35. Pensions and other post-retirement benefits | |
The Group operates pension plans in a number of countries around the world and provides post-retirement healthcare insurance benefits to certain former employees.
Pension arrangements for UK employees are operated principally through two defined benefit schemes (the GUS Scheme and the Argos Scheme) and the GUS Defined Contribution Scheme. In other countries, benefits are determined in accordance with local practice and regulations and funding is provided accordingly. There are defined benefit arrangements in place in North America, South Africa and The Netherlands with schemes in other countries being either defined contribution or state sponsored schemes.
(a) Pension costs
Pension costs are determined in accordance with SSAP 24 with supplementary disclosures in accordance with the transitional arrangements of FRS 17.
The total pension cost for the Group was £63m (2003 £57m) of which £15m (2003 £14m) related to overseas plans. At 31 March 2004 there was a net pension asset of £60m in respect of the defined benefit schemes and other pension arrangements. This has arisen largely as a result of the special contributions made during the year, details of which are given below, and is included within Debtors (Note 18). At 31 March 2003 accrued pension costs in respect of the defined benefit schemes and other pension liabilities amounted to £47m and were included in Provisions for liabilities and charges (Note 23). The pension asset at 31 March 2004 is stated after deducting unfunded liabilities of £13m; the accrued pension costs at 31 March 2003 included £30m in respect of such liabilities.
Included within exceptional items is a charge of £3m (2003 nil) in respect of the transfer of pension arrangements for those employees of the home shopping and Reality businesses who have chosen to transfer their pension rights to their new employer following the disposal of those businesses. The charge is based on the market value of scheme assets and scheme liabilities of the GUS defined benefit scheme, in respect of the transferring employees, at 31 March 2004 and is included within creditors at 31 March 2004. The payment in respect of the transfer will be made in the year ending 31 March 2005.
The GUS Defined Benefit Scheme
This scheme has rules which specify the benefits to be paid and is financed accordingly with assets being held in independently administered funds. A full actuarial valuation of the scheme is carried out every three years with interim reviews in the intervening years.
The latest full actuarial valuation of the scheme was carried out as at 31 March 2001 by independent, qualified actuaries, Mercer Human Resource Consulting Limited, using the projected unit method. Under the projected unit method of valuation the current service cost will increase as members approach retirement due to the ageing active membership of the scheme.
The principal actuarial assumptions used for SSAP 24 purposes were as follows:
| Valuation rate of interest | 6.0% per annum |
|---|---|
| Rate of future earnings growth | 4.3% per annum |
| Pension increases | 2.5% per annum |
At the valuation date, the market value of the scheme's assets was £327m. On the above assumptions, this represented 100% of the value of benefits that had accrued to members. Since that date the Company has made special contributions to the scheme of £48m, of which £30m has been made in the year under review.
The Argos Defined Benefit Scheme
This scheme has rules which specify the benefits to be paid and is financed accordingly with assets being held in independently administered funds. A full actuarial valuation of the scheme is carried out every three years with interim reviews in the intervening years.
The latest full actuarial valuation of the scheme was carried out as at 5 April 2001 by independent, qualified actuaries, Watson Wyatt LLP, using the projected unit method. Under the projected unit method of valuation the current service cost will increase as members approach retirement due to the ageing active membership of the scheme.
The principal actuarial assumptions used for SSAP 24 purposes were as follows:| Valuation rate of interest | 6.0% per annum |
|---|---|
| Rate of future earnings growth | 4.3% per annum |
| Pension increases | 2.5% per annum |
At the valuation date, the market value of the scheme's assets was £217m. This represented 98% of the benefits that had accrued to members. Since that date Argos Limited has made a special contribution to the scheme of £80m of which £70m has been made in the year under review.
The GUS Defined Contribution Scheme
This scheme was introduced during the year ended 31 March 1999 with the aim of providing pension benefits to those Group employees in the United Kingdom who had been ineligible for pension scheme membership. The assets of the scheme are held separately from those of the Company in an independently administered fund. The pension cost represents contributions payable by the Company to the fund and amounted to £11m (2003 £8m). Contributions totalling £1m (2003 £1m) were payable to the fund at 31 March 2004 and are included within creditors.
(b) Post-retirement healthcare costs
The Group operates schemes which provide post-retirement healthcare benefits to certain retired employees and their dependent relatives. The principal scheme relates to former employees in the UK and, under this scheme, the Group has undertaken to meet the cost of post-retirement healthcare insurance for all eligible former employees and their dependants who retired prior to 1 April 1994.
The last full actuarial valuation of the accrued liability in respect of these benefits was carried out as at 31 March 2003 by independent, qualified actuaries, Watson Wyatt LLP, using the projected unit method. The assumption which has the most significant impact on the actuarial valuation is that medical cost inflation will be 6.5% per annum for three years reducing to 4.3% per annum for the longer term. A provision at 31 March 2004 of £12m (2003 £12m) is included in Provisions for liabilities and charges (Note 23).
Premiums paid in the year were £1m (2003 £1m) and the total cost for the Group was £1m (2003 £1m).
(c) Disclosures made in accordance with FRS 17
Under the transitional arrangements of FRS 17, the Group continues to account for pension costs in accordance with SSAP 24 but a number of additional disclosures are required including information in relation to overseas schemes. These have been determined with the assistance of the Group's actuaries who have adjusted the SSAP 24 calculations up to 31 March 2004.
During the year ended 31 March 2004, contributions to the Group’s defined benefit schemes amounted to £132m (2003 £48m).
The last full valuations of the schemes, which used the projected unit method of valuation, were carried out as follows:
| The GUS Defined Benefit Scheme | – 31 March 2001 |
|---|---|
| The Argos Defined Benefit Scheme | – 5 April 2001 |
| The Lewis Stores Group Pension Fund | – 1 January 2003 |
| The Lewis Stores Retirement Fund | – 1 January 2003 |
| The Experian Pension Plan (USA) | – 31 March 2002 |
| The Experian Information Solutions Inc Supplemental Benefit Plan (USA) | – 31 March 2002 |
| The Wehkamp Retirement Plan (Netherlands) | – 31 December 2001 |
The Experian North America schemes are in the process of being terminated, following the sale in January 2004 of the business employing the members of these schemes. This has led to a curtailment gain of £2m and a settlement cost of £11m. The net amount of £9m (2003 nil) is included as a charge to profit and loss account in the FRS 17 disclosures.
The principal assumptions used in the valuations for FRS 17 purposes were as follows:
| UK schemes | GUS 2004 % |
Argos 2004 % | GUS 2003 % | Argos 2003 % | GUS 2002 % | Argos 2002 % |
|---|---|---|---|---|---|---|
| Rate of inflation | 2.8 | 2.8 | 2.5 | 2.5 | 2.5 | 2.5 |
| Rate of salary increases | 4.6 | 4.6 | 4.3 | 4.3 | 4.3 | 4.3 |
| Rate of increase for pensions in payment and deferred pensions | 2.8 | 2.8 | 2.5 | 2.5 | 2.5 | 2.5 |
| Discount rate | 5.5 | 5.5 | 5.5 | 5.5 | 6.0 | 6.0 |
| Overseas schemes | USA 2004 % |
South Africa 2004 % |
Netherlands 2004 % | USA 2003 % | South Africa 2003 % | Netherlands 2003 % | USA 2002 % | South Africa 2002 % | Netherlands 2002 % |
|---|---|---|---|---|---|---|---|---|---|
| Rate of inflation | 2.5 | 6.0 | 2.0 | 2.0 | 7.0 | 2.5 | 2.0 | 8.0 | 2.0 |
| Rate of salary increases | 4.0 | 7.0 | 2.5 | 4.0 | 8.0 | 4.0 | 4.0 | 12.5 | 4.0 |
| Rate of increase for pensions in payment and deferred pensions |
– | 6.0 | 2.4 | – | 5.0 | 2.5 | – | 5.0 | 1.0 |
| Discount rate | 5.1 | 9.0 | 5.3 | 6.5 | 10.0 | 5.3 | 6.5 | 15.0 | 6.0 |
The assets of the Group’s defined benefit schemes and the expected rates of return are summarised as follows:
| UK | Overseas | UK | Overseas | UK | Overseas | ||||||||||||
| | Fair value 2004 £m |
Expected long-term rate of return 2004 %pa |
Fair value 2004 £m |
Expected long-term rate of return 2004 %pa |
Fair value 2003 £m | Expected long-term rate of return 2003 %pa | Fair value 2003 £m | Expected long-term rate of return 2003 %pa | Fair value 2002 £m | Expected long-term rate of return 2002 %pa | Fair value 2002 £m | Expected long-term rate of return 2002 %pa | |||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Market value of schemes’ assets: | |||||||||||||||||
| Equities | 461 | 8.0 | 62 | 8.8 | 318 | 8.5 | 49 | 8.5 | 406 | 8.0 | 54 | 9.8 | |||||
| Fixed interest securities | 204 | 5.1 | 50 | 5.0 | 120 | 5.0 | 46 | 5.0 | 132 | 5.0 | 48 | 5.4 | |||||
| Property | – | – | – | – | – | – | – | – | – | – | 1 | 18.0 | |||||
| Other | 14 | 3.8 | 10 | 8.1 | 33 | 4.0 | 11 | 4.0 | 16 | 5.0 | 10 | 8.3 | |||||
 | 679 | 7.0 | 122 | 7.2 | 471 | 7.3 | 106 | 6.5 | 554 | 7.2 | 113 | 7.9 | |||||
The following amounts were measured in accordance with the requirements of FRS 17:
| UK | Overseas | ||||||
| | 2004 £m | 2003 £m | 2002 £m | 2004 £m | 2003 £m | 2002 £m | |
|---|---|---|---|---|---|---|---|
| Market value of schemes’ assets | 679 | 471 | 554 | 122 | 106 | 113 | |
| Present value of funded schemes’ liabilities | (821) | (710) | (599) | (141) | (127) | (111) | |
| (Deficit)/surplus in the funded schemes | (142) | (239) | (45) | (19) | (21) | 2 | |
| Liability for post-retirement healthcare and unfunded pension arrangements | (23) | (41) | (45) | (4) | (6) | (5) | |
| (165) | (280) | (90) | (23) | (27) | (3) | ||
| Related deferred tax assets | 50 | 84 | 27 | 7 | 8 | 1 | |
| Net pension liability | (115) | (196) | (63) | (16) | (19) | (2) | |
Movement in (deficit)/surplus during the year:
| UK | Overseas | ||||
| | 2004 £m | 2003 £m | 2004 £m | 2003 £m | |
|---|---|---|---|---|---|
| (Deficit)/surplus at start of year in all schemes (2003 funded schemes only) | (280) | (45) | (27) | 2 | |
| Movement: | |||||
| Current service cost | (39) | (32) | (4) | (4) | |
| Contributions | 126 | 47 | 6 | 1 | |
| Other finance income | (5) | 5 | (1) | – | |
| Actuarial gain/(loss) recognised | 10 | (214) | 12 | (20) | |
| Settlement gain in respect of unfunded liabilities of home shopping and Reality businesses | 23 | – | – | – | |
| Net curtailment and settlement loss in respect of Experian North America schemes | – | – | (9) | – | |
| Deficit at end of year | (165) | (239) | (23) | (21) | |
Disclosure of the effect of the adoption of FRS 17 on the financial statements:
As indicated above, the Group continues to account for pension costs in accordance with SSAP 24 but, in accordance with the transitional requirements of FRS 17, disclosure is required of the amounts that would have been recognised under FRS 17. The disclosures are as follows:
(i) Profit and loss account
If FRS 17 had been adopted in full in the financial statements, the amounts charged in the profit and loss account would have comprised:| UK | Overseas | Total | ||||||
| | 2004 £m | 2003 £m | 2004 £m | 2003 £m | 2004 £m | 2003 £m | ||
|---|---|---|---|---|---|---|---|---|
| Amount charged to operating profit in respect of defined benefit schemes: | ||||||||
| Current service cost | (39) | (32) | (4) | (4) | (43) | (36) | ||
| Amount credited/(charged) to net interest: | ||||||||
| Expected return on schemes’ assets | 35 | 40 | 7 | 8 | 42 | 48 | ||
| Interest on schemes’ liabilities | (40) | (35) | (8) | (8) | (48) | (43) | ||
| Amount (charged)/credited as Other finance income | (5) | 5 | (1) | – | (6) | 5 | ||
| Credit/(charge) in respect of settlements and curtailments | 23 | – | (9) | – | 14 | – | ||
| Total charge to profit and loss account | (21) | (27) | (14) | (4) | (35) | (31) | ||
(ii) Statement of total recognised gains and losses
If FRS 17 had been adopted in full in the financial statements, the amounts recognised in the statement of total recognised gains and losses would have comprised:
| UK | Overseas | Total | ||||||
| 2004 £m | 2003 £m | 2004 £m | 2003 £m | 2004 £m | 2003 £m | ||
|---|---|---|---|---|---|---|---|---|
| Actual return less expected return on schemes’ assets (see note (iv)) | 61 | (156) | 18 | (21) | 79 | (177) | ||
| Experience gains and (losses) arising on the schemes’ liabilities (see note (iv)) | (2) | 11 | 1 | 15 | (1) | 26 | ||
| Changes in the assumptions underlying the present value of the schemes’ liabilities | (49) | (69) | (7) | (14) | (56) | (83) | ||
| Actuarial gain/(loss) recognised in the statement of total recognised gains and losses | 10 | (214) | 12 | (20) | 22 | (234) | ||
(iii) Balance sheet
A pension asset of £34m (2003 liability of £40m) (net of deferred tax) has been recognised in the financial statements under SSAP 24. If FRS 17 had been adopted in full in the financial statements, the Group's net assets and profit and loss account reserve would have been as follows:
| 2004 £m | 2003 £m |
|---|---|---|
| Net assets per balance sheet | 3,007 | 2,640 |
| Elimination of (assets)/liabilities under SSAP 24 | (34) | 40 |
| Net pension liability under FRS 17 | (131) | (215) |
| Net assets including net pension liability | 2,842 | 2,465 |
| Profit and loss account reserve per balance sheet | 2,518 | 2,154 |
| Elimination of (assets)/liabilities under SSAP 24 | (34) | 40 |
| Net pension liability under FRS 17 | (131) | (215) |
| Profit and loss account reserve including net pension liability | 2,353 | 1,979 |
(iv) History of experience gains and (losses)
| UK | Overseas | ||||
| 2004 | 2003 | 2004 | 2003 | |
|---|---|---|---|---|---|
| Difference between the actual and expected return on schemes’ assets: | |||||
| Amount (£m) | 61 | (156) | 18 | (21) | |
| Percentage of schemes’ assets | 8.9% | 33.2% | 14.8% | 19.8% | |
| Experience gains and (losses) on schemes’ liabilities: | |||||
| Amount (£m) | (2) | 11 | 1 | 15 | |
| Percentage of the present value of schemes’ liabilities | 0.2% | 1.6% | 0.7% | 11.9% | |
| Total amount recognised in the statement of total recognised gains and losses: | |||||
| Amount (£m) | 10 | (214) | 12 | (20) | |
| Percentage of the present value of schemes’ liabilities | 1.2% | 30.1% | 8.3% | 16.1% | |