Annual Report PDF - Black Sun Plc

Directors’ Report: Business ReviewFinancial performance continuedPensionsPension schemesThe Group’s principal pension plans are funded defined benefitplans. The two largest schemes are the BAE Systems PensionsScheme (Main Scheme) and the BAE Systems 2000 PensionPlan (2000 Plan). In aggregate, these two plans represent 73%(2009 77%) of the total IAS 19, Employee benefi ts, deficit at31 December 2010.Investment strategyIn aggregate, some 60% of the Group’s pension assets are heldin equities due to the higher expected level of return over thelong term. The investment portfolios are highly diversified inorder to provide reasonable assurance that no single securityor type of security could have a materially adverse impact onthe total portfolio. In addition, some of the Group’s pensionschemes use derivative financial instruments as part of theirinvestment strategy to manage the level of risk.An analysis of pension scheme assets split between equities,bonds, property and other investments, together with theexpected returns on those investments, is shown in note 21to the Group accounts.ValuationPension plan valuations are performed by independentactuaries for both IAS 19 accounting (see critical accountingpolicies on page 44) and funding purposes.accounting valuationsA summary of the Group’s pension scheme assets and liabilitiesis set out on the opposite page.Pension scheme assets are included in the valuation at bid value.The key assumptions used to calculate pension schemeliabilities for the principal plans are shown below:pRincipal pension accounting valuation assumptionsUKUS2010 2009 2010 2009Real discount rate 9 (%) 2.1 2.2 2.5 2.9Rate of increase insalaries (%) 4.4 4.5 4.5 4.5Rate of increase inpensions in payment (%) 2.3–3.6 2.3–3.7 n/a n/aRate of increase indeferred pensions (%) 2.8–3.4 3.5 n/a n/aLife expectancy ofa male currentlyaged 65 (years) 19–23 19–23 19 19Life expectancy ofa female currentlyaged 65 (years) 22–26 22–26 21 21The discount rate assumptions are based on third party AAcorporate bond indices using yields that reflect the maturityprofile of the expected benefit payments.The valuation of the Group’s pension liabilities is highly sensitiveto movements in real discount rates. During the year, theserates have continued to be volatile. A ten basis point movementin the rate changes the pre-tax liability by some £0.3bn.The relationship between the UK pension deficit (as definedby the Group) and the real discount rate is illustrated in thechart opposite.Certain of the Group’s equity accounted investments participatein the Group’s defined benefit plans as well as Airbus SAS, theGroup’s share of which was sold in 2006. As these are multiemployerplans, the Group allocates an appropriate share ofthe IAS 19 pension deficit to those equity accountedinvestments and to Airbus SAS.funding valuationsThe triennial funding valuations of the Group’s two largestpension schemes, the Main Scheme and 2000 Plan, wereperformed as at 5 April 2008 and 2010, respectively.Pension scheme assets are included in the valuation at marketvalue, whilst the liabilities are determined based on prudentassumptions set by the trustees following consultation withscheme actuaries.The triennial funding valuations form the basis for the Group’scash funding obligations to its pension schemes.The current deficit recovery plan agreed with the trustees of theMain Scheme runs until April 2026 and includes annual lumpsum contributions of £40m until 2016. In addition, as part ofthe agreed deficit recovery plan, the Group contributed a further£25m into Trust in 2010. The cumulative contributions into Trustof £250m are reported within other investments (£260m aftercumulative fair value gains of £11m), and cash and cashequivalents (£1m) at 31 December 2010, and the use of theseassets is restricted under the terms of the Trust. A final £25m isdue to be paid into Trust in 2011. The Group considers thesecontributions to be equivalent to other lump sum contributionsit makes into the Group’s pension schemes and, accordingly,presents a definition of the pension deficit including them.During the year, the Group made an incremental lump sumcontribution of £51m into the 2000 Plan. This payment wasmade in advance of the finalisation of discussions between thetrustees and the Group to determine the funding implications ofthe 2010 triennial valuation. The deficit recovery plan in respectof the 2010 triennial valuation was subsequently agreed andruns until April 2026. It includes lump sum contributions of£15m in 2011 and £77m in 2012, and annual lump sumcontributions of £54m thereafter.The Group also made contributions to the UK pension schemestotalling £157m following the £500m share buybackprogramme completed in July 2010.The results of future triennial valuations and associated fundingrequirements will be impacted by the future performance ofinvestment markets, and interest and inflation rates.EFFECT OF CHANGES IN REAL DISCOUNT RATES 9ON THE UK PENSION DEFICIT (AS DEFINED BY THE GROUP)£bn %5432102006 2007 2008 2009 2010UK pension deficit (as defined by the Group) (£bn)Effect of change in real discount rate (£bn)Other movements (£bn)UK real discount rate (%)5432109 Discount rate net of inflation.40 www.baesystems.com