27 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

 

Note

2014
£m

2013
£m

1.

Retirement benefit obligations are presented gross of £723m of annuity obligations insured by Society (2013: £646m).

Retirement benefit obligations1

27(ii)

1,217

1,113

Other provisions

 

30

15

 

 

1,247

1,128

(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. As from 1 January 2014 the plan was closed for future additions.
  • 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 £52m (2013: £50m) 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 2012.
  • 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 2012.
  • Legal & General America Inc. Cash Balance Plan (US); last full actuarial valuation as at 31 December 2013.
  • Legal & General Nederland Stichting Pensioenfonds (Netherlands); last full actuarial valuation as at 31 December 2014.
  • 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 to meet long-term pension obligations to past and present employees. Trustees are appointed to the schemes and have a responsibility to act in the best interest of the scheme beneficiaries. The Trustees’ long term objectives are to minimise the risk that there are insufficient assets to meet the liabilities of the scheme over the longer term, control the ongoing operational costs of the schemes and to maximise returns for the beneficiaries within an acceptable level of risk.

The total number of members of the UK Fund and Scheme was:

 

2014

2013

Active

537

637

Deferred

4,173

4,227

Pensioners

3,371

3,285

 

8,081

8,149

The group work closely with the trustees to develop an investment strategy for each UK scheme in order to meet the long term objectives of the trustees as noted above. Each UK scheme has a Statement of Investment Principles which governs the mix of assets and limits for each class of asset. As noted below the asset mix of the schemes is primarily split between bonds and equities. Additionally certain of the liabilities of the scheme are secured by way of annuities purchased from the group. These annuities are not recognised as an asset for IAS 19 purposes but at 31 December 2014 the value of these annuities, on an IAS19 basis, was £723m (2013: £646m).

The Scheme and Fund are primarily exposed to equity price risk, interest rate risk, inflation risk and longevity risk. These risks are managed within the risk appetite of the Scheme and Fund and the sensitivity of the net obligations to changes in any of the variables are monitored and action is taken if any risk moves outside of the appetite. Annuities are purchased to mitigate these risks for certain of the pension liabilities which passes the risks from the Scheme and Fund onto the group.

Full actuarial valuations are carried out on the Scheme and Fund every three years, updated by formal reviews at reporting dates. The actuarial assumptions used in the triennial valuation would normally be more prudent than those used for the purposes of IAS 19 reporting. Where the Scheme or Fund are in deficit following the triennial valuation, the group and the Trustee agree a deficit recovery plan. Both the Scheme and Fund have formal deficit recovery plans which agree to make good the deficits over a certain period of time. The latest triennial valuation at 31 December 2012 showed a total funding deficit for both the Scheme and the Fund as £494m. As a result of this, a recovery plan has been agreed of £55m a year until 2024.

The Scheme and the Fund liabilities have average duration of 23.4 years (2013: 23.1 years) and 23.6 years (2013: 23.1 years) respectively. The expected undiscounted benefits payments to members of the Scheme and Fund, including pensions in payment secured by annuities purchased from the group, are shown in the chart below:

UNDISCOUNTED BENEFIT PAYMENTS
Undiscounted benefit payments [Active and Deferred member cashflows: 2015 £11m, 2025 £48m, 2035 £65m, 2045 £81m, 2055 £83m, 2065 £47m, 2075 £9m, 2084 £0m]; [Pensioner cashflows: 2015 £1m, 2025 £17m, 2035 £27m, 2045 £22m, 2055 £8m, 2065 £1m, 2075 £0m, 2084 £0m]; [Annuity payments: 2015 £52m, 2025 £41m, 2035 £27m, 2045 £13m, 2055 £3m, 2065 £0m, 2075 £0m, 2084 £0m] (bar chart)

Read a textual description of the above chart

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:

 

Fund and Scheme
2014
%

Fund and Scheme
2013
%

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

3.60

4.40

Rate of increase in salaries1

2.30

2.30

Rate of increase in pensions in payment

3.40

3.70

Rate of increase in deferred pensions

4.30

4.20

Rate of general inflation (RPI)

3.10

3.50

Rate of wage inflation

2.30

2.30

Post retirement mortality

 

 

2014: 100% (Fund)/85% (Scheme) of PCMA/PCFA 00 with improvement at CMI 2011 base date 2000 with long-term rates 1.5% p.a males and 1.0% p.a females, with tapering linearly down to nil between ages 90 and 120.

2013: 100% (Fund)/85% (Scheme) of PCMA/PCFA 00 with improvement at CMI 2011 base date 2000 with long-term rates 1.5% p.a males and 1.0% p.a females, with tapering linearly down to nil between ages 90 and 120.

This equates to average life expectancy as follows:

 

Fund and Scheme
2014
years

Fund and Scheme
2013
years

Normal retirement age

60.0

60.0

Male life expectancy at retirement age

89.0

88.9

Female life expectancy at retirement age

90.4

90.3

Male life expectancy at 20 years younger than retirement age

91.6

91.4

Female life expectancy at 20 years younger than retirement age

92.0

91.9

 

Fund and Scheme
2014
£m

Overseas
2014
£m

Fund and Scheme
2013
£m

Overseas
2013
£m

Movement in present value of defined benefit obligations

 

 

 

 

As at 1 January

(2,069)

(41)

(1,851)

(39)

Current service cost

(12)

(2)

(11)

(2)

Interest expense

(90)

(2)

(81)

(2)

Actuarial remeasurement (recognised in statement of comprehensive income)

(234)

(13)

(208)

1

Benefits paid

57

1

65

1

Exchange differences

1

Curtailment

17

As at 31 December

(2,348)

(56)

(2,069)

(41)

 

 

 

 

 

Movement in fair value of plan assets

 

 

 

 

As at 1 January

956

44

884

40

Expected return on plan assets at liability discount rate

42

2

39

2

Actuarial remeasurement (recognised in statement of comprehensive income)

124

9

38

1

Employer contributions

68

1

60

2

Benefits paid

(57)

(1)

(65)

(1)

Exchange differences

(1)

As at 31 December

1,133

54

956

44

 

 

 

 

 

Gross pension obligations

(1,215)

(2)

(1,113)

3

Restricted surplus not recognised

(3)

Gross pension obligations included in provisions

(1,215)

(2)

(1,113)

Annuity obligations insured by Society

723

646

Gross defined benefit pension deficit

(492)

(2)

(467)

Deferred tax on defined benefit pension deficit

98

93

Net defined benefit pension deficit

(394)

(2)

(374)

The total amount of actuarial losses net of tax recognised in the statement of comprehensive income for the year was £(94)m; cumulative £(741)m (2013: £(145)m); cumulative £(647)m). Actuarial losses net of tax relating to with-profits policyholders of £(38)m (2013: £(49)m) have been allocated to the unallocated divisible surplus.

In 2013, a curtailment was 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. There is no curtailment in 2014.

The mortality base assumptions are aligned with those used by the scheme’s Trustees at the last valuation. 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.

 

2014
£m

2013
£m

1 year increase in longevity

(49)

(47)

0.1% decrease in the rate used to discount liabilities

(38)

(32)

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

(33)

(38)

0.1% increase in the rate of wage inflation

The historic funding and experience adjustments are as follows:

 

2014
£m

2013
£m

2012
£m

2011
£m

2010
£m

Present value of defined benefit obligations

(2,404)

(2,110)

(1,890)

(1,695)

(1,527)

Fair value of plan assets

1,187

1,000

924

829

781

Restricted surplus not recognised

(3)

(3)

(5)

(2)

Gross pension obligations included in provisions

(1,217)

(1,113)

(969)

(871)

(748)

 

 

 

 

 

 

Experience adjustments on plan liabilities

(7)

(11)

(10)

(17)

(8)

Experience adjustments on plan assets

124

39

53

1

13

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

 

Valuation based on quoted market price

Valuation based on other than quoted market price

As at 31 December 2014

UK
£m

Overseas
£m

UK
£m

Overseas
£m

Equities

502

12

2

Bonds

546

35

Properties

58

Other investments

27

1

4

 

1,075

48

58

6

 

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

In 2014, the return on plan assets was £168m (2013: £80m). The average credit rating of the bond portfolio is A (2013: A).

Employer contributions of £69m (2013: £62m) include a pension deficit reduction payment of £61m (2013: £47m). Employer contributions of £93m are expected to be paid to the plan during 2015.

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

 

2014
£m

2013
£m

Current service costs

14

13

Net interest expense

48

42

Curtailment

(17)

Total included in other expenses

62

38