Annual Report and Accounts 2008
35 Pensions and other post-employment benefits
(a) Summary of pension benefits and assumptions
The UK Bus and UK Coach divisions operate both funded defined benefit schemes and a defined contribution scheme. The majority of employees of the UK Trains companies are members of the appropriate shared-cost section of the Railways Pension Scheme ("RPS"), a funded defined benefit scheme. The assets of all schemes are held separately from those of the Group. Contributions to the schemes are determined by independent professionally qualified actuaries.
Subsidiaries in North America contribute to a number of defined contribution plans. The Group also provides certain additional unfunded post-employment benefits to employees in North America and Spain, which are disclosed in section c) in the Other category.
The total pension cost for the year was £23.5m (2007: £27.5m), of which £3.9m (2007: £3.2m) relates to the defined contribution schemes.
The defined benefit pension liability included in the balance sheet is as follows:
| 2008 £m | 2007 £m | |
|---|---|---|
| UK Bus | (3.6) | (5.1) |
| UK Coach | (1.2) | (4.9) |
| UK Trains | (38.7) | (18.8) |
| Other | (1.5) | (1.0) |
| Total | (45.0) | (29.8) |
The valuations conducted for financial reporting purposes are based on the triennial actuarial valuations. A summary of the latest triennial actuarial valuations, and assumptions made, is as follows. The triennial valuation of the Railways Pension Scheme has taken place during the year, however the results have not yet been finalised.
| UK Bus | UK Coach | UK Train | ||||
|---|---|---|---|---|---|---|
| Date of actuarial valuation | Tayside 31 March 2008 | Travel West Midlands 31 March 2007 | 5 April 2007 | 31 December 2004 | ||
| Actuarial method used | Attained age* | Attained age* | Projected unit | Projected unit | ||
| Rate of investment returns per annum | 7.8% | 5.4%–6.4% | 4.7%–5.5% | 4.8%–6.8% | ||
| Increase in earnings per annum | 5.2% | 4.6% | 4.0% | 4.3% | ||
| Scheme assets taken at market value | £40.5m | £374.0m | £39.8m | £638.9m | ||
| Funding level | 92% | 93% | 77% | 86%–95% | ||
The range of funding levels for UK Trains reflects the range of funding levels in the various sections of the RPS. The plans do not provide medical benefits.
The most recent triennial valuations are then updated by independent professionally qualified actuaries for financial reporting purposes, in accordance with IAS 19. The main actuarial assumptions underlying the IAS 19 valuations are:
| 2008 | 2007 | ||||||
|---|---|---|---|---|---|---|---|
| UK Bus | UK Coach | UK Trains | UK Bus | UK Coach | UK Trains | ||
| Rate of increase in salaries | 3.8% | 3.8% | 3.8% | 4.3% | 4.3% | 4.8% | |
| Rate of increase of pensions | 2.8% | 2.8% | 2.8% | 3.3% | 3.3% | 3.3% | |
| Discount rate | 6.5% | 6.3% | 6.3% | 5.8% | 5.8% | 5.8% | |
| Inflation assumption | 2.8% | 2.8% | 2.8% | 3.3% | 3.3% | 3.3% | |
| Expected rates of return on scheme assets | |||||||
| Equities | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | |
| Bonds | 6.1% | 6.1% | 6.1% | 5.8% | 5.8% | 5.8% | |
| Properties | 5.9% | 5.9% | 5.9% | 6.3% | 6.3% | 6.3% | |
| Other | 1.3% | 1.3% | 1.3% | 4.8% | 4.8% | 4.8% | |
| Post-retirement mortality in years: | |||||||
| Current pensioners at 65 – male | 19.4 | 21.9 | 19.4 | 21.9 | 17.8 | ||
| Current pensioners at 65 – male, pension under £8,500 pa or pensionable pay under £30,000 pa | 19.8 | ||||||
| Current pensioners at 65 – male – others | 21.5 | ||||||
| Current pensioners at 65 – female | 22.2 | 24.8 | 22.2 | 24.8 | 20.1 | ||
| Current pensioners at 65 – female, pension under £3,000 pa or pensionable pay under £30,000 pa | 21.7 | ||||||
| Current pensioners at 65 – female – others | 22.7 | ||||||
| Future pensioners at 65 – male | 20.4 | 23.0 | 20.3 | 23.0 | 18.8 | ||
| Future pensioners at 65 – male, pension under £8,500 pa or pensionable pay under £30,000 pa | 22.2 | ||||||
| Future pensioners at 65 – male – others | 23.7 | ||||||
| Future pensioners at 65 – female | 23.1 | 25.8 | 23.1 | 25.8 | 21.3 | ||
| Future pensioners at 65 – female, pension under £3,000 pa or pensionable pay under £30,000 pa | 23.2 | ||||||
| Future pensioners at 65 – female – others | 24.2 | ||||||
The demographic assumptions reflect those included in the most recent triennial valuation. For the UK Bus and UK Coach schemes improvements in mortality are in line with medium cohort tables. For the UK Trains scheme, mortality assumptions are based on the recent experience of the scheme with an allowance for future improvements in mortality as follows:
| Age | Year | Under 85 | 85–105 | Over 105 | |
|---|---|---|---|---|---|
| Males & females | 2008–2012 | 3.0% pa | 3.0% pa tapering to 0.6% pa | 0.6% pa | |
| Males | 2013 onwards | 1.5% pa | 1.5% pa tapering to 0.3% pa | 0.3% pa | |
| Females | 2013 onwards | 1.0% pa | 1.0% pa tapering to 0.2% pa | 0.2% pa |
The Directors regard the assumption around the discount rate to be the key assumption in the IAS19 valuation, and the following table provides an approximate sensitivity analysis of the impact of a 0.1% change in the discount rate assumption.
| UK Bus £m | UK Coach £m | UK Trains £m | |
|---|---|---|---|
| Defined benefit pension (liability) at 31 December 2008 | (3.6) | (1.2) | (38.7) |
| Effect of a 0.1% increase in the discount rate | 5.5 | 0.9 | 0.1 |
| Current service (cost) for the year ended 31 December 2008 | (4.8) | (1.2) | (21.0) |
| Effect of a 0.1% increase in the discount rate | 0.1 | – | 0.4 |
Scheme assets are stated at their market values at the respective balance sheet dates. The expected rate of return on scheme assets is determined based on market returns on each category of scheme assets.
(b) Accounting for the Railways Pension Scheme
The majority of employees of the UK Train companies are members of the appropriate section of the RPS, a funded defined benefit scheme. The RPS is a shared cost scheme, which means that costs are formally shared 60% employer and 40% employee. To date, the Group has experienced ten changes of UK Train franchise ownership where the current owner has funded the scheme during the franchise term and the pension deficit at franchise exit has transferred to the new owner, without cash settlement. However, although the Group's past experience has proven otherwise, our legal advisors have opined that in certain situations, the liability for the deficit on the relevant sections of the RPS could theoretically crystallise for funding by an individual TOC at the end of the franchise. By entering into the franchise contract, the TOC becomes the designated employer for the term of the contract and under the rules of the RPS must fund its share of the pension liability in accordance with the schedule of contributions agreed with the Scheme trustees and actuaries and for which there is no funding cap set out in the franchise contract.
To comply with IAS 19, the Group is required to account for its legal obligation under the formal terms of the RPS and its constructive obligation that arises under the terms of each franchise agreement.
In determining the appropriate accounting policy for the RPS to ensure that the Group's accounts present fairly its financial position, financial performance and cash flows, management has consulted with TOC industry peers and has concluded that the Group's constructive but not its legal RPS defined benefit obligations should be accounted for in accordance with IAS 19. This accounting policy, which in all other respects is consistent with that set out in this note for the Group's other defined benefit schemes, means that the Group's accounts reflect that element of the deficits anticipated to be settled by the Group during the franchise term and will prevent gains arising on transfer of the existing RPS deficits to a new owner at franchise exit.
In calculating the Group's constructive obligations in respect of the RPS, the Group has calculated the total pension deficits in each of the RPS sections in accordance with IAS 19 and the assumptions set out above. These deficits are reduced by a "franchise adjustment" which is that portion of the deficit projected to exist at the end of the franchise and for which the Group will not be required to fund. The franchise adjustment, which has been calculated by the Group's actuaries, is offset against the present value of the RPS liabilities so as to fairly present the financial performance, position and cash flows of the Group's obligations.
The franchise adjustment increased from £2.3m at 31 December 2007 to £28.2m at 31 December 2008. The increase is caused by interest on the franchise adjustment of £0.2m, net actuarial movements of £25.2m and £0.5m relating to the franchise exit. In the prior year, the franchise adjustment decreased by £42.1m from £44.4m at 1 January 2007 to £2.3m at 31 December 2007. The decrease was caused by interest on the franchise adjustment of £2.1m offset by net actuarial movements in scheme liabilities of £29.4m and by £14.8m relating to franchise exits.
If the Group had accounted for its legal obligation in respect of the RPS instead of the constructive obligation, the following adjustments would have been made to the financial information:
| 2008 £m | 2007 £m | |
|---|---|---|
| Balance sheet | ||
| Defined benefit pension deficit | (28.2) | (2.3) |
| Deferred tax asset | 6.5 | – |
| Intangible asset | 2.4 | 3.0 |
| Net (reduction)/increase in net assets | (19.3) | 0.7 |
| Statement of recognised income and expense | ||
| Actuarial (losses)/gains | (25.2) | 29.4 |
| Tax on actuarial gains and losses | 6.4 | (9.8) |
| Net (decrease)/increase in actuarial gains | (18.8) | 19.6 |
| Income statement | ||
| Interest on franchise adjustment | (0.2) | (2.1) |
| Curtailment gain on franchise exit | (0.5) | 14.8 |
| Intangible asset amortisation | (0.5) | (0.3) |
| Deferred tax credit/(charge) | 0.1 | (3.8) |
| Net (decrease)/increase in income | (1.1) | 8.6 |
(c) Financial results for pension benefits
The amounts charged to the Group income statement and Group statement of recognised income and expense for the years ended 31 December 2008 and 2007 are set out in the following tables. The restriction on surplus in 2008 arose on the Travel West Midlands UK Bus scheme and in 2007 arose on the Tayside UK Bus scheme.
| Group income statement | UK Bus 2008 £m | UK Coach 2008 £m | UK Trains 2008 £m | Other 2008 £m | Total 2008 £m |
|---|---|---|---|---|---|
| Amounts charged to normalised operating profit: | |||||
| Current service cost | (4.8) | (1.2) | (21.0) | (0.5) | (27.5) |
| Past service cost | (0.4) | – | – | – | (0.4) |
| Expected return on pension scheme assets | 26.4 | 3.0 | 28.0 | – | 57.4 |
| Interest on pension liabilities | (23.4) | (2.8) | (23.1) | – | (49.3) |
| Interest on franchise adjustment | – | – | 0.2 | – | 0.2 |
| Total charge to income statement | (2.2) | (1.0) | (15.9) | (0.5) | (19.6) |
| Actual return on plan assets | (36.4) | (4.8) | (93.4) | – | (134.6) |
| Group statement of recognised income and expense | UK Bus 2008 £m | UK Coach 2008 £m | UK Trains 2008 £m | Other 2008 £m | Total 2008 £m |
|---|---|---|---|---|---|
| Actual return less expected return on pension scheme assets | (62.8) | (7.8) | (121.4) | – | (192.0) |
| Other actuarial gains and losses | 61.7 | 8.7 | 101.1 | – | 171.5 |
| Adjustment for unrecognised surplus | (4.3) | – | – | – | (4.3) |
| Actuarial (losses)/gains | (5.4) | 0.9 | (20.3) | – | (24.8) |
| Group income statement | UK Bus 2007 £m | UK Coach 2007 £m | UK Trains 2007 £m | Other 2007 £m | Total 2007 £m |
|---|---|---|---|---|---|
| Amounts charged to normalised operating profit: | |||||
| Current service cost | (5.1) | (1.5) | (30.2) | (0.3) | (37.1) |
| Past service credit | 0.7 | – | – | – | 0.7 |
| Expected return on pension scheme assets | 25.2 | 2.6 | 31.9 | – | 59.7 |
| Interest on pension liabilities | (21.1) | (2.7) | (25.9) | – | (49.7) |
| Interest on franchise adjustment | – | – | 2.1 | – | 2.1 |
| Total charge to income statement | (0.3) | (1.6) | (22.1) | (0.3) | (24.3) |
| Actual return on plan assets | 20.0 | 2.0 | 35.1 | – | 57.1 |
| Group statement of recognised income and expense | UK Bus 2007 £m | UK Coach 2007 £m | UK Trains 2007 £m | Other 2007 £m | Total 2007 £m |
|---|---|---|---|---|---|
| Actual return less expected return on pension scheme assets | (5.2) | (0.6) | 3.2 | – | (2.6) |
| Other actuarial gains and losses | 12.6 | 7.5 | (2.6) | – | 17.5 |
| Adjustment for unrecognised surplus | (3.2) | – | – | – | (3.2) |
| Actuarial gain | 4.2 | 6.9 | 0.6 | – | 11.7 |
The amounts recognised in the balance sheet at 31 December are:
| As at 31 December 2008 | UK Bus 2008 £m | UK Coach 2008 £m | UK Trains 2008 £m | Other 2008 £m | Total 2008 £m |
|---|---|---|---|---|---|
| Equities | 152.3 | 20.8 | 370.9 | – | 544.0 |
| Bonds | 202.1 | 20.8 | 39.7 | – | 262.6 |
| Property | 3.1 | – | 34.1 | – | 37.2 |
| Other | 5.3 | 0.5 | – | – | 5.8 |
| Fair value of scheme assets | 362.8 | 42.1 | 444.7 | – | 849.6 |
| Present value of scheme liabilities | (357.4) | (43.3) | (554.9) | (1.5) | (957.1) |
| Franchise adjustment | – | – | 28.2 | – | 28.2 |
| Defined benefit obligation | (357.4) | (43.3) | (526.7) | (1.5) | (928.9) |
| Restriction on surplus | (9.0) | – | – | – | (9.0) |
| Members’ share of deficit | – | – | 43.3 | – | 43.3 |
| Defined benefit pension deficit | (3.6) | (1.2) | (38.7) | (1.5) | (45.0) |
| As at 31 December 2007 | UK Bus 2007£m | UK Coach 2007£m | UK Trains 2007£m | Other 2007£m | Total 2007£m |
|---|---|---|---|---|---|
| Equities | 228.0 | 21.4 | 510.0 | – | 759.4 |
| Bonds | 175.0 | 21.9 | 62.4 | – | 259.3 |
| Property | 4.0 | – | 47.4 | – | 51.4 |
| Other | 5.0 | 0.4 | 0.5 | – | 5.9 |
| Fair value of scheme assets | 412.0 | 43.7 | 620.3 | – | 1,076.0 |
| Present value of scheme liabilities | (412.4) | (48.6) | (655.4) | (1.0) | (1,117.4) |
| Franchise adjustment | – | – | 2.3 | – | 2.3 |
| Defined benefit obligation | (412.4) | (48.6) | (653.1) | (1.0) | (1,115.1) |
| Restriction on surplus | (4.7) | – | – | – | (4.7) |
| Members’ share of deficit | – | – | 14.0 | – | 14.0 |
| Defined benefit pension deficit | (5.1) | (4.9) | (18.8) | (1.0) | (29.8) |
The movement in the present value of the defined benefit obligation in the year is as stated below. For UK Trains, the RPS is a shared cost scheme, which means that costs are formally shared 60% employer and 40% employee.
The Group's defined benefit obligation comprises £927.4m (2007: £1,114.1m) arising from plans that are wholly or partly funded and £1.5m (2007: £1.0m) from unfunded plans.
| UK Bus £m | UK Coach £m | UK Trains £m | Other £m | Total £m | |
|---|---|---|---|---|---|
| Defined benefit obligation at 1 January 2008 | (412.4) | (48.6) | (653.1) | (1.0) | (1,115.1) |
| Current service cost | (4.8) | (1.2) | (21.0) | (0.5) | (27.5) |
| Past service cost | (0.4) | – | – | – | (0.4) |
| Franchise exit | – | – | 25.6 | – | 25.6 |
| Benefits paid | 23.3 | 1.0 | 21.0 | – | 45.3 |
| Contributions by employees | (1.4) | (0.4) | (11.0) | – | (12.8) |
| Finance charge | (23.4) | (2.8) | (23.1) | – | (49.3) |
| Interest on franchise adjustment | – | – | 0.2 | – | 0.2 |
| Members’ share of movement on liabilities | – | – | 33.6 | – | 33.6 |
| Actuarial gain recognised in statement of recognised income and expense | 61.7 | 8.7 | 101.1 | – | 171.5 |
| Defined benefit obligation at 31 December 2008 | (357.4) | (43.3) | (526.7) | (1.5) | (928.9) |
| UK Bus £m | UK Coach £m | UK Trains £m | Other £m | Total £m | |
|---|---|---|---|---|---|
| Defined benefit obligation at 1 January 2007 | (421.8) | (52.6) | (808.2) | (1.7) | (1,284.3) |
| Current service cost | (5.1) | (1.5) | (30.2) | (0.3) | (37.1) |
| Past service credit | 0.7 | – | – | – | 0.7 |
| Franchise entry | – | – | (277.6) | – | (277.6) |
| Franchise exit | – | – | 419.3 | – | 419.3 |
| Curtailment | – | – | 55.9 | – | 55.9 |
| Benefits paid | 23.7 | 1.1 | 21.5 | 1.0 | 47.3 |
| Contributions by employees | (1.4) | (0.4) | (13.7) | – | (15.5) |
| Finance charge | (21.1) | (2.7) | (25.9) | – | (49.7) |
| Interest on franchise adjustment | – | – | 2.1 | – | 2.1 |
| Members’ share of movement on liabilities | – | – | 6.3 | – | 6.3 |
| Actuarial gain/(loss) recognised in statement of recognised income and expense | 12.6 | 7.5 | (2.6) | – | 17.5 |
| Defined benefit obligation at 31 December 2007 | (412.4) | (48.6) | (653.1) | (1.0) | (1,115.1) |
The movement in the fair value of scheme assets is as follows:
| UK Bus £m | UK Coach £m | UK Trains £m | Total £m | |
|---|---|---|---|---|
| Fair value of scheme assets at 1 January 2008 | 412.0 | 43.7 | 620.3 | 1,076.0 |
| Expected return on plan assets | 26.4 | 3.0 | 28.0 | 57.4 |
| Franchise exit | – | – | (25.6) | (25.6) |
| Cash contributions – Employer | 9.1 | 3.8 | 16.3 | 29.2 |
| Cash contributions – Employee | 1.4 | 0.4 | 11.0 | 12.8 |
| Benefits paid | (23.3) | (1.0) | (21.0) | (45.3) |
| Members’ share of return on assets | – | – | (62.9) | (62.9) |
| Actuarial loss recognised in statement of recognised income and expense | (62.8) | (7.8) | (121.4) | (192.0) |
| Fair value of scheme assets at 31 December 2008 | 362.8 | 42.1 | 444.7 | 849.6 |
| UK Bus £m | UK Coach £m | UK Trains £m | Total £m | |
|---|---|---|---|---|
| Fair value of scheme assets at 1 January 2007 | 406.0 | 39.9 | 743.4 | 1,189.3 |
| Expected return on plan assets | 25.2 | 2.6 | 31.9 | 59.7 |
| Franchise entry | – | – | 277.6 | 277.6 |
| Franchise exit | – | – | (419.3) | (419.3) |
| Curtailment | – | – | (55.9) | (55.9) |
| Cash contributions – Employer | 8.3 | 2.5 | 23.8 | 34.6 |
| Cash contributions – Employee | 1.4 | 0.4 | 13.7 | 15.5 |
| Benefits paid | (23.7) | (1.1) | (21.5) | (46.3) |
| Members’ share of return on assets | – | – | 23.4 | 23.4 |
| Actuarial gain/(loss) recognised in statement of recognised income and expense | (5.2) | (0.6) | 3.2 | (2.6) |
| Fair value of scheme assets at 31 December 2007 | 412.0 | 43.7 | 620.3 | 1,076.0 |
The Group expects to contribute £24.9m to its defined benefit pension plans in 2009.
| History of experience gains and losses: | 2008 £m | 2007 £m | 2006 £m | 2005 £m |
|---|---|---|---|---|
| UK Bus | ||||
| Fair value of scheme assets | 362.8 | 412.0 | 406.0 | 385.8 |
| Present value of defined benefit obligation | (357.4) | (412.4) | (421.8) | (423.6) |
| Restriction on surplus | (9.0) | (4.7) | (1.5) | – |
| Deficit in the scheme | (3.6) | (5.1) | (17.3) | (37.8) |
| Experience adjustments arising on liabilities | (3.3) | (4.6) | (3.0) | (3.3) |
| Experience adjustments arising on assets | (62.8) | (5.2) | 7.5 | 35.3 |
| UK Coach | ||||
| Fair value of scheme assets | 42.1 | 43.7 | 39.9 | 35.7 |
| Present value of defined benefit obligation | (43.3) | (48.6) | (52.6) | (50.6) |
| Deficit in the scheme | (1.2) | (4.9) | (12.7) | (14.9) |
| Experience adjustments arising on liabilities | – | (2.2) | (1.6) | – |
| Experience adjustments arising on assets | (7.8) | (0.6) | – | 2.5 |
| UK Trains | ||||
| Fair value of scheme assets | 444.7 | 620.3 | 743.4 | 796.4 |
| Present value of defined benefit obligation | (526.7) | (653.1) | (808.2) | (900.7) |
| Members’ share of deficit | 43.3 | 14.0 | 43.7 | 70.1 |
| Deficit in the scheme | (38.7) | (18.8) | (21.1) | (34.2) |
| Experience adjustments arising on liabilities | 16.9 | (5.3) | (25.5) | (53.8) |
| Experience adjustments arising on assets | (121.4) | 3.2 | 32.6 | 54.4 |
| Other | ||||
| Fair value of scheme assets | – | – | – | – |
| Present value of defined benefit obligation | (1.5) | (1.0) | (1.7) | (1.9) |
The cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expense since 1 January 2004 is £26.8m loss (2007: £2.0m loss). The Directors are unable to determine how much of the pension scheme deficit recognised on transition to IFRSs and taken directly to equity of £51.9m is attributable to actuarial gains and losses since inception of those pension schemes. Consequently the Directors are unable to determine the amount of actuarial gains and losses that would have been recognised in the statement of recognised income and expense before 1 January 2004.