Risks and uncertainties

To achieve AEA’s strategic objectives the Group must respond effectively to the associated risks.

AEA has a well established risk management process that complies with the FSA’s Combined Code on Corporate Governance and addresses strategic risks and risks specific to individual businesses and contracts including operational risks, financial risks, strategic risks, environmental and safety risks.

The Board reviews material risks identified and the mitigating action plan. The principal risks for the Group are as follows:

Achieving organic growth

AEA is in a very strong market, but recognises that at present it is dominant in one part of that market. Of AEA’s business 68% (2007: 69%) is with the UK central Government. While AEA intends to grow this core work even further, it is of strategic importance that the Group diversifies and it is doing this in three ways:

Firstly, to diversify the customer base within the UK public sector; to bring in new senior management and marketing and sales professionals to help increase the number of individuals AEA works for within Government departments; to reduce dependence on narrow areas and to expand work outside Westminster for the Devolved Administrations, Regional Development Agencies and Local Authorities.

Secondly, to seek organic growth, outside the UK public sector, for the private sector from aid agencies on international projects and in Eastern Europe.

Thirdly, to continue to seek acquisitions in other economic areas, including the US.

The Group would also be impacted, in the short term, by any delay in Government orders.

Changes in the competitive environment resulting from Government policy

Work for UK central Government will remain a significant component of AEA’s business. Future changes in UK Government, policies, priorities and expenditure levels could affect the Group’s success. Climate change and environmental priorities are clearly increasingly high priorities for all governments, but AEA must not be complacent. At the very least internal government reorganisation could mean AEA finds itself working for new customers with different detailed priorities. AEA must therefore maintain links with senior officials in key UK Government departments and anticipate and be able to react to future changes. Recruitment of senior experienced managers is aimed at improving AEA’s approach.

Recruitment and retention of sufficient high calibre people

During the year AEA continued with recruitment programmes to enhance the management team and targeted recruitment of individuals with key skills and experience in management and consulting. This was combined with developing future plans to implement appropriate reward and retention arrangements. There have been further new senior management appointments in the period. The risks associated with absorbing new people, rewarding and retaining them and managing the subsequent business changes in order to respond to market opportunities are regularly under review. Additions in the sales and marketing areas will also strengthen the business outlook. It is planned to add further senior, high calibre people during the first and second quarters of 2008/09. A slippage in the timetable could result in slowing the forward direction of the business. AEA is confident, however, that this infusion of experience and capability will continue to underpin AEA’s 2008/09 objectives.

Retirement benefits

The Group operates both defined contribution and defined benefit pension schemes. The defined benefit scheme is closed to new members but continues to cover future service for existing members. The risk that the scheme assets may not match liabilities is inherent in defined benefit schemes. At year-end there is an accounting deficit of £60.0 million (2007: £92.2 million), including £3.4 million (2007: £3.7 million) of unfunded obligations. At present the scheme’s assets largely comprise equities and the value of the scheme’s assets is directly affected by performance of the equity market. The value of the scheme liabilities is affected by discount rates, changes in inflation, longevity of scheme members and the level of salary and pension increases. If the assumptions made regarding these prove inaccurate, a material difference between the scheme’s assets and liabilities could persist. The current year reduction in the net liability substantially reflects reductions in the scheme liabilities as a result of an increase in the discount rate applied.

Legacy provisions

As detailed in note 28, the Group has provided for various liabilities in respect of disposals of companies and businesses and in respect of retained decommissioning and waste management obligations relating to discontinued operations. Uncertainty exists around the potential for claims under warranties and indemnities in respect of these disposals, with a number of indemnities continuing for five or more years post divestment, and there is uncertainty in estimating the future costs of decomissioning nuclear facilities. Refer to note 2.4. All residual issues relating to the divested and closed businesses are under the control of an experienced senior manager specifically appointed to the task of resolving these issues. The Group has not become aware of any significant additional liabilities in respect of disposals.