Setting new standards - Friends Life

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FINANCIAL STATEMENTS IFRS FINANCIAL STATEMENTS EEV SUPPLEMENTARY INFORMATION Notes to the consolidated accounts continued 10. Staff pension schemes continued (xi) Risk Management The Trustee has established a separate investment subcommittee which is responsible for assisting the Trustee in investment policy and monitoring the Scheme’s investments. The investment subcommittee seeks advice from the investment adviser and believes it has sufficient skills and expertise to make investment decisions based on this advice. The Trustee sets general investment policy but delegates day to day responsibility for the selection of specific investments (other than investments in respect of members’ voluntary contributions) to the Investment Manager. The Trustee has set performance and risk targets for the Investment Manager. The performance objectives are long-term (5 years), however, the Trustee monitors the Investment Manager on a regular basis in order to ensure that it is on track to meet its long-term objectives. Interest rate and inflation risk In 2003, FPPS implemented a series of derivative hedges with Merrill Lynch (swaps) designed to hedge the interest rate and inflation sensitivities of the Scheme’s liabilities. The fall in long-term interest rates (compared to when the swaps were effected) has meant that the value of the swaps has increased and broadly matched the increase in value of the liabilities. In 2006, to achieve a better match to the liabilities, the inflation swaps were exchanged in November 2006 for positions in ten Liability Driven Investment (LDI) pools managed by F&C. In addition, FPPS residual Government Bonds and Index linked bonds were exchanged for additional holdings in the LDI pools. These pools are designed to achieve a good match to the interest rate and nominal sensitivities of the liabilities of FPPS liabilities. The value of investment in LDI pools at 31 December 2006 was £256m. Currency risk To increase the diversification of the equity portfolio, the Scheme invests in overseas assets. The Scheme’s liability is entirely in pound sterling and therefore there is a risk that the appreciation of pound sterling against other currencies will reduce the return from overseas equities. The Trustee has reviewed this risk and hedged one third of the overseas exposure on a strategic basis. Operational risk The Investment Manager does not directly hold any of the Scheme’s securities. These are held in a separate account with the custodian. All organisations involved in stock lending are kept under review by the Investment Manager’s credit committee. The borrowing organisations have to post collateral with the Scheme, which is marked to market on a daily basis. 102 Friends Provident Annual Report & Accounts 2006
PARENT COMPANY ACCOUNTS ABBREVIATIONS AND DEFINITIONS Notes to the consolidated accounts continued 10. Staff pension schemes continued (d) F&C Asset Management plc pension schemes F&C operates two core defined benefit pension schemes in the UK, one in The Netherlands and one in Portugal. Both of the UK schemes are closed to new entrants with all new UK employees eligible to benefit from defined contribution arrangements. The Chairman of F&C, Mr RW Jenkins, was awarded pension benefits by F&C Management Limited prior to completion of the merger of ISIS and F&C in respect of his past service to F&C. This is an unfunded pensions liability and therefore the Group has made an appropriate provision in its accounts. F&C Netherlands BV Prior to the merger with F&C, employee benefits in The Netherlands were provided through the Achmea pension plan. Post-merger a separate insurance contract has been set up, with all assets and liabilities in respect of the F&C employees transferring to the new contract. Existing benefits of the employees participating in the scheme have not been altered as a result of the transfer. F&C Ireland Limited Employee benefits in Ireland are provided through the Friends First Retirement and Death Benefits Plan, in which F&C participates together with Friends First. F&C have set up a separate new defined benefit plan and a process is underway to calculate the assets and liabilities that will transfer from the multi-employer plan to the new F&C plan. This process had not been completed at 31 December 2006. As the assets and liabilities are not identifiable at 31 December 2006, pension benefits provided through the Friends First plan have been accounted for as a multiemployer plan on a defined contribution basis. Once the transfer of assets and liabilities to the F&C plan has completed, they will be separately identifiable and defined benefit accounting will be possible. This new scheme’s trustee board consists of four trustees, two of whom are employer appointed and two of whom are member selected. At the end of 2006 the plan had a deficit of €5,100,000 (£3,436,000). F&C Ireland Limited contributed €174,000 (£117,000) to the Friends First Retirement and Death Benefits Plan for the year. (i) Major assumptions used by the Schemes’ Actuary 2006 2005 % % Inflation assumption 1.75–3.00 1.75–2.75 Rate of increase in salaries 2.50–4.25 2.75–4.00 Rate of increase in pensions in payment 2.75–4.00 2.75–3.50 Discount rate 4.60–5.00 4.25–4.70 Friends Provident Annual Report & Accounts 2006 103
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Setting new standards - Friends Life

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