united-utilities-annual-report-2015

UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2015Stock Code: UU.unitedutilities.comA3 FINANCIAL RISK MANAGEMENT continuedCompanyThe company does not hold any financial instruments that are measured subsequent to initial recognition at fair value orwhere fair value has been separately disclosed in the notes as the carrying value is not a reasonable approximation offair value.A4 RETIREMENT BENEFITSDefined benefit schemesThe group participates in two major funded defined benefit pension schemes in the United Kingdom – the United UtilitiesPension Scheme (UUPS) and the United Utilities PLC group of the Electricity Supply Pension Scheme (ESPS), both of whichare closed to new employees. The assets of these schemes are held in trust funds independent of the group’s finances.The trustees are composed of representatives of both the employer and employees. The trustees are required by law to act inthe interests of all relevant beneficiaries and are responsible for the investment policy with regard to the assets plus theday-to-day administration of the benefits.The group also operates a series of unfunded, unregistered retirement benefit schemes. The costs of these schemes areincluded in the total pension cost, on a basis consistent with IAS 19 and the assumptions set out below.Information about the pension arrangements for executive directors is contained in the directors’ remuneration report.Under the schemes, employees are entitled to annual pensions on retirement. Benefits are also payable on death and followingother events such as withdrawing from active service. No other post-retirement benefits are provided to these employees.The latest actuarial valuations of UUPS and ESPS were carried out as at 31 March 2013. The results of these valuations havebeen adjusted to take account of the requirements of IAS 19 ‘Employee Benefits’ in order to assess the position at 31 March2015 by projecting forward from the valuation date by the independent actuary, Aon Hewitt Limited.Funding requirementsThe latest funding valuations of the schemes as at 31 March 2013 reported a deficit. The basis on which liabilities are valuedfor funding purposes differs to the basis required under IAS 19. Under UK legislation there is a requirement that pensionschemes are funded prudently.The group has a plan in place with the schemes’ trustees to address the funding deficit by 31 December 2020, through a seriesof annual deficit recovery contributions.The group and trustees have agreed long-term strategies for reducing investment risk in each scheme.For UUPS this includes an asset liability matching policy which aims to reduce the volatility of the funding level of the pensionplan by investing in assets such as fixed income swaps which perform in line with the liabilities so as to hedge against changesin swap yields. For ESPS, a partial hedge is in place to protect against changes in swap yields.In addition, the group has had an Inflation Funding Mechanism (IFM) in place since 2010; details of this are outlined in the 2011annual report. In 2013, it extended the mechanism to the ESPS, and increased the fixed percentage rate used to 3.0 per centper annum from 2.75 per cent per annum. To the extent that inflation, as measured by the RPI index at each 31 March precedingthe payment due date, is different from 3.0 per cent per annum, the inflation reserve will increase/decrease. Additionalcontributions are then payable annually based on the size of the inflation reserve.The duration of the combined schemes is around 20 years. The schemes’ duration is an indicator of the weighted-average timeuntil benefit payments are settled, taking account of the split of the defined benefit obligation between current employees,deferred members and the current pensioners of the schemes.The group expects to make contributions of £55.7 million in the year ending 31 March 2016, comprising £29.2 million to UUPSand £4.1 million to ESPS in respect of accelerated deficit repair contributions, and £21.4 million and £1.0 million in respect ofregular contributions to UUPS and ESPS respectively.Impact of scheme risk management on IAS 19 disclosuresUnder the prescribed IAS 19 basis, pension scheme liabilities are calculated based on current accrued benefits. Expected cashflows are projected forward allowing for RPI and the current member mortality assumptions. These projected cash flows arethen discounted by an AA corporate bond rate, which comprises an underlying interest rate and a credit spread.STRATEGIC REPORTSHAREHOLDER INFORMATION FINANCIAL STATEMENTSGOVERNANCE153