24. Retirement benefit and other post-retirement obligations
Background
The Group operates a number of defined benefit and defined contribution retirement plans throughout the world. For the defined benefit plans, benefits are based on employees’ length of service and final pensionable pay. Defined contribution benefits are based on the amount of contributions paid in respect of an individual member, the investment returns earned and the amount of pension this money will buy when a member retires.
The largest plan is the Pearson Group Pension Plan (‘UK Group plan’) with both defined benefit and defined contribution sections. From 1 November 2006, all sections of the UK Group plan were closed to new members with the exception of a defined contribution section that was opened in 2003. This section is available to all new employees of participating companies. The other major defined benefit plans are based in the US.
Other defined contribution plans are operated principally overseas with the largest plan being in the US. The specific features of these plans vary in accordance with the regulations of the country in which employees are located.
Pearson also has several post-retirement medical benefit plans (PRMBs), principally in the US. PRMBs are unfunded but are accounted for and valued similarly to defined benefit pension plans.
Assumptions
The principal assumptions used for the UK Group plan and the US PRMB are shown below. Weighted average assumptions have been shown for the other plans, which primarily relate to US pension plans.
| 2007 | 2006 | |||||
|---|---|---|---|---|---|---|
| % | UK Group plan |
Other plans |
PRMB | UK Group plan |
Other plans |
PRMB |
| Inflation | 3.30 | 2.93 | 3.00 | 3.00 | 2.91 | 3.00 |
| Rate used to discount plan liabilities | 5.80 | 6.01 | 6.05 | 5.20 | 5.70 | 5.85 |
| Expected return on assets | 6.50 | 7.27 | – | 6.40 | 7.18 | – |
| Expected rate of increase in salaries | 5.00 | 4.36 | – | 4.70 | 4.37 | – |
| Expected rate of increase for pensions in payment and deferred pensions |
2.50 to 4.30 | – | – | 2.10 to 4.60 | – | – |
| Initial rate of increase in healthcare rate | – | – | 9.50 | – | – | 10.00 |
| Ultimate rate of increase in healthcare rate | – | – | 5.00 | – | – | 5.00 |
The UK discount rate is based on the annualised yield on the iBoxx over 15-year AA-rated corporate bond index. The US discount rate is set by reference to a US bond portfolio matching model. The expected return on assets is based on market expectations of long-term asset returns for the defined portfolio at the end of the year.
The expected rates of return on categories of plan assets are determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the plan’s investment portfolio.
The UK mortality assumptions have been derived by adjusting standard mortality tables (PMFA 92 tables projected forward with medium cohort improvement factors). The Group changed its mortality assumptions in the UK in 2007 to reflect an assumed increased life expectancy of pensioners by adding a 1% floor to the medium cohort projections.
For the US plans, the assumptions used were based on standard US mortality tables (GAM94).
Using the above tables, the remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date for the UK and US Group plans is as follows:
| UK | US | |||
|---|---|---|---|---|
| 2007 | 2006 | 2007 | 2006 | |
| Male | 21.3 | 20.9 | 17.9 | 17.9 |
| Female | 21.6 | 21.3 | 21.3 | 21.3 |
The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, for the UK and US Group plans is as follows:
| UK | US | |||
|---|---|---|---|---|
| 2007 | 2006 | 2007 | 2006 | |
| Male | 23.1 | 22.2 | 17.9 | 17.9 |
| Female | 23.6 | 22.5 | 21.3 | 21.3 |
Financial statement information
The amounts recognised in the income statement are as follows:
| All figures in £ millions | 2007 | |||||
|---|---|---|---|---|---|---|
| UK Group plan |
Defined benefit other |
Sub total | Defined contribution |
PRMB | Total | |
| Current service cost | 29 | 2 | 31 | 39 | 1 | 71 |
| Total operating expense | 29 | 2 | 31 | 39 | 1 | 71 |
| Expected return on plan assets | (96) | (7) | (103) | – | – | (103) |
| Interest on plan liabilities | 84 | 7 | 91 | – | 2 | 93 |
| Net finance (income)/expense | (12) | – | (12) | – | 2 | (10) |
| Net income statement charge | 17 | 2 | 19 | 39 | 3 | 61 |
| Actual return on plan assets | 128 | 4 | 132 | – | – | 132 |
| All figures in £ millions | 2006 | |||||
|---|---|---|---|---|---|---|
| UK Group plan |
Defined benefit other |
Sub total | Defined contribution |
PRMB | Total | |
| Current service cost | 27 | 2 | 29 | 36 | 1 | 66 |
| Past service cost | – | – | – | – | (2) | (2) |
| Total operating expense/(income) | 27 | 2 | 29 | 36 | (1) | 64 |
| Expected return on plan assets | (85) | (7) | (92) | – | – | (92) |
| Interest on plan liabilities | 78 | 7 | 85 | – | 3 | 88 |
| Net finance (income)/expense | (7) | – | (7) | – | 3 | (4) |
| Net income statement charge | 20 | 2 | 22 | 36 | 2 | 60 |
| Actual return on plan assets | 153 | 13 | 166 | – | – | 166 |
The total operating charge is included in administrative and other expenses.
The amounts recognised in the balance sheet are as follows:
| All figures in £ millions | 2007 | 2006 | ||||||
|---|---|---|---|---|---|---|---|---|
| UK Group plan |
Other funded plans | Other unfunded plans | Total | UK Group plan |
Other funded plans | Other unfunded plans | Total | |
| Fair value of plan assets | 1,744 | 109 | – | 1,853 | 1,528 | 105 | – | 1,633 |
| Present value of defined benefit obligation |
(1,682) | (117) | (12) | (1,811) | (1,683) | (115) | (12) | (1,810) |
| Net pension asset/(liability) | 62 | (8) | (12) | 42 | (155) | (10) | (12) | (177) |
| Other post-retirement medical benefit obligation |
(47) | (48) | ||||||
| Other pension accruals | (28) | (25) | ||||||
| Net retirement benefit obligations |
(33) | (250) | ||||||
| Analysed as: | ||||||||
| Retirement benefit asset | 62 | – | ||||||
| Retirement benefit obligations | (95) | (250) | ||||||
The following gains have been recognised in the statement of recognised income and expense:
| All figures in £ millions | 2007 | 2006 |
|---|---|---|
| Amounts recognised for defined benefit plans | 79 | 102 |
| Amounts recognised for post-retirement medical benefit plans | 1 | 5 |
| Total recognised in year | 80 | 107 |
| Cumulative amounts recognised | 124 | 44 |
The fair value of plan assets comprises the following:
| % | 2007 | 2006 | ||||
|---|---|---|---|---|---|---|
| UK Group plan |
Other funded plans |
Total | UK Group plan |
Other funded plans |
Total | |
| Equities | 34.3 | 3.4 | 37.7 | 46.6 | 3.9 | 50.5 |
| Bonds | 34.9 | 2.0 | 36.9 | 23.8 | 2.1 | 25.9 |
| Properties | 7.7 | – | 7.7 | 9.2 | – | 9.2 |
| Other | 17.2 | 0.5 | 17.7 | 14.0 | 0.4 | 14.4 |
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:
| All figures in £ millions | ||||||
|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
| UK Group plan |
Other plans |
Total | UK Group plan |
Other plans |
Total | |
| Fair value of plan assets | ||||||
| Opening fair value of plan assets | 1,528 | 105 | 1,633 | 1,390 | 110 | 1,500 |
| Exchange differences | – | 1 | 1 | – | (12) | (12) |
| Expected return on plan assets | 96 | 7 | 103 | 85 | 7 | 92 |
| Actuarial gains and losses | 32 | (3) | 29 | 68 | 6 | 74 |
| Contributions by employer | 152 | 5 | 157 | 43 | 2 | 45 |
| Contributions by employee | 8 | – | 8 | 7 | – | 7 |
| Benefits paid | (72) | (6) | (78) | (65) | (8) | (73) |
| Closing fair value of plan assets | 1,744 | 109 | 1,853 | 1,528 | 105 | 1,633 |
| Present value of defined benefit obligation | ||||||
| Opening defined benefit obligation | (1,683) | (127) | (1,810) | (1,661) | (142) | (1,803) |
| Exchange differences | – | 1 | 1 | – | 15 | 15 |
| Current service cost | (29) | (2) | (31) | (27) | (2) | (29) |
| Interest cost | (84) | (7) | (91) | (78) | (7) | (85) |
| Actuarial gains and losses | 50 | – | 50 | 25 | 3 | 28 |
| Contributions by employee | (8) | – | (8) | (7) | – | (7) |
| Benefits paid | 72 | 6 | 78 | 65 | 8 | 73 |
| Acquisition through business combination | – | – | – | – | (2) | (2) |
| Closing defined benefit obligation | (1,682) | (129) | (1,811) | (1,683) | (127) | (1,810) |
Changes in the value of the US PRMB are as follows:
| All figures in £ millions | 2007 | 2006 |
|---|---|---|
| Opening defined benefit obligation | (48) | (60) |
| Exchange differences | – | 8 |
| Current service cost | (1) | (1) |
| Past service cost | – | 2 |
| Interest cost | (2) | (3) |
| Actuarial gains and losses | 1 | 5 |
| Benefits paid | 3 | 4 |
| Reclassifications | – | (3) |
| Closing defined benefit obligation | (47) | (48) |
The history of the defined benefit plans is as follows:
| All figures in £ millions | 2007 | 2006 | 2005 | 2004 | 2003 |
|---|---|---|---|---|---|
| Fair value of plan assets | 1,853 | 1,633 | 1,500 | 1,280 | 1,164 |
| Present value of defined benefit obligation | (1,811) | (1,810) | (1,803) | (1,615) | (1,454) |
| Net pension asset/(liability) | 42 | (177) | (303) | (335) | (290) |
| Experience adjustments on plan assets | 29 | 74 | 140 | 67 | 88 |
| Experience adjustments on plan liabilities | 50 | 28 | (119) | (127) | (113) |
Funding
The UK Group plan is self-administered with the plans’ assets being held independently of the Group. The trustees of the plan are required to act in the best interest of the plan’s beneficiaries. The most recently completed triennial actuarial valuation for funding purposes was completed as at 1 January 2006 and revealed a funding shortfall. The Group has agreed that the funding shortfall will be eliminated by 31 December 2014. In 2007 the Group contributed £121m (including a special contribution of £100m) and has agreed to contribute £21m in 2008 and £21.9m per annum thereafter in excess of an estimated £30m of regular contributions.
The Group expects to contribute $70m in 2008 and $73m in 2009 to its US pension plans.
Sensitivities
The net retirement benefit obligations are calculated using a number of assumptions, the most significant being the discount rate used to calculate the defined benefit obligation. The effect of a one percentage point increase and decrease in the discount rate on the defined benefit obligation and the total pension expense is as follows:
| All figures in £ millions | 2007 | |
|---|---|---|
| 1% increase | 1% decrease | |
| Effect on: | ||
| (Decrease)/increase in defined benefit obligation – UK Group plan | (222) | 275 |
| (Decrease)/increase of aggregate of service cost and interest cost – UK Group plan |
(4.6) | 5.8 |
| (Decrease)/increase in defined benefit obligation – US plan | (6.7) | 7.3 |
The effect of a one percentage point increase and decrease in the assumed medical cost trend rates is as follows:
| All figures in £ millions | 2007 | |
|---|---|---|
| 1% increase | 1% decrease | |
| Effect on: | ||
| (Decrease)/increase in post-retirement medical benefit obligation | (3.7) | 4.1 |
| Increase/(decrease) of aggregate of service cost and interest cost | 0.1 | (0.1) |