21. Pensions and other post-employment benefits

Pension costs2013
£000
2012 *
£000
UK defined benefit scheme1,0601,033
UK defined contribution schemes1,2581,149
Contributions to personal pension plans39
Total charged to operating expenses (note 4)2,3182,221
Interest on defined benefit plan liabilities3,5703,930
Less: expected return on defined benefit plan assets(3,672)(3,960)
Net interest included in other finance income (note 9)(102)(30)
Total cost of pensions charged to income statement2,2162,191

* Restated (see note 1).

The Group operates pension schemes in the UK to provide pensions to retired employees. UK pension benefits are provided by a defined benefit scheme, whereby retirement benefits are based on employee pensionable remuneration and length of service, and by defined contribution schemes, whereby retirement benefits are determined by the value of funds arising from contributions paid in respect of each employee. The defined benefit scheme was closed to new entrants with effect from 30 June 2002.

Increases to pensions in payment and in deferment in respect of future service are capped at 2.5% per annum. The members' share of the cost of the Scheme is 8% of pensionable salaries and is generally paid via a "salary sacrifice" arrangement. Under this arrangement the Group meets the full cost of accrual, but members receive a reduction in their salary equal to their share of the cost of the Scheme. Members have the right to opt out of this arrangement if they wish to receive their full salary and contribute to the Scheme, in which case the Group's contributions to the Scheme are reduced.

Contributions to defined benefit schemes are determined in accordance with the advice of an independent, professionally qualified actuary. Pension costs of defined benefit schemes for accounting purposes have been assessed in accordance with independent actuarial advice, using the projected unit method. Liabilities are assessed annually in accordance with the advice of an independent actuary. Formal, independent, actuarial valuations of the Group's defined benefit scheme are undertaken, normally every three years.

The following information relates to the Group's UK defined benefit pension scheme, the Bespak plc Staff Retirement Benefits Scheme ("the Scheme").

The Group also operated a smaller defined contribution scheme in the USA which was disposed of during the year (see note 28). The pension cost associated with this scheme of £41,000 (2012: £33,000) has been reported within discontinued operations.

2013
£000
2012
£000
Change in defined benefit obligation
Benefit obligation at start of year71,52871,400
Current service cost1,0601,033
Interest cost3,5703,930
Contributions by plan participants23
Actuarial losses/(gains)16,416(3,898)
Benefits paid(1,300)(940)
Benefit obligation at end of year91,27671,528
Change in fair value of plan assets
Fair value of plan assets at start of year68,16164,995
Expected return on plan assets3,6723,960
Actuarial gain/(loss)7,986(2,799)
Regular employer contributions9891,038
Employer contributions — deficit funding1,904
Contributions by plan participants23
Benefits paid(1,300)(940)
Fair value of plan assets at end of year79,51068,161
Defined benefit pension scheme deficit recognised11,7663,367
Components of defined benefit pension cost2013
£000
2012
£000
Current service cost1,0601,033
Interest cost3,5703,930
Expected return on plan assets(3,672)(3,960)
Total defined benefit pension cost recognised in the income statement9581,003
Actuarial gains immediately recognised in other comprehensive income8,430(1,115)
Cumulative amount of actuarial losses immediately recognised18,0699,639

The actual return on plan assets in the year ended 30 April 2013 was a gain of £11.658m (2012: £1.161m).

Five-year history2013
£000
2012
£000
2011
£000
2010
£000
2009
£000
Benefit obligation at end of year(91,276)(71,528)(71,400)(70,160)(55,503)
Fair value of plan assets at end of year79,51068,16164,99556,87643,422
Deficit(11,766)(3,367)(6,405)(13,284)(12,081)
Difference between expected and actual return of scheme assets:
Amount (£000)(7,986)2,799(1,660)7,636(10,743)
Percentage of scheme assets(10%)4%(3%)13%(25%)
Experience gains and losses to scheme liabilities:
Amount (£000)(5,660)(270)
Percentage of scheme liabilities(8%)

Contributions

Under the Schedule of Contributions agreed with the Scheme's trustees in place at the time this disclosure was prepared, the Group expects to contribute approximately £1.0m to the defined benefit scheme in the 2014 financial year.

Explanation of the relationship between Consort Medical plc and the trustees of the Scheme

The Scheme assets are held in a separate trustee-administered fund to meet long-term pension liabilities to past and present employees. The trustees of the Scheme are required to act in the best interests of the Scheme's beneficiaries. The appointment of trustees to the Scheme is set out under Rule A16 of the Scheme's trust deed and rules dated 14 March 1997. The Scheme has a policy that one-third of all trustees should be nominated by members of the Scheme.

Disclosure of principal assumptions

The principal actuarial assumptions adopted at the balance sheet date were:

20132012
Discount rate4.3% p.a.5.0% p.a.
Future RPI inflation3.3% p.a.3.2% p.a.
Future CPI inflation2.3% p.a.2.2% p.a.
Future salary increases3.8% p.a.3.7% p.a.
Rate of pension increases
RPI inflation capped at 5% p.a.3.2% p.a.3.1% p.a.
RPI inflation capped at 5% p.a. with a minimum of 3% p.a.3.6% p.a.3.5% p.a.
RPI inflation capped at 2.5% p.a.2.2% p.a.2.2% p.a.
CPI inflation capped at 3.0% p.a.2.1% p.a.2.1% p.a.
Expected return on plan assets4.8% p.a.5.4% p.a.

The IAS 19 accounting standard "Employee benefits" requires that the discount rate used be determined by reference to market yields at the balance sheet date on high quality fixed income investments. The currency and term of these should be consistent with the currency and estimated term of the post-employment obligations.

The discount rate has been developed from a spot yield curve based on UK Government bonds, adjusted to reflect the credit spread between AA-rated corporate bonds and Government bonds.

The expected rate of inflation is an important building block for the salary growth and pension increase assumption. A rate of inflation is "implied" by the difference between the yields on fixed-interest and index-linked Government bonds.

For the majority of members, pension accrued before 6 April 1997 does not receive any guaranteed increases and it is assumed that no discretionary increases will be awarded. Pension accrued between 6 April 1997 and 30 April 2009 receives increases in line with inflation subject to a maximum of 5% per annum (for which the Company has assumed future increases will be 3.2% per annum). Some members receive fixed increases of 3% per annum on pension accrued before 6 April 1997 and increases in line with inflation subject to a minimum of 3% per annum and a maximum of 5% per annum on pension accrued between 6 April 1997 and 30 April 2009 (for which the Company has assumed future increases will be 3.6% per annum). For all members, pension accrued after 1 May 2009 receives increases in line with inflation subject to a maximum of 2.5% per annum (for which the Company has assumed future increases will be 2.2% per annum).

One of the key assumptions made in valuing the pension scheme's liabilities are the mortality rates used to assess how long pensions will be paid for. The mortality rates used to calculate the Scheme's liabilities were updated as part of the Scheme's actuarial valuation in 2008 to reflect the results of surveys that have highlighted that people are living longer. The mortality rates now used in calculating the Scheme's liabilities are based on data collected between 1991 and 1994, but allow for the accelerated improvements in longevity witnessed since that time and also allow for these accelerated improvements to continue in the future with a minimum annual rate of improvement of 1% per annum. These mortality tables are referred to as 110% of the PA92 long cohort tables with a 1% per annum underpin.

The current life expectancies (in years) underlying the value of the accrued liabilities for the Scheme are:

20132012
Life expectancy at age 65MaleFemaleMaleFemale
Member currently aged 6523.625.923.525.7
Member currently aged 4525.928.225.728.1

The overall expected return on assets has been calculated as the weighted average of the expected return for the principal asset categories, net of investment expenses, held by the plan as follows:

20132012
Asset categoryWeightingExpected returnWeightingExpected return
Gilts16%2.6%16%3.4%
Corporate bonds26%4.0%27%4.7%
Equities49%6.0%47%6.4%
Hedge funds9%5.0%10%5.4%
Cash0%0.0%0%0.0%
Overall100%4.8%100%5.4%

Sensitivity analysis of the principal assumptions used to measure Scheme liabilities

The sensitivity of the Scheme's liabilities to changes in the principal assumptions used to measure these liabilities is illustrated below. The illustrations consider the single change shown with the other assumptions assumed to be unchanged. In practice, changes in one assumption may be accompanied by offsetting changes in another assumption (this is not always the case).

The Group liability is the difference between the Scheme liabilities and the Scheme assets. Certain changes in the assumptions will be as a result of changes in market yields. Where this is the case, the market value of Scheme assets may change simultaneously, which may or may not offset the change in assumptions. For example, a fall in interest rates will increase the Scheme liability, but may also trigger an offsetting increase in the market value of assets so that the net effect on the Group liability is reduced.

AssumptionChange in assumptionImpact on Scheme's accrued liabilities
Discount rateDecrease by 0.25% p.a.Increase by 6.8%
Rate of inflation and salary increaseDecrease by 0.25% p.a.Decrease by 7.1%
Rate of inflation and salary increaseIncrease by 0.25% p.a.Increase by 7.7%
Rate of mortalityMembers assumed to live one year longerIncrease by 2.1%

How the liabilities arising from the Scheme are measured

The Group provides retirement benefits via the Scheme to some of its former employees and approximately 30% of current UK employees. The level of retirement benefit is principally based on salary earned in the final three years of employment and period of service as a Scheme member.

The projected liabilities of the Scheme are apportioned between members' past and future service using the projected unit actuarial cost method. The deficit in the consolidated balance sheet is the difference between the projected liability allocated to past service (the defined benefit obligation) and the market value of the assets of the Scheme. The defined benefit obligation makes allowance for future earnings growth. If all active members were assumed to leave the Group and the allowance for future earnings growth was replaced by an allowance for statutory revaluation, the liabilities would reduce by approximately £5.2m.

An alternative measure of liability is the cost of buying out benefits at the balance sheet date with a suitable insurer. This amount represents the amount that would be required to settle the Scheme liabilities at the balance sheet date rather than the Group continuing to fund the ongoing liabilities of the Scheme. The latest estimate of the amount required to settle the Scheme's liabilities was calculated at 30 April 2011. This indicated that the amount required was £43.9m in excess of the assets held by the Scheme.

Future funding obligations in relation to the Scheme

The trustees have selected a funding target based on the Scheme being closed to new members but with active members continuing to accrue benefits. The agreed funding objective is to reach, and then maintain, assets equal to 100% of the value of the projected past service liabilities, assessed on an ongoing basis, allowing for future salary increases for active members.

The most recently completed triennial actuarial valuation of the Scheme was performed by an independent actuary for the trustees of the Scheme and was carried out as at 30 April 2011. Following the valuation and changes to the Scheme's benefits for future service the trustees agreed that the Group could cease paying deficit reduction contributions of £238,000 per month.

Nature and extent of the risks arising from financial instruments held by the Scheme

The expected return on the Scheme's assets is based on market expectations at the beginning of the financial period for returns over the life of the related obligation. The expected yield on bond investments with fixed interest rates can be derived exactly from their market value. Some of these bond investments are issued by the UK Government and the risk of default on these is very small. The trustees also hold bond investments issued by public companies. There is a more significant risk of default on these which is assessed by various rating agencies. The trustees also have a substantial holding of equity and hedge fund investments, with a target of 60% of the Scheme's assets being invested in these funds. The investment return related to these is variable, and they are generally considered much "riskier" investments. It is generally accepted that the yield on these investments will contain a premium ("the equity risk premium") to compensate investors for the additional risk of holding this type of investment. There is significant uncertainty about the likely size of this risk premium.

The majority of the equities held by the Scheme are in international blue chip entities. The aim is to hold a globally diversified portfolio of equities, with a target of 22% of equities being held in the UK, 27% in the rest of Europe, 20% in North American equities, 10% in each of Japanese and Pacific Basin equities and 11% in emerging markets.

As part of the investment strategy review, the trustees, in conjunction with the Group, have carried out an asset-liability review for the Scheme. These studies are used to assist the trustees and the Group in determining the optimal long-term asset allocation with regard to the structure of liabilities within the Scheme. The results of the study are used to assist the trustees in managing the volatility in the underlying investment performance and the risk of a significant increase in the Scheme's deficit by providing information used to determine the pension scheme's investment strategy.