Defined contribution plans
The Company operates a defined contribution stakeholder plan for
all new qualifying employees joining the Company since 1 April 2003, an additional
voluntary contribution scheme for qualifying members of the defined benefit
plans and a shift pay pension plan. The assets of the pension plans are held
separately from those of the Group in funds under the control of trustees
and insurance companies. The only obligation of the Group with respect to
these retirement plans is to make the specified contributions.
The Company provides death in service benefits to those employees who are active contributing members of the stakeholder plan through the life assurance section of the AEA Technology Pension Scheme.
The total cost charged to the income statement of £0.6 million (2007: £1.2 million) represents contributions payable to these plans by the Group at rates specified in the rules of the plans. As at 31 March 2008 contributions of £0.1 million (2007: £0.1 million) due in respect of the current year had not been paid over to the plans.
Defined benefit schemes – funded obligations
In the UK the Company operates the AEA Technology Pension Scheme
(“the Scheme”) for a proportion of its UK employees. The Scheme
is a registered Pension Scheme (within the meaning of Part 4 of the Finance
Act 2004), is contracted out of the State Earnings Related Pension Scheme
and provides defined benefits. The fund does not invest in equity or debt
securities issued by the Company. The Scheme was closed to new employees on
31 March 2003.
Members currently build up retirement benefits between 1.25% and 1.66% of final pensionable earnings for each year of future pensionable service upon attainment of a retirement age of 60/65.
International Accounting Standard 19 ‘Employee Benefits’ requires the Group to include in the balance sheet the surplus or deficit on the Scheme calculated as at the balance sheet date. It is a snapshot view that can be significantly influenced by short–term market factors. The calculation of the surplus or deficit is, therefore, dependent on factors which are beyond the control of AEA – principally the value at the balance sheet date of equity shares in which the scheme has invested and long–term interest rates, which are used to discount future liabilities.
In contrast the funding of the scheme is based on long–term trends and assumptions relating to market growth, as advised by qualified actuaries. The method used for the calculation is as prescribed by IAS 19. The calculations for the Scheme are based on the liabilities determined at the funding valuation as at 31 March 2005 on a going concern basis. The valuation was carried out by the Company’s actuaries, Hewitt Associates Limited. The results are then adjusted by the actuaries each year, allowing for the IAS 19 financial and demographic assumptions and rolling forward the liabilities to the balance sheet date in an approximate manner.
The expected return on assets assumption reflects the average of the Group’s best estimates for the long-term expected rates of return on the Scheme’s main asset classes, having taken professional advice. Mortality assumptions have been chosen with regard to the latest available tables that have common characteristics to the membership of the Group’s pension plans. Details of the assumptions are given within this note.
In June 2006 the Company and the Trustee agreed a schedule of employer contributions to clear the Scheme’s past service funding deficit over approximately 15 years. £10.0 million was paid into the Scheme in September 2006 from the sale of the Rail business and portfolio of companies in addition to contributions of 5.5% of pensionable earnings, plus £0.1 million per month until 31 March 2008. In addition the Company pays a contribution equal to the Pension Protection Fund levy that for the year to 31 March 2008 amounted to £0.5 million (2007: £0.1 million). The estimated amount of contributions expected to be paid to the Scheme during the financial year to 31 March 2009 is £8.0 million.
As at 31 March 2008 contributions of £0.2 million (2007: £0.2 million) due in respect of the year to 31 March had not been paid over to the Scheme.
Defined benefit schemes – unfunded obligations
In the UK the Company operates a formal, employer financed retirement benefit
scheme to provide benefits in excess of the HMRC earnings cap for a former
director and also has unfunded top–up arrangements in place to provide
benefits to certain former employees.
The value of the pensions reserve required to be recognised under IAS 19 is calculated by the Company’s actuaries using the same assumptions as used for the funded Company Scheme, with the exception of post–retirement mortality. The post–retirement mortality assumption, given within this note, adopted for the unapproved reserves is less pessimistic than that adopted for the mixed population of the funded Company Scheme. This reflects the lower mortality rates typically experienced by individuals with above average levels of personal wealth.
Other discontinued schemes
Plans in the UK and Canada operated during the prior year. These
plans related to businesses that were sold during that year (the Rail business
in the UK and Kinectrics in Canada). The Group also operated an unfunded post
retirement healthcare plan in the Canadian subsidiary, Kinectrics, which was
sold during the prior year. Liabilities passed to the purchaser in all cases.
The most recent actuarial valuations of those plan assets and the present value of defined benefit obligations were carried out as at 31 December 2004 for the three sections of the Railways Pension Scheme by Watson Wyatt Limited and as at 1 January 2004 for the Canadian Pension and Healthcare plans by Towers Perrin HR Services. The present value of the defined benefit obligations, the related current service cost and past service costs were measured using the projected unit credit method.
Pension benefits
The amounts recognised in the income statement and the balance sheet are summarised
as follows:
| Group | Company | ||||||
| 2008 £m |
2007 £m |
2008 £m |
2007 £m |
||||
| Balance sheet liabilities for: | |||||||
| pension benefits | 60.0 | 92.2 | 60.0 | 92.2 | |||
| Balance sheet liability | 60.0 | 92.2 | 60.0 | 92.2 | |||
| Income statement charge for: | |||||||
| pension benefits | 2.1 | 3.2 | 2.1 | 2.9 | |||
| post-employment medical benefits | – | 0.3 | – | – | |||
| Income statement charge | 2.1 | 3.5 | 2.1 | 2.9 | |||
The amounts recognised in the balance sheet are determined as follows:
|
2008 £m |
2007 £m |
||
| Present value of funded obligations |
315.0 | 363.2 | |
| Fair value of plan assets | (284.4) | (274.7) | |
| 56.6 | 88.5 | ||
| Present value of unfunded obligations | 3.4 | 3.7 | |
| 60.0 | 92.2 |
The amounts recognised in the income statement are as follows:
| 2008 | ||||||||
| Company | Company | AEA | AEA Rail | AEA Rail | ||||
| Scheme | Scheme | Rail | (TCI) | (TEL) | Kinectrics | Total | ||
| £m | £m | £m | £m | £m | £m | £m | ||
| Continuing operations | ||||||||
| Current service cost | 1.8 | 2.2 | – | – | – | – | 2.2 | |
| Interest cost | 19.0 | 14.4 | – | – | – | – | 14.4 | |
| Expected return on plan assets | (18.7) | (14.6) | – | – | – | – | (14.6) | |
| Curtailment loss during year | – | – | – | – | – | – | 0.8 | |
| Past service income | – | (0.2) | – | – | – | – | (2.0) | |
| 2.1 | 0.8 | – | – | – | – | 0.8 | ||
| Discontinued operations | ||||||||
| Current service cost | – | 0.4 | 0.5 | 0.1 | 0.1 | 0.7 | 1.8 | |
| Interest cost | – | 2.7 | 1.3 | 0.5 | 0.7 | 1.3 | 6.5 | |
| Expected return on plan assets | – | (2.8) | (1.7) | (0.7) | (0.8) | (1.7) | (7.7) | |
| – | 0.3 | 0.1 | (0.1) | – | 0.3 | 0.6 | ||
| Profit on disposal – curtailment loss | – | 1.8 | – | – | – | – | 1.8 | |
| Amount included in staff costs | 2.1 | 2.9 | 0.1 | (0.1) | – | 0.3 | 3.2 | |
The continuing operations curtailment loss of £0.8 million reported in the prior year resulted from a further reduction in numbers of members of the Scheme due to the Company’s redundancy programme. The curtailment loss arising from the disposal of businesses in the prior year was £1.8 million and was charged to the profit on disposal (note 9).
The past service income of £2.0 million reported in the prior year relates to “A-day” changes. From 6 April 2006 new legislation allowed for a larger lump sum to be provided to pension scheme members on retirement. As a result of this increase there is expected to be a reduction in the Scheme’s obligations. This expected reduction has been credited to the income statement.
£1.8 million current service costs (2007: £0.2 million combined current and past service costs) were included in the continuing operations income statement. These costs were split between cost of sales and administrative expenses. The prior year curtailment loss of £0.8 million was included in ‘administrative expenses: significant one-off items’. The interest cost of £19.0 million (2007: £14.4 million) and the expected return on plan assets of £18.7 million (2007: £14.6 million) are included in continuing operations ‘finance costs’ and ‘finance income’ respectively. The actual loss on plan assets was £8.6 million (2007: return of £10.8 million).
The movement in the pension obligation recognised in the balance sheet is as follows
| Funded | Unfunded | ||||||||||||
| Company | Company | AEA Rail | AEA Rail | ||||||||||
| Scheme | Scheme | AEA Rail | (TCI) | (TEL) | Kinectrics | Total | |||||||
| £m | £m | £m | £m | £m | £m | £m | |||||||
| At 1 April 2006 | 354.4 | 3.6 | 62.9 | 24.4 | 32.0 | 60.3 | 537.6 | ||||||
| Exchange differences | – | – | – | – | – | (3.1) | (3.1) | ||||||
| Interest cost | 17.1 | – | 1.3 | 0.5 | 0.7 | 1.3 | 20.9 | ||||||
| Current and past service costs | 0.6 | – | 0.7 | 0.1 | 0.2 | 0.7 | 2.3 | ||||||
| Actuarial (gains) and losses | (1.4) | 0.3 | 0.1 | (0.2) | – | 4.8 | 3.6 | ||||||
| Contributions by plan participants | 0.3 | – | – | – | – | 0.2 | 0.5 | ||||||
| Benefits paid | (10.4) | (0.2) | (2.1) | (0.8) | (1.2) | (0.3) | (15.0) | ||||||
| Curtailment and settlements | 2.6 | – | – | – | – | – | 2.6 | ||||||
| Businesses sold | – | – | (62.9) | (24.0) | (31.7) | (63.9) | (182.5) | ||||||
| At 31 March 2007 | 363.2 | 3.7 | – | – | – | – | 366.9 | ||||||
| Interest cost | 19.0 | – | – | – | – | – | 19.0 | ||||||
| Current service costs | 1.8 | – | – | – | – | – | 1.8 | ||||||
| Actuarial gains | (57.6) | – | – | – | – | – | (57.6) | ||||||
| Contributions paid by employer | – | (0.3) | – | – | – | – | (0.3) | ||||||
| Contributions by plan participants | 0.3 | – | – | – | – | – | 0.3 | ||||||
| Benefits paid | (11.7) | – | – | – | – | – | (11.7) | ||||||
| At 31 March 2008 | 315.0 | 3.4 | – | – | – | – | 318.4 |
The movement in the pension asset recognised in the balance sheet is as follows:
| Funded | Unfunded | ||||||||||||
| Company | Company | AEA Rail | AEA Rail | ||||||||||
| Scheme | Scheme | AEA Rail | (TCI) | (TEL) | Kinectrics | Total | |||||||
| £m | £m | £m | £m | £m | £m | £m | |||||||
| At 1 April 2006 | 260.0 | – | 57.0 | 25.3 | 28.3 | 59.4 | 430.0 | ||||||
| Exchange differences | – | – | – | – | – | (2.8) | (2.8) | ||||||
| Expected return on plan assets | 17.4 | – | 1.7 | 0.7 | 0.8 | 1.7 | 22.3 | ||||||
| Actuarial losses | (7.5) | – | (0.9) | (1.2) | (0.4) | (1.5) | (11.5) | ||||||
| Contributions by plan participants | 14.9 | – | 0.3 | – | 0.1 | 0.5 | 15.8 | ||||||
| Contributions by plan participants | 0.3 | – | 0.2 | – | 0.1 | 0.2 | 0.8 | ||||||
| Benefits paid | (10.4) | – | (2.1 | (0.8) | (1.2) | (0.3) | (14.8) | ||||||
| Businesses sold | – | – | (56.2) | (24.0) | (27.7) | (57.2) | (165.1 | ||||||
| At 31 March 2007 | 274.7 | – | – | – | – | – | 274.7 | ||||||
| Expected return on plan assets | 18.7 | – | – | – | – | – | 18.7 | ||||||
| Actuarial losses | (27.3) | – | – | – | – | – | (27.3) | ||||||
| Contributions paid by employer | 3.7 | – | – | – | – | – | 3.7 | ||||||
| Contributions by plan participants | 0.3 | – | – | – | – | – | 0.3 | ||||||
| Benefits paid | (11.7) | – | – | – | – | – | (11.7) | ||||||
| At 31 March 2008 | 258.4 | – | – | – | – | – | 258.4 |
| Total | |
| £m | |
| At 31 March 2008 | 60.0 |
| At 31 March 2007 | 92.2 |
A £30.3 million gain (2007: £15.1 million loss) in respect of actuarial gains and losses has been reported in the Statement of Recognised Income and Expense (‘SORIE’) and the cumulative total of actuarial gains and losses reported through the SORIE is a net £33.1 million gain.
The principal actuarial assumptions used were as follows:|
2008 % |
2007 % |
||
| Discount rate |
6.6% | 5.3% | |
| Inflation | 3.7% | 3.2% | |
| Expected return on plan assets: | |||
| equities | 8.3% | 8.1% | |
| corporate bonds | 5.8% | 5.2% | |
| government bonds | n/a | 4.5% | |
| infrastructure | 8.3% | 8.1% | |
| other | 6.0% | 5.5% | |
| Future salary increases | 3.3% | 2.9% | |
| Future pension increases | 3.7% | 3.2% |
The discount rate is based on the yield on AA–rated corporate bonds with terms to maturity of over 20 years. Projected inflation rates and future pension increases are derived from the difference between yields on fixed interest and index–linked government bonds.
The expected rates of return on categories of plan assets are determined by reference to relevant indices and are shown net of investment expenses. A risk premium, based on historic performance, is added to the expected yield on government bonds to derive an expected yield on equities.
Post–retirement mortality assumptions for the funded Company Scheme were as follows:
|
2008 |
2007 | ||
| PNxA00 Year of Use tables. | |||
| Improvements in line with the Medium | |||
| Cohort, subject to a minimum annual | |||
| improvement of 1.0% p.a. for males | PNxA00 Year of Use tables. | ||
| and 0.5% p.a. for females. | Improvements in line with the Medium | ||
| Scaling factor of 112.5%. | Cohort. Scaling factor of 112.5%. |
Post–retirement mortality assumptions for the unfunded Company pension arrangements were as follows:
|
2008 |
2007 | ||
| PNxA00 Year of Use tables. | |||
| Improvements in line with the Medium | |||
| Cohort, subject to a minimum annual | |||
| improvement of 1.0% p.a. for males | PNxA00 Year of Use tables. | ||
| and 0.5% p.a. for females. | Improvements in line with the Medium | ||
| Scaling factor of 105%. | Cohort. Scaling factor of 105%. |
Demographic assumptions (post–retirement mortality)
Based on the mortality assumptions adopted, the following table shows the
expected future lifetime of a Scheme member on retirement at age 60:
| 2008 | 2007 | ||
| Years
|
Years | ||
| Males retiring today |
25.9 | 25.4 | |
| Males retiring in 20 years | 28.0 | 26.7 | |
| Females retiring today | 28.0 | 27.9 | |
| Females retiring in 20 years | 29.3 | 29.0 |
Sensitivity analysis of the principal assumptions used to measure Scheme liabilities
| Assumption | Change
in assumption |
Impact on scheme liabilities | |
| Discount rate |
Increase/decrease by 0.5% | Decrease/increase by 12% | |
| Rate of inflation | Increase/decrease by 0.5% | Increase/decrease by 11% | |
| Rate of mortality | Increase by 1 year | Increase by 2% |
The analysis of the Scheme assets and expected rate of return at 31 March is as follows:
| Expected return | Fair value of assets | ||||||
| 2008 % |
2007 % |
2008 £m |
2007 £m |
||||
| Equity instruments | 8.3 | 8.1 | 210.8 | 217.3 | |||
| Corporate bonds | 5.8 | 5.2 | 22.2 | 22.7 | |||
| Government bonds | – | 4.5 | – | 21.5 | |||
| Infrastructure | 8.3 | 8.1 | 17.5 | 6.3 | |||
| Other assets | 6.0 | 5.5 | 7.9 | 6.9 | |||
| 258.4 | 274.7 | ||||||
The five year history of pension obligations and plan assets is as follows:
| 2008 | 2007 | 2006 | 2005 | 20041 | |||||
| £m | £m | £m | £m | £m | |||||
| Present value of defined benefit obligations | 318.4 | 366.9 | 537.6 | 493.1 | 470.5 | ||||
| Fair value of plan assets | (258.4) | (274.7) | (430.0) | (341.4) | (308.3) | ||||
| Deficit | 60.0 | 92.2 | 107.6 | 151.7 | 162.2 |
The five year history of experience adjustments is as follows:
| 2008 | 2007 | 2006 | 20051 | 20041 | |||||
| £m | £m | £m | £m | £m | |||||
| Experience adjustments on plan liabilities | |||||||||
| Amount (£ million) | (57.6) | 3.6 | 2.9 | 19.2 | (2.7) | ||||
| Percentage of plan liabilities (%) | 18.1 | 1.0 | 0.5 | 3.9 | 0.6 | ||||
| Experience adjustments on plan assets | |||||||||
| Amount (£ million) | 27.3 | 11.5 | 57.6 | 14.1 | 45.5 | ||||
| Percentage of plan assets (%) | 10.6 | 4.2 | 13.4 | 4.1 | 14.8 |
1 Information based on FRS 17.
Development of net pension deficit over the year to 31 March 2008
The pensions cost recognised in the income statement is calculated based on
assumptions made at the beginning of the year. If experience over the year
is in line with assumptions made at the start of the year, the pension deficit
would reduce by the excess of the cash contributions made over the income
statement charge. Actuarial gains and losses due to differences between actual
experience and the assumptions made at the start of the year are recognised
in full in the SORIE.
Post-employment medical benefits
Prior to the disposal of Kinectrics the Group operated a post–retirement
medical benefit scheme in Canada. The method of accounting, assumptions and
the frequency of valuations are similar to those used for defined benefit
pension schemes.
The amounts recognised in the income statement are as follows:
| Group | |||
| 2008 | 2007 | ||
| £m
|
£m | ||
| Current service cost |
– | 0.1 | |
| Interest cost | – | 0.2 | |
| Amount included in staff costs | – | 0.3 | |
£nil (2007: £0.1 million) was included in discontinued operations ‘administrative expenses’.
The movement in the liability recognised in the balance sheet is as follows:
| 2008 | 2007 | ||
| £m
|
£m | ||
| At 1 April |
– | 8.6 | |
| Total expensed in income statement | – | 0.3 | |
| Actuarial losses | – | 0.1 | |
| Contributions paid | – | (0.1) | |
| Businesses sold | – | (8.9) | |
| At 31 March | – | – | |