pensions % |
US Other post- retirement benefits % |
UK Pensions % |
US Pensions % |
US Other post- retirement benefits % |
||||
| Rate of increase in salaries (i) |
3.9 | 4.1 | – | 3.9 | 3.8 | – | 3.5 | 4.0 | – | |||
| Rate of increase in pensions in payment and deferred pensions |
3.0 | – | – | 3.0 | – | – | 2.6 | – | – | |||
| Discount rate for liabilities |
5.4 | 5.8 | 5.8 | 5.5 | 5.8 | 5.8 | 5.4 | 6.3 | 6.3 | |||
| Rate of increase in Retail Price Index or equivalent |
2.9 | – | – | 2.9 | – | – | 2.5 | – | – | |||
| Initial healthcare cost trend rate |
– | – | 10.0 | – | – | 10.0 | – | – | 10.0 | |||
| Ultimate healthcare cost trend rate |
– | – | 5.0 | – | – | 5.0 | – | – | 5.0 | |||
| (i) | A promotional age-related scale has also been used where appropriate. |
|---|
An analysis of the assets held in the various pension and other post-retirement benefit schemes and the expected rates of return at 31 March 2005, 31 March 2004 and 31 March 2003 were as follows:
| UK Pensions | US Pensions | US Other post- retirement benefits |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Long-term rate of return expected at 31 March 2005 % |
Value at 31 March 2005 % |
Value at 31 March 2005 £m |
Long-term rate of return expected at 31 March 2005 % |
Value at 31 March 2005 % |
Value at 31 March 2005 £m |
Long-term rate of return expected at 31 March 2005 % |
Value at 31 March 2005 % |
Value at 31 March 2005 £m |
||||
| Equities | 7.8 | 41.5 | 5,414 | 10.0 | 64.5 | 669 | 10.0 | 65.0 | 317 | |||
| Bonds | 4.8 | 49.1 | 6,412 | 5.0 | 34.0 | 353 | 4.6 | 33.8 | 165 | |||
| Property | 6.5 | 8.1 | 1,049 | 7.1 | 0.3 | 3 | – | – | – | |||
| Other | 4.0 | 1.3 | 175 | 8.1 | 1.2 | 12 | 2.5 | 1.2 | 6 | |||
| Total market value of assets |
13,050 | 1,037 | 488 | |||||||||
| Present value of scheme liabilities |
(14,154) | (1,486) | (1,017) | |||||||||
| Deficit in schemes | (1,104) | (449) | (529) | |||||||||
| Related deferred tax asset | 331 | 178 | 210 | |||||||||
| Net liability | (773) | (271) | (319) | |||||||||
| UK Pensions | US Pensions | US Other post- retirement benefits |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Long-term rate of return expected at 31 March 2004 % |
Value at 31 March 2004 % |
Value at 31 March 2004 £m |
Long-term rate of return expected at 31 March 2004 % |
Value at 31 March 2004 % |
Value at 31 March 2004 £m |
Long-term rate of return expected at 31 March 2004 % |
Value at 31 March 2004 % |
Value at 31 March 2004 £m |
|||
| Equities | 8.0 | 42.5 | 5,260 | 10.8 | 64.4 | 685 | 10.8 | 62.3 | 309 | |||
| Bonds | 4.9 | 47.7 | 5,896 | 4.0 | 33.9 | 360 | 4.0 | 36.3 | 180 | |||
| Property | 6.5 | 7.4 | 913 | 8.0 | 0.6 | 6 | – | – | – | |||
| Other | 4.0 | 2.4 | 300 | 12.0 | 1.1 | 12 | 0.9 | 1.4 | 7 | |||
| Total market value of assets | 12,369 | 1,063 | 496 | |||||||||
| Present value of scheme liabilities | (13,790) | (1,488) | (1,002) | |||||||||
| Deficit in schemes | (1,421) | (425) | (506) | |||||||||
| Related deferred tax asset |
426 | 166 | 197 | |||||||||
| Net liability | (995) | (259) | (309) | |||||||||
| UK Pensions | US Pensions | US Other post- retirement benefits |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Long-term rate of return expected at 31 March 2003 % |
Value at 31 March 2003 % |
Value at 31 March 2003 £m |
Long-term rate of return expected at 31 March 2003 % |
Value at 31 March 2003 % |
Value at 31 March 2003 £m |
Long-term rate of return expected at 31 March 2003 % |
Value at 31 March 2003 % |
Value at 31 March 2003 £m |
|||
| Equities | 8.5 | 41.4 | 4,590 | 11.0 | 57.6 | 586 | 11.0 | 42.4 | 158 | |||
| Bonds | 4.6 | 49.0 | 5,436 | 5.1 | 38.8 | 395 | 5.0 | 42.1 | 157 | |||
| Property | 6.5 | 8.1 | 901 | 9.0 | 0.8 | 8 | – | – | – | |||
| Other | 4.0 | 1.5 | 171 | 6.8 | 2.8 | 28 | 3.5 | 15.5 | 58 | |||
| Total market value of assets | 11,098 | 1,017 | 373 | |||||||||
| Present value of scheme liabilities | (13,269) | (1,617) | (1,003) | |||||||||
| Deficit in schemes | (2,171) | (600) | (630) | |||||||||
| Related deferred tax asset |
651 | 238 | 250 | |||||||||
| Net liability | (1,520) | (362) | (380) | |||||||||
The net liability for UK Pensions comprises net pension liabilities relating to funded schemes in deficit of £752m (2004: £976m), and net pension liabilities relating to unfunded schemes of £21m (2004: £19m).
The net liability for US Pensions comprises net pension liabilities relating to funded schemes in deficit of £235m (2004: £221m), and net pension liabilities relating to unfunded schemes of £36m (2004: £38m).
The net liability for US Other post-retirement benefits relates to funded schemes for all years presented.
At 31 March 2005, an increase of 0.1% in the discount rate would decrease the present value of liabilities for all schemes by around £247m and decrease the liability net of deferred tax by £170m and vice versa.
If the FRS 17 position had been recognised in the Group’s accounts, the Group’s net assets employed at 31 March would have been as follows:
| |
2005 £m |
2004 (restated) £m |
|---|---|---|
| Net assets employed excluding net SSAP 24 liabilities and related impact on regulatory assets | 1,647 | 1,490 |
| Net FRS 17 liabilities | (1,363) | (1,563) |
| Net assets/(liabilities) including net FRS 17 liabilities | 284 | (73) |
The impact of the implementation of FRS 17 on net assets employed, as shown above, would be reflected within the profit and loss account reserve.
The pension and other post-retirement benefits deficit has moved during the year ended 31 March 2004 and 31 March 2005 as set out below:
| |
2005 £m |
2004 £m |
|---|---|---|
| At 1 April | (2,352) | (3,401) |
| Acquisition of Group undertaking | (10) | – |
| Current service cost | (150) | (146) |
| Past service cost | (44) | (3) |
| Net loss on settlements or curtailments | (17) | (130) |
| Contributions | 219 | 393 |
| Other financial income/(costs) | 2 | (43) |
| Actuarial gains | 240 | 822 |
| Exchange adjustments | 30 | 156 |
| At 31 March | (2,082) | (2,352) |
If FRS 17 had been implemented for the years ended 31 March 2003, 31 March 2004 or 31 March 2005, the following amounts would have been charged to the profit and loss account in respect of pensions and other post-retirement benefits for the year:
| |
2005 £m |
2004 £m |
2003 £m |
|---|---|---|---|
| Operating charge | |||
| Current service cost | 150 | 146 | 171 |
| Past service cost | 44 | 3 | 8 |
| Net loss on settlements or curtailments | 17 | 130 | 118 |
| Total charge to operating profit | 211 | 279 | 297 |
| Other financial (income)/costs | |||
| Expected return on scheme assets (i) | (881) | (806) | (977) |
| Interest on scheme liabilities | 879 | 849 | 888 |
| Impact on financial income | (2) | 43 | (89) |
| Net profit and loss charge before taxation | 209 | 322 | 208 |
| (i) | Expected return on scheme assets for the year ended 31 March 2005 is reported after charging scheme administration expenses of £7m. |
|---|
As the Lattice Group Pension Scheme is a closed scheme, the current service cost under the projected unit method of valuation is expected to increase as the members of the scheme approach retirement.
If the Group were to prepare its accounts under FRS 17, the net loss on settlements or curtailments and past service costs in 2005 above (2004 and 2003: net loss on settlements or curtailments) would be reported as part of exceptional items. The net FRS 17 profit and loss account impact before tax excluding these exceptional items amounted to £148m (2004: £192m; 2003: £90m) and compares with the current UK GAAP gross charge, before amounts capitalised and amounts deferred as regulatory assets, in respect of pensions and other post-retirement benefits of £231m (2004: £264m; 2003: £151m). The FRS 17 pre-exceptional profit and loss account charge (pre-tax) would therefore be £83m lower (2004: £72m lower; 2003: £61m lower) than the SSAP 24 charge.
The following pre-tax amounts would have been recognised in the statement of total recognised gains and losses:
| |
2005 £m |
2004 £m |
2003 £m |
|---|---|---|---|
| Difference between actual and expected return on scheme assets | 390 | 1,310 | (2,529) |
| Experience gains arising on scheme liabilities | 117 | 51 | 11 |
| Changes in assumptions | (267) | (539) | (690) |
| Actuarial gains/(losses) | 240 | 822 | (3,208) |
| Exchange adjustments | 30 | 156 | 64 |
| Net credit/(charge) to the statement of total recognised gains and losses | 270 | 978 | (3,144) |
History of experience gains and losses that would be recognised on an FRS 17 basis is set out below:
| 2005 | 2004 | 2003 | |
|---|---|---|---|
| Difference between actual and expected return on scheme assets (£m) | 390 | 1,310 | (2,529) |
| - percentage of scheme assets | 3% | 9% | (20)% |
| Experience gains arising on scheme liabilities (£m) | 117 | 51 | 11 |
| - percentage of present value of scheme liabilities | 1% | – | – |
| Actuarial gains/(losses) (£m) | 240 | 822 | (3,208) |
| - percentage of present value of scheme liabilities | 1% | 5% | (20)% |