26 Provisions.

26 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

2013
£m

2012
£m

1.

Retirement benefit obligations are presented gross of £646m of annuity obligations insured by Society (2012: £636m).

Retirement benefit obligations1

(ii)

1,113

969

Other provisions

 

15

14

 

 

1,128

983

(ii) Retirement benefit obligations

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 £50m (2012: £40m) 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 2012.
  • Legal & General Nederland Stichting Pensioenfonds (Netherlands); last full actuarial valuation as at 31 December 2013.
  • 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
2013
%

Fund and Scheme
2012
%

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

4.40

Rate of increase in salaries1

2.30

2.20

Rate of increase in pensions in payment

3.70

3.30

Rate of increase in deferred pensions

4.20

3.50

Rate of general inflation (RPI)

3.50

2.80

Rate of wage inflation

2.30

2.20

Post retirement mortality

 

 

2013: 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.

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.

Average life expectancy:

(XLS:) Provisions – Retirement benefit obligations – Average life expectancy

 

Fund and Scheme
2013
years

Fund and Scheme
2012
years

Normal retirement age

60.0

60.0

Male life expectancy at retirement age

88.9

88.8

Female life expectancy at retirement age

90.3

90.2

Male life expectancy at 20 years younger than retirement age

91.4

91.3

Female life expectancy at 20 years younger than retirement age

91.9

91.9

(XLS:) Provisions – Retirement benefit obligations – Movements

 

Fund and Scheme
2013
£m

Overseas
2013
£m

Fund and Scheme
20121
£m

Overseas
2012
£m

1.

The comparatives have been restated in line with the amendments to IAS 19 (see Note 1).

Movement in present value of defined benefit obligations

 

 

 

 

As at 1 January

(1,851)

(39)

(1,663)

(32)

Current service cost

(11)

(2)

(11)

(1)

Interest expense

(81)

(2)

(77)

(2)

Actuarial remeasurement (recognised in statement of comprehensive income)

(208)

1

(157)

(13)

Benefits paid

65

1

57

1

Exchange differences

1

Curtailment

17

7

As at 31 December

(2,069)

(41)

(1,851)

(39)

 

 

 

 

 

Movement in fair value of plan assets

 

 

 

 

As at 1 January

884

40

793

36

Expected return on plan assets at liability discount rate

39

2

38

2

Actuarial remeasurement (recognised in statement of comprehensive income)

38

1

51

2

Employer contributions

60

2

59

2

Benefits paid

(65)

(1)

(57)

(1)

Exchange differences

(1)

As at 31 December

956

44

884

40

 

 

 

 

 

Gross pension obligations

(1,113)

3

(967)

1

Restricted surplus not recognised

(3)

(3)

Gross pension obligations included in provisions

(1,113)

(967)

(2)

Annuity obligations insured by Society

646

636

Gross defined benefit pension deficit

(467)

(331)

(2)

Deferred tax on defined benefit pension deficit

93

76

Net defined benefit pension deficit

(374)

(255)

(2)

The total amount of actuarial losses net of tax recognised in the statement of comprehensive income for the year was £(145)m; cumulative £(647)m (2012: £(101)m; cumulative £(502)m). Actuarial losses net of tax relating to with-profits policyholders of £(49)m (2012: £(38)m) have been allocated to the unallocated divisible surplus.

In 2013, a curtailment is recognised in the UK schemes due to the assignment of annuities to members with small pensions following the purchase of additional annuities in respect of future increments for them.

In line with the requirements of IFRS, the surplus in the Legal & General Nederland Stichting Pensioenfonds of £3m (2012: £3m) has not been reflected in the net defined benefit deficit. In 2012, a curtailment was recognised with regard to employees in the Legal & General Nederland Stichting Pensioenfonds scheme, where future indexation accrued to existing pension rights had 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

 

2013
£m

2012
£m

1 year increase in longevity

(47)

(38)

0.1% decrease in the rate used to discount liabilities

(32)

(27)

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

(38)

(33)

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

 

2013
£m

2012
£m

2011
£m

2010
£m

2009
£m

1.

Experience adjustments on plan assets have been restated for all previous periods in line with the amendments to IAS 19 (see Note 1).

Present value of defined benefit obligations

(2,110)

(1,890)

(1,695)

(1,527)

(1,474)

Fair value of plan assets

1,000

924

829

781

728

Restricted surplus not recognised

(3)

(3)

(5)

(2)

Gross pension obligations included in provisions

(1,113)

(969)

(871)

(748)

(746)

 

 

 

 

 

 

Experience adjustments on plan liabilities

(11)

(10)

(17)

(8)

18

Experience adjustments on plan assets1

39

53

1

13

48

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

(XLS:) Provisions – Retirement benefit obligations – Fair value of plan assets and expected return 2013

 

Valuation based on quoted market price

Valuation based on other than quoted market price

As at 31 December 2013

UK
£m

Overseas
£m

UK
£m

Overseas
£m

Equities

492

11

2

Bonds

413

28

Properties

50

Other investments

4

 

905

39

50

6

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

 

Valuation based on quoted market price

Valuation based on other than quoted market price

As at 31 December 2012

UK
£m

Overseas
£m

UK
£m

Overseas
£m

Equities

420

11

Bonds

418

25

Properties

46

Other investments

4

 

838

36

46

4

In 2013, the return on plan assets was £80m (2012: £93m). The average credit rating of the bond portfolio is A (2012: A).

Employer contributions of £62m (2012: £61m) include a pension deficit reduction payment of £47m (2012: £47m). Employer contributions of £96m are expected to be paid to the plan during 2014.

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

(XLS:) Provisions – Retirement benefit obligations – Amounts charged/(credited) to the income statement

 

2013
£m

2012
£m

1.

Net interest expense has been restated in line with the amendments to IAS 19 (see Note 1).

Current service costs

13

12

Net interest expense1

42

39

Curtailment

(17)

(7)

Total included in other expenses

38

44

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