Defined benefit schemes
The group participates in a number of pension schemes principally in the United Kingdom. The three major schemes are funded defined benefit schemes - the United Utilities Pension Scheme (UUPS), the United Utilities Group PLC section of the Electricity Supply Pension Scheme (ESPS) and the Northern Gas Networks Pension Scheme (NGNPS), all of which are closed to new employees. The assets of these schemes are held in trust funds independent of the group’s finances.
The last actuarial valuation of UUPS was carried out as at 30 September 2008, ESPS was carried out as at 31 March 2008 and NGNPS was carried out as at 31 December 2008. These valuations have been updated to take account of the requirements of IAS 19 ‘Employee Benefits’ in order to assess the position at 31 March 2010 by projecting forward from the dates of the respective valuations, and have been performed by an independent actuary, Mercer Limited.
On 31 March 2005, the group made lump sum payments of £216.0 million and £103.5 million to UUPS and ESPS respectively. The payments were in lieu of the estimated company contributions that were expected to have been payable for defined benefit members over the five years from 1 April 2005. Whilst some company contributions to UUPS and ESPS resumed in respect of the defined benefit members during 2008/09, significant elements of the company contribution holiday following the lump sum payments continued during the year ended 31 March 2010. The group made total contributions of £44.1 million (2009: £45.4 million) to its pension schemes for the year ended 31 March 2010. The group also operates a series of unfunded, unregistered retirement benefit schemes. The cost of the unfunded, unregistered retirement benefit schemes is included in the total pension cost, on a basis consistent with IAS 19 and the assumptions set out below.
The group also continues to pay contributions in respect of NGNPS, the defined contribution members and insurance premiums. Other payments will be made by the group in accordance with the funding agreements between the trustees and the group. Overall, the group expects to contribute around £106.5 million to its defined benefit schemes in the year ending 31 March 2011.
The total defined benefit pension income for the year was £23.1 million (2009: £33.0 million expense), including pension income credited to operating profit of £46.3 million (2009: £39.8 million expense), which reflects curtailment gains arising on amendment of pension obligations of £92.3 million (2009: £nil). A pension obligation of £271.3 million is included in the statement of financial position at 31 March 2010 (2009: £213.1 million). Information about the pension arrangements for executive directors is contained in the directors’ remuneration report.
The credit of £92.3 million offsetting the pension expense for the year ended 31 March 2010 has arisen as a result of the amendment of pensions obligations (see pensions information in the business review). These include the introduction of a restriction on the rate of increase in pensionable pay for defined benefit members of the UUPS and the ESPS. This restriction took effect on 31 March 2010. Changes to the benefits accruing after 31 March 2010 for the defined benefit members of the UUPS have also been implemented. The impact of these changes will be reflected in the current service cost element of the pension expense for 2010/11.
The main financial assumptions used by the actuary were as follows:
The current male life expectancies at age 60 underlying the value of the accrued liabilities for the schemes are:
Studies in the last five years have shown faster rates of life expectancy improvement than had previously been expected. Studies have also illustrated that mortality rates vary significantly according to the demographics of the schemes’ members. These factors have been taken into account in the calculation of the defined benefit obligations of the group.
At 31 March, the fair value of the schemes’ assets and liabilities recognised in the statement of financial position were as follows:
To develop the expected long-term rate of return on asset assumptions, the group considered the current level of expected returns on risk free investments, the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based upon the actual asset allocation to develop the expected long-term rate of return on asset assumptions for the portfolio. The group’s actual return on schemes’ assets was a gain of £459.3 million (2009: £372.1 million loss).
Movements in the present value of the defined benefit obligations are as follows:
At 31 March 2010, £7.2 million (2009: £5.9 million) of the defined benefit obligations related to unfunded, unregistered benefit plans.
Movements in the fair value of the schemes’ assets were as follows:
The net pension income/(expense) before taxation recognised in the income statement in respect of the defined benefit schemes is summarised as follows:
Defined benefit pension costs excluding pension schemes curtailment gains arising on amendment of pension obligations and restructuring costs included within employee benefit expense of £28.8 million (2009: £39.8 million) comprise current service costs and past service costs. Total post-employment benefits expense excluding pension schemes curtailment gains arising on amendment of pension obligations and restructuring costs charged to operating profit of £50.7 million (2009: £60.4 million) comprise the defined benefit costs described above of £28.8 million (2009: £39.8 million) and defined contribution pension costs of £21.9 million (2009: £20.6 million).
Curtailments arising on reorganisation of £17.2 million (2009: £nil) are included within restructuring costs within total employee benefits expense.
The reconciliation of the opening and closing statement of financial position balances is as follows:
Actuarial gains and losses are recognised directly in the statement of comprehensive income. At 31 March 2010, a cumulative pre-tax loss of £220.5 million (2009: £95.1 million) had been recorded directly in the statement of comprehensive income.
The history of the schemes for the current and prior years is as follows:
At 31 March 2010, gross pension liabilities in respect of retirement benefit obligations for NGNPS were £233.5 million (2009: £171.7 million). Gross pension assets in respect of NGNPS at 31 March 2010 were £225.8 million (2009: £169.7 million). The group recorded a related deferred tax asset at 31 March 2010 of £2.2 million (2009: £0.6 million). The directors consider that the group should apply defined benefit accounting in respect of the scheme. However, the group does not have the responsibility to fund the net pension deficit and has reflected this by the recognition of an available for sale financial asset within investments of £5.5 million at 31 March 2010 (2009: £1.4 million).
Defined contribution pension costs
The schemes also include a defined contribution section which constitutes around two per cent of the total asset value.
During the year, the group made £9.9 million (2009: £7.0 million) of contributions to defined contribution schemes, which are included in arriving at operating profit from continuing operations.
Various companies in the United Kingdom electricity industry participate in the Electricity Supply Pension Scheme (ESPS), which is an industry-wide defined benefit scheme. The United Utilities Electricity Services Limited (UUES) section of the Electricity North West (ENW) Group of the scheme was created in December 2007 to accommodate the transfer of employees from ENW (formerly United Utilities Electricity Limited) to UUES. At that date, the UUES section of the scheme was fully funded. The group makes cash contributions over the period of the Asset Services Agreement (ASA) between UUES and ENW, which are fully recoverable from ENW under the terms of the ASA. There is no obligation brought forward, or carried forward, for which the group is responsible. However, as the group is the employer, it is required to disclose the gross pension liabilities and assets associated with the scheme.
At 31 March 2010, gross pension liabilities in respect of retirement benefit obligations for the UUES section of the ESPS were £224.6 million (2009:£157.3 million). Gross pension assets in respect of the UUES section of the ESPS, at 31 March 2010, were £214.1 million (2009: £149.4 million). £12.0 million of cash contributions have been made to the UUES section of the ESPS during the year ended 31 March 2010 (2009: £13.6 million), these costs being charged to operating profit as defined contribution pension costs. Therefore, in total, the group incurred defined contribution pension costs of £21.9 million (2009: £20.6 million) (see note 3).
The company does not participate in any of the group’s pension schemes.