23 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

(XLS:) Provisions – analysis of provisions

 

Note

2012
£m

2011
£m

1.

Retirement benefit obligations are presented gross of £636m of annuity obligations insured by Society (2011: £583m).

Retirement benefit obligations1

(ii)

969

871

Other provisions

 

14

20

 

 

983

891

(ii) Retirement benefit obligations

Future developments

Amendment to IAS 19, ‘Employee Benefits’ issued in June 2011 (effective for annual periods commencing on or after 1 January 2013). This makes certain changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The Group does not intend to early adopt this standard and when adopted it is expected to reduce IFRS profit after tax by approximately £4m per annum. This will be offset by a corresponding benefit in other comprehensive income.

Defined contribution plans

The Group operates the following principal 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); replacing the early retirement scheme previously part of the defined benefit plan.
  • Legal & General International (Ireland) Limited Retirement Solution Plan (Ireland).

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 £40m (2011: £37m) 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 2011.
  • Legal & General Nederland Stichting Pensioenfonds (Netherlands); last full actuarial valuation as at 31 December 2012.
  • 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, provided any surplus in the fund is not restricted. 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:

(XLS:) Provisions – retirement benefit obligations – assumptions

 

Fund and
Scheme
2012
%

Fund and
Scheme
2011
%

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; benefits accrued before that date have an underpin of the early leaver benefits.

Rate used to discount liabilities

4.40

4.70

Expected return on plan assets

5.35

5.60

Rate of increase in salaries1

2.20

2.20

Rate of increase in pensions in payment

3.30

3.20

Rate of increase in deferred pensions

3.50

3.50

Rate of general inflation (RPI)

2.80

2.80

Rate of wage inflation

2.20

2.20

 

 

 

Post retirement mortality

 

 

2012: 100% (Fund) / 85% (Scheme) of PCMA/PCFA 00 with improvement at CMI 2011 base date 2000 with long term rates 1.5% pa males and 1.0% pa females, with tapering linearly down to nil between ages 90 and 120.

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.

Average life expectancy:

(XLS:) Provisions – retirement benefit obligations – average life expectancy

 

Fund and
Scheme
2012
years

Fund and
Scheme
2011
years

Normal retirement age

60.0

60.0

Male life expectancy at retirement age

88.8

88.3

Female life expectancy at retirement age

90.2

89.4

Male life expectancy at 20 years younger than retirement age

91.3

91.0

Female life expectancy at 20 years younger than retirement age

91.9

91.1

(XLS:) Provisions – retirement benefit obligations – movements

 

Fund and Scheme
2012
£m

Overseas
2012
£m

Fund and Scheme
2011
£m

Overseas
2011
£m

Movement in present value of defined benefit obligations

 

 

 

 

As at 1 January

(1,663)

(32)

(1,497)

(30)

Current service cost

(11)

(1)

(10)

(1)

Interest expense

(77)

(2)

(81)

(2)

Actuarial loss (recognised in statement of comprehensive income)

(157)

(13)

(129)

Benefits paid

57

1

54

1

Exchange differences

1

Curtailment

7

As at 31 December

(1,851)

(39)

(1,663)

(32)

 

 

 

 

 

Movement in fair value of plan assets

 

 

 

 

As at 1 January

793

36

748

32

Expected return on plan assets

44

2

45

2

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

45

2

(4)

1

Employer contributions

59

2

58

2

Benefits paid

(57)

(1)

(54)

(1)

Exchange differences

(1)

As at 31 December

884

40

793

36

Gross pension obligations

(967)

1

(870)

4

Restricted surplus not recognised

(3)

(5)

Gross pension obligations included in provisions

(967)

(2)

(870)

(1)

Annuity obligations insured by Society

636

583

Gross defined benefit pension deficit

(331)

(2)

(287)

(1)

Deferred tax on defined benefit pension deficit

76

72

Net defined benefit pension deficit

(255)

(2)

(215)

(1)

The total amount of actuarial (losses) net of tax recognised in the statement of comprehensive income for the year was £(107)m; cumulative £(508)m (2011: £(121)m); cumulative £(401)m). Actuarial (losses) net of tax relating to with-profits policyholders of £(41)m (2011: £(48)m) have been allocated to the unallocated divisible surplus.

In line with the requirements of IFRS, the surplus in the Legal & General Nederland Stichting Pensioenfonds of £3m (2011: £5m) has not been reflected in the net defined benefit deficit. A curtailment has been recognised with regard to employees in the Legal & General Nederland Stichting Pensioenfonds scheme, where future indexation accrued to existing pension rights has become conditional.

The mortality base assumptions are aligned with those used by the scheme’s trustees at the last valuation, but a more up to date improvement rate is used. The effect of assuming reasonable alternative assumptions in isolation to the gross defined benefit pension deficit are shown below. Opposite sensitivities are broadly symmetrical, but larger sensitivities are not necessarily broadly proportionate due to the existence of maxima and minima for inflation linked benefits.

(XLS:) Provisions – retirement benefit obligations – mortality assumptions

 

2012
£m

2011
£m

1 year increase in longevity

(38)

(32)

0.1% decrease in the rate used to discount liabilities

(27)

(24)

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

(33)

(29)

0.1% increase in the rate of wage inflation

The historic funding and experience adjustments are as follows:

(XLS:) Provisions – retirement benefit obligations – historic funding and experience adjustments

 

2012
£m

2011
£m

2010
£m

2009
£m

2008
£m

Present value of defined benefit obligations

(1,890)

(1,695)

(1,527)

(1,474)

(1,187)

Fair value of plan assets

924

829

781

728

636

Restricted surplus not recognised

(3)

(5)

(2)

Gross pension obligations included in provisions

(969)

(871)

(748)

(746)

(551)

Experience adjustments on plan liabilities

(10)

(17)

(8)

18

3

Experience adjustments on plan assets

45

(3)

11

46

(222)

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

(XLS:) Provisions – retirement benefit obligations – fair value of plan assets and expected return 2012

As at 31 December 2012

UK
£m

Expected return
%

Overseas
£m

Expected return
%

Equities

420

6.3

11

7.5

Bonds

418

4.4

25

3.6

Properties

46

5.3

Other investments

4

1.5

 

884

 

40

 

(XLS:) Provisions – retirement benefit obligations – fair value of plan assets and expected return 2011

As at 31 December 2011

UK
£m

Expected return
%

Overseas
£m

Expected return
%

Equities

377

6.5

9

8.2

Bonds

371

4.7

21

3.7

Properties

45

5.5

Other investments

6

1.5

 

793

 

36

 

The average credit rating of the bond portfolio is A (2011: A).

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 2012, the return on plan assets, excluding annuity obligations, was £91m (2011: £43m).

Employer contributions of £61m (2011: £60m) include a pension deficit reduction payment of £47m (2011: £47m). Employer contributions of £50m are expected to be paid to the plan during 2013.

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

(XLS:) Provisions – retirement benefit obligations – amounts charged/(credited) to the income statement

 

2012
£m

2011
£m

Current service costs

12

11

Interest expense

79

83

Expected return on plan assets

(46)

(47)

Curtailment

(7)

Total included in other expenses

38

47