36 PROVISIONS.


Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract.

(i) Analysis of provisions

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Note

2011
£m

2010
£m

1.

Retirement benefit obligations are presented gross of £583m of annuity obligations insured by [Society] (2010: £514m).

Retirement benefit obligations1

(ii)

871

748

Other provisions

 

20

13

 

 

891

761

(ii) Retirement benefit obligations

Defined contribution plans

The Group operates the following defined contribution pension schemes in the UK and overseas:

  • Legal & General Group Personal Pension Plan (UK).
  • Legal & General Staff Stakeholder Pension Scheme (UK).
  • Legal & General America Inc. Savings Plan (US).
  • Régime de Retraite Professionnel (France).
  • Legal & General Nederland Stichting Pensioenfonds (Netherlands).
  • Legal & General International (Ireland) Limited Retirement Solution Plan (Ireland).
  • The Liberation Group Pension Scheme (UK). This scheme is operated by a consolidated private equity investment vehicle owned by the with-profits part of the UK LTF.

The Group pays contractual contributions in respect of defined contribution schemes. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expenses when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.

Contributions of £37m (2010: £35m) were charged as expenses during the year in respect of defined contribution plans.

Defined benefit plans

The Group operates the following defined benefit pension schemes in the UK and overseas:

  • Legal & General Group UK Pension and Assurance Fund (the Fund). The Fund was closed to new members from January 1995; last full actuarial valuation as at 31 December 2009.
  • Legal & General Group UK Senior Pension Scheme (the Scheme). The Scheme was, with a few exceptions (principally transfers from the Fund), closed to new members from August 2000 and finally closed to new members from April 2007; last full actuarial valuation as at 31 December 2009.
  • Legal & General America Inc. Cash Balance Plan (US); last full actuarial valuation as at 31 December 2010.
  • Legal & General Nederland Stichting Pensioenfonds (Netherlands); last full actuarial valuation as at 31 December 2011.
  • Régime de Retraite à Prestations Définies de Legal & General (France); last full actuarial valuation as at 31 December 2011.

The assets of all UK defined benefit schemes are held in separate trustee administered funds which are subject to regular actuarial valuation every three years, updated by formal reviews at reporting dates.

The liability recognised in the balance sheet in respect of defined benefit pension schemes is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. Plan assets exclude any insurance contracts issued by the Group. The defined benefit obligation is calculated actuarially each year using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows. The discount rate is based on market yields of high quality corporate bonds which are denominated in the currency in which the benefits will be paid, and that have terms to maturity which approximate to those of the related pension liability.

Where the unallocated divisible surplus or equity holders’ funds are affected as a result of actuarial gains and losses on the defined benefit pension scheme, the charge or credit is not recognised in the income statement but through the statement of comprehensive income.

The benefits paid from the defined benefit schemes are based on percentages of the employees’ final pensionable salary for each year of credited service. The Group has no liability for retirement benefits other than for pensions, except for a small scheme in LGF (Indemnités de Fin de Carrière), which provides lump sum benefits on retirement. The Fund and Scheme account for all of the UK and over 97% of worldwide assets of the Group’s defined benefit schemes.

The principal actuarial assumptions for the UK defined benefit schemes were:

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Fund and
Scheme
2011
%

Fund and
Scheme
2010
%

1.

On 1 December 2008, the conditions of the Fund and Scheme were amended to cap future pensionable salary increases at a maximum of 2.5% each year with effect from 1 January 2009.

Rate used to discount liabilities

4.70

5.50

Expected return on plan assets

5.60

5.98

Rate of increase in salaries1

2.20

2.30

Rate of increase in pensions in payment

3.20

3.50

Rate of increase in deferred pensions

3.50

4.10

Rate of general inflation (RPI)

2.80

3.40

Rate of wage inflation

2.20

2.30

Post retirement mortality

 

 

– 2011: 100% (Fund) / 85% (Scheme) of PCMA/PCFA 00 with improvement at 100% MC males, 75% MC females, minimum improvement 1.5% pa males and 1.0% pa females, with tapering of minimum improvement rate linearly down to nil between ages 90 and 120.

– 2010: 100% (Fund) / 85% (Scheme) of PCMA/PCFA 00 with improvement at 100% MC males, 75% MC females, minimum improvement 1.5% pa males and 1.0% pa females, with tapering of minimum improvement rate linearly down to nil between ages 90 and 120.

Average life expectancy:

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Fund and
Scheme
2011
years

Fund and
Scheme
2010
years

Normal retirement age

60.0

60.0

Male life expectancy at retirement age

88.3

88.1

Female life expectancy at retirement age

89.4

89.3

Male life expectancy at 20 years younger than retirement age

91.0

90.9

Female life expectancy at 20 years younger than retirement age

91.1

91.0

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Fund and
Scheme
2011
£m

Overseas
2011
£m

Fund and
Scheme
2010
£m

Overseas
2010
£m

Movement in present value of defined benefit obligations

 

 

 

 

As at 1 January

(1,497)

(30)

(1,446)

(28)

Current service cost

(10)

(1)

(11)

(1)

Interest expense

(81)

(2)

(82)

(2)

Actuarial (loss) (recognised in statement of comprehensive income)

(129)

(20)

(1)

Benefits paid

54

1

62

1

Exchange differences

1

As at 31 December

(1,663)

(32)

(1,497)

(30)

 

 

 

 

 

Movement in fair value of plan assets

 

 

 

 

As at 1 January

748

31

699

29

Expected return on plan assets

45

2

44

2

Actuarial (loss)/gain (recognised in statement of comprehensive income)

(4)

(3)

8

Employer contributions

58

2

59

1

Benefits paid

(54)

(1)

(62)

(1)

As at 31 December

793

31

748

31

Gross pension obligations included in provisions

(870)

(1)

(749)

1

Annuity obligations insured by Society

583

514

Gross defined benefit pension deficit

(287)

(1)

(235)

1

Deferred tax on defined benefit pension deficit

72

66

Net defined benefit pension deficit

(215)

(1)

(169)

1

The total amount of actuarial (losses) net of tax recognised in the statement of comprehensive income for the year was £(121)m; cumulative £(401)m (2010: £(9)m); cumulative £(280)m). Actuarial (losses) net of tax relating to with-profits policyholders of £(48)m (2010: £(4)m) have been allocated to the unallocated divisible surplus.

The mortality assumptions are aligned with those used by the scheme’s trustees. The effect of assuming reasonable alternative assumptions in isolation to the gross defined benefit pension deficit are shown below. Opposite sensitivities are broadly symmetrical.

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2011
£m

2010
£m

1 year increase in longevity

(32)

(28)

0.1% decrease in the rate used to discount liabilities

(24)

(21)

0.1% increase in the rate of general inflation (RPI)

(29)

(26)

0.1% increase in the rate of wage inflation

The historic funding and experience adjustments are as follows:

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2011
£m

2010
£m

2009
£m

2008
£m

2007
£m

Present value of defined benefit obligations

(1,695)

(1,527)

(1,474)

(1,187)

(1,384)

Fair value of plan assets

824

779

728

636

789

Gross pension obligations

(871)

(748)

(746)

(551)

(595)

Experience adjustments on plan liabilities

(17)

(8)

18

3

(19)

Experience adjustments on plan assets

(3)

11

46

(222)

(32)

The fair value of the plan assets and expected return at the end of the year is made up as follows:

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As at 31 December 2011

UK
£m

Expected
return
%

Overseas
£m

Expected
return
%

Equities

377

6.5

11

8.2

Bonds

371

4.7

16

3.7

Properties

45

5.5

Other investments

4

1.5

 

793

 

31

 

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As at 31 December 2010

UK
£m

Expected
return
%

Overseas
£m

Expected
return
%

Equities

357

6.5

10

8.0

Bonds

349

5.5

17

3.9

Properties

42

5.5

Other investments

4

2.1

 

748

 

31

 

The average credit rating of the bond portfolio is A (2010: AA).

The expected rate of return for bonds is based on the current yield on a medium to long term AA bond index. The expected rates of return on equities and properties are based on margins over bond yields reflecting risk premiums. In 2011, the return on plan assets, excluding annuity obligations, was £43m (2010: £57m).

Employer contributions of £60m (2010: £60m) include a pension deficit reduction payment of £47m (2010: £47m). Employer contributions of £61m are expected to be paid to the plan during 2012.

The following amounts have been charged/(credited) to the income statement:

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2011
£m

2010
£m

Current service costs

11

12

Interest expense

83

84

Expected return on plan assets

(47)

(46)

Total included in other expenses

47

50

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