BAE-annual-report-2014

Financial statements
NOTES TO THE GROUP ACCOUNTS
CONTINUED
21. RETIREMENT BENEFIT OBLIGATIONS continued
Principal actuarial assumptions
The assumptions used are estimates chosen from a range of possible actuarial assumptions which, due to the long-term nature of the
obligation covered, may not necessarily occur in practice.
UK
US
2014 2013 2012 2014 2013 2012
Financial assumptions
Discount rate (%) 3.6 4.5 4.5 4.1 4.9 4.1
Inflation (%) 3.2 3.4 2.9 n/a n/a n/a
Rate of increase in salaries (%) 3.2 3.4 3.4 n/a n/a 3.7
Rate of increase in pensions in payment (%) 1.8 – 3.6 1.9 – 3.7 1.8 – 3.5 n/a n/a n/a
Rate of increase in deferred pensions (%) 2.3/3.2 2.5/3.4 2.3/2.9 n/a n/a n/a
Demographic assumptions
Life expectancy of a male currently aged 65 (years) 87 – 89 87 – 89 87 – 89 87 84 84
Life expectancy of a female currently aged 65 (years) 89 – 90 89 – 90 89 – 90 89 86 86
Life expectancy of a male currently aged 45 (years) 89 – 91 88 – 90 88 – 90 87 84 84
Life expectancy of a female currently aged 45 (years) 91 – 92 91 – 92 91 – 92 89 86 86
Discount rate
Discount rate assumptions are based on third-party AA corporate bond indices and yields that reflect the maturity profile of the expected
benefit payments.
Inflation
In the UK, the inflation assumptions are derived by reference to the difference between the yields on index-linked and fixed-interest
long-term government bonds, or advice from the local actuary depending on the available information. In the US, inflation assumptions
are not significant as the Group’s US pension schemes are not indexed with inflation.
Rate of increase in salaries
The rate of increase in salaries for the UK schemes is assumed to be Retail Prices Index (RPI) inflation of 3.2% (2013 RPI inflation of
3.4%), plus a promotional scale. From 1 January 2013, employees in the US schemes no longer accrue salary-related benefits.
Rate of increase in pensions in payment
The rate of increase in pensions in payment differs between UK schemes. Different tranches of the schemes increase at rates based on
either RPI or Consumer Prices Index (CPI) inflation, and some are subject to an inflation cap. With the exception of two smaller schemes,
the rate of increase in pensions in payment is based on RPI inflation.
Rate of increase in deferred pensions
The rate of increase in deferred pensions for the UK schemes is based on CPI inflation of 2.3% (2013 CPI inflation of 2.5%), with the
exception of the 2000 Plan, which is based on RPI inflation of 3.2% (2013 RPI inflation of 3.4%). For all UK schemes, the rate of
increase in deferred pensions is subject to inflation caps.
Life expectancy
For its UK pension schemes, the Group has used the Self-Administered Pension Schemes S2 mortality tables based on year of birth (as
published by the Institute of Actuaries) for both pensioner and non-pensioner members in conjunction with the results of an investigation
into the actual mortality experience of scheme members. In addition, to allow for future improvements in longevity, the Continuous
Mortality Investigation 2013 tables (published by the Institute of Actuaries) have been used, with an assumed long-term rate of future
annual mortality improvements of 1.25% (2013 1%), for both pensioner and non-pensioner members.
In October 2014, the Society of Actuaries in the US released updated mortality assumptions reflecting the results of its comprehensive
mortality study. For the majority of the US schemes, the mortality tables used at 31 December 2014 are a blend of the fully generational
RP-2014 Aggregate table and the RP-2014 White Collar table, both projected using Scale MP-2014. The mortality table changes have
resulted in a £0.3bn increase in the US defined benefit obligations. IRS approval of the mortality tables is expected in 2017, following
which the tables are expected to be adopted for funding valuation purposes.
Retirement benefits other than pensions
Background
The Group operates a number of non-pension retirement benefit schemes, under which certain employees are eligible to receive
benefits after retirement, the majority of which relate to the provision of medical benefits to retired employees of the Group’s
subsidiaries in the US. The latest valuations of the principal schemes, covering retiree medical and life insurance schemes in certain
US subsidiaries, were performed by independent actuaries as at 1 January 2014. These valuations were rolled forward to reflect the
information at 31 December 2014. The method of accounting for these is similar to that used for defined benefit pension schemes.
Principal actuarial assumptions
The assumption for long-term healthcare cost increases is 5.3% (2013 5.3%) based on the assumptions that the increases are 7.9%
in 2015 reducing to 5% by 2023 and 5% each year thereafter for pre-retirement, and 7.5% in 2015 reducing to 5% by 2023 and 5%
each year thereafter for post-retirement.
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BAE Systems
Annual Report 2014