Financial Statements
Notes to the Group financial statements
for the year ended 31 March 2006
25. Retirement benefit assets/obligations
a) Defined Benefit Schemes
The Group operates pension plans in a number of countries around the world and provides post-retirement healthcare insurance benefits to certain former employees.
The Group has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan that defines the amount of contributions that are paid by the Group into an independently administered fund.
Pension arrangements for UK employees are operated principally through two defined benefit schemes (the GUS Pension Scheme and the Argos Pension Scheme) and one defined contribution scheme (the GUS Money Purchase Pension Plan). In other countries, benefits are determined in accordance with local practice and regulations and funding is provided accordingly. The GUS and Argos defined benefit schemes have rules which specify the benefits to be paid and are financed accordingly with assets being held in independently administered funds. A full actuarial funding valuation of these schemes is carried out every three years with interim reviews in the intervening years. The latest full actuarial funding valuation of the schemes was carried out as at 31 March 2004 by independent, qualified actuaries, Watson Wyatt Limited, using the projected unit method. Under the projected unit method of valuation the current service cost, when expressed as a percentage of payroll, will increase as members approach retirement due to the ageing active membership of the schemes.
The Group has early adopted the December 2004 amendments to IAS 19.
(i) The amounts recognised in the Group balance sheet are determined as follows:
| UK | Overseas | Total | ||||||||
| 2006 £m |
2005 £m |
2006 £m |
2005 £m |
2006 £m |
2005 £m |
|||||
| Market value of schemes’ assets | 1,121 | 819 | 39 | 144 | 1,160 | 963 | ||||
| Present value of funded schemes’ liabilities | (1,063) | (892) | (39) | (150) | (1,102) | (1,042) | ||||
| Surplus/(deficit) in the funded schemes | 58 | (73) | – | (6) | 58 | (79) | ||||
| Present value of unfunded pension arrangements | (24) | (19) | (4) | (2) | (28) | (21) | ||||
| Liability for post-retirement healthcare | (11) | (9) | (1) | (3) | (12) | (12) | ||||
| Retirement benefit asset/(liability)
recognised in the Group balance sheet |
23 | (101) | (5) | (11) | 18 | (112) | ||||
During the year the Group put in place arrangements to secure unfunded pension benefit arrangements already in place for certain directors and senior managers by granting charges to an independent trustee over independently managed portfolios of marketable securities owned by the Group. The amount of assets charged in this way will be adjusted annually to keep the ratio of assets charged to the discounted value of the accrued benefits secured in this way as close as possible to the corresponding ratio in the Group's registered pension schemes. The total value of the assets charged in this way at 31 March 2006 was £16m. Further details of the unfunded pension arrangements for directors appear in the Report on directors’ remuneration and related matters on pages 48 and 49.
(ii) The amounts recognised in the Group income statement are as follows:
| UK | Overseas | Total | |||||||||
| 2006 £m |
2005 £m |
2006 £m |
2005 £m |
2006 £m |
2005 £m |
||||||
| Current service cost | 36 | 32 | 3 | 4 | 39 | 36 | |||||
| Interest on schemes’ liabilities (note 9) | 49 | 46 | 2 | 8 | 51 | 54 | |||||
| Expected return on schemes’ assets (note 9) | (56) | (47) | (2) | (8) | (58) | (55) | |||||
| Settlement gain in respect of unfunded liabilities of home shopping and Reality businesses | – | (4) | – | – | – | (4) | |||||
| Total charge to Group income statement | 29 | 27 | 3 | 4 | 32 | 31 | |||||
(iii) The movements during the year in the net asset/(liability) recognised in the Group balance sheet are as follows:
| UK | Overseas | Total | |||||||||
| 2006 £m |
2005 £m |
2006 £m |
2005 £m |
2006 £m |
2005 £m |
||||||
| At 1 April | (101) | (155) | (11) | (23) | (112) | (178) | |||||
| Liabilities disposed with the sale of overseas businesses | – | – | 25 | – | 25 | – | |||||
| Total amounts recognised in the Group income statement – as disclosed above |
(29) | (27) | (3) | (4) | (32) | (31) | |||||
| Actuarial gain/(loss) recognised in the Group statement of recognised income and expense |
25 | (19) | (18) | 1 | 7 | (18) | |||||
| Contributions paid by the Group | 128 | 100 | 2 | 15 | 130 | 115 | |||||
| At 31 March | 23 | (101) | (5) | (11) | 18 | (112) | |||||
| (iv) The expense is recognised in the following line items in the Group income statement: | ||
| 2006 £m |
2005 £m |
|
| Administrative costs | 39 | 32 |
| Net financing costs | (7) | (1) |
| Total charge to Group income statement | 32 | 31 |
| (v) The amount recognised in the Group statement of recognised income and expense is as follows: | ||
| 2006 £m |
2005 £m |
|
| Loss on liabilities | (128) | (18) |
| Gain on assets | 135 | – |
| Total gain/(loss) included in Group statement of recognised income and expense in year | 7 | (18) |
| Cumulative actuarial loss included in Group statement of recognised income and expense | (11) | (18) |
| (vi) Changes in the present value of the defined benefit obligation are as follows: | ||
| 2006 £m |
2005 £m |
|
| Opening defined benefit obligation | 1,075 | 989 |
| Pension liability disposed with the sale of overseas businesses | (134) | – |
| Current service cost | 39 | 36 |
| Interest cost | 51 | 54 |
| Currency loss | 3 | – |
| Settlement or curtailment | (2) | (4) |
| Contributions paid by employees | 9 | 11 |
| Actuarial loss on liabilities | 128 | 18 |
| Benefits paid | (27) | (29) |
| Closing defined benefit obligation | 1,142 | 1,075 |
The total defined benefit obligation of £1,142m (2005: £1,075m) includes £1,102m (2005: £1,042m) in respect of the Group’s funded arrangements and £40m (2005: £33m) in respect of the Group’s unfunded arrangements. |
||
(vii) Changes in the market value of the plan assets are as follows: |
||
| 2006 £m |
2005 £m |
|
| Opening market value of plan assets | 963 | 811 |
| Pension assets disposed with the sale of overseas businesses | (109) | – |
| Expected return | 58 | 55 |
| Currency gain | 3 | – |
| Settlement or curtailment | (2) | – |
| Actuarial gain on assets | 135 | – |
| Contributions paid by the Group | 130 | 115 |
| Contributions paid by employees | 9 | 11 |
| Benefits paid | (27) | (29) |
| Closing market value of plan assets | 1,160 | 963 |
The actual return on plan assets was £193m (2005: £55m). Contributions include a special contribution of £100m paid into the Argos Pension Scheme in March 2006 and special contributions paid into the Argos Pension Scheme (£50m) and the GUS Pension Scheme (£26m) in March 2005. The estimated amount of contributions expected to be paid to the UK and Overseas schemes during the next financial year is £26m by the Group and £11m by employees. |
||
| (viii) The valuations used for IAS 19 have been based on the most recent actuarial funding valuations and have been updated by Watson Wyatt Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the scheme at 31 March 2006. The principal actuarial assumptions used to calculate the present value of the defined benefit obligation are as follows: |
||
UK schemes |
||
| 2006 % |
2005 % |
|
| Rate of inflation | 2.9 | 2.9 |
| Rate of increase for salaries | 4.7 | 4.7 |
| Rate of increase for pensions in payment and deferred pensions | 2.9 | 2.9 |
| Rate of increase for medical costs | 6.5 | 6.5 |
| Discount rate | 4.9 | 5.4 |
Overseas Schemes |
||
| USA | USA | South | Netherlands | |||
| Africa | ||||||
| 2006 % |
2005 % |
2005 % |
2005 % |
|||
| Rate of inflation | 2.7 | 2.5 | 6.0 | 2.0 | ||
| Rate of increase for salaries | n/a | n/a | 7.0 | 2.5 | ||
| Rate of increase for pensions in payment and deferred pensions | – | – | 6.0 | 2.0 | ||
| Rate of increase for medical costs | 11.5 | 11.5 | n/a | n/a | ||
| Discount rate | 5.1 | 5.0 | 9.0 | 4.8 |
The main financial assumption is the real discount rate, i.e. the excess of the discount rate over the rate of inflation. If this assumption increased/decreased by 0.1%, the UK defined benefit obligation would decrease/increase by approximately £23m and the annual UK current service cost would decrease/increase by approximately £1m. The discount rate is based on market yields on high quality corporate bonds of equivalent currency and term to the defined benefit obligations.
The IAS 19 valuation assumes that mortality will be in line with standard tables for males and females. An allowance is also made for anticipated future improvements in life expectancy, by assuming that the probability of death occurring at each age will decrease by 0.25% each year. Overall, the average expectation of life on retirement in normal health is assumed to be:
- 18.9 years at age 65 for a male currently aged 65
- 22.0 years at age 65 for a female currently aged 65
- 19.6 years at age 65 for a male currently aged 50
- 22.9 years at age 65 for a female currently aged 50
(ix) The assets of the Group's defined benefit schemes and the expected rates of return are summarised as follows:
| UK | Overseas | UK | Overseas | ||||||||
| Fair value |
Expected long-term rate of return 2006 %pa |
Fair value 2006 £m |
Expected long-term rate of return 2006 %pa |
Fair value 2005 £m |
Expected long-term rate of return 2005 %pa |
Fair value 2005 £m |
Expected long-term rate of return 2005 %pa |
||||
| Market value of schemes’ assets: | |||||||||||
| Equities | 776 | 7.9 | – | n/a | 561 | 8.0 | 57 | 7.9 | |||
| Fixed interest securities | 332 | 4.5 | – | n/a | 247 | 5.0 | 39 | 4.4 | |||
| Property | – | n/a | – | n/a | – | – | 9 | 7.5 | |||
| Other | 13 | 3.7 | 39 | 5.0 | 11 | 3.7 | 40 | 5.2 | |||
| 1,121 | 6.8 | 39 | 5.0 | 819 | 7.0 | 145 | 6.2 | ||||
(b) Defined Contribution Schemes
The pension cost represents contributions payable by the Group to the fund and amounted to £20m (2005: £14m).
