Annual Report and Accounts 2009

Notes to the Consolidated Financial Statements for the year to 31 December 2009

22. Retirement benefit schemes

Retirement benefit obligation comprises gross pension liability of £406.4m (2008: £277.2m) and gross post-retirement healthcare liability of £2.9m (2008: £2.6m).

The Group operates defined benefit and defined contribution pension schemes. In the UK, the Taylor Woodrow Group Pension and Life Assurance Fund (TWGP&LAF) and the George Wimpey Staff Pension Scheme (GWSPS) are funded defined benefit schemes. The Taylor Woodrow NHS Pension Scheme (TWNHSPS), which was also a defined benefit scheme, was disposed of as part of the disposal of the Construction business on 9 September 2008. The TWGP&LAF merged with the Bryant Group Pension Scheme (BGPS) on 24 June 2002 and with the Wilson Connolly Holdings Pension Scheme (WCHPS), the Wainhomes Ltd Pension Scheme (WHLPS) and the Prestoplan Pension Scheme (PPS) on 27 August 2004. These schemes are managed by boards of trustees. The Group's defined benefit schemes are closed to new entrants. The TWGP&LAF was closed to future pension accrual with effect from 30 November 2006. An alternative Defined Contribution arrangement, the Taylor Wimpey Personal Choice Plan, is offered to new employees and from 1 December 2006 to employees who previously accrued benefits in the TWGP&LAF. Legacy George Wimpey staff are members of a UK Stakeholder arrangement. The Group also operates a number of small overseas pension schemes including defined benefit schemes in the US and Canada. Of the defined benefit pension scheme net deficit of £406.4m (2008: £277.2m) at 31 December 2009, £401.4m (2008: £268.3m) related to the TWGP&LAF and GWSPS schemes in the UK and £5.0m (2008: £8.9m) related to defined benefit schemes in the US and Canada.

The pension scheme assets of the Group's principal defined benefit pension schemes, TWGP&LAF and GWSPS are held in a separate trustee-administered fund to meet long term pension liabilities to past and present employees. The trustees of the schemes are required to act in the best interests of the schemes' beneficiaries. The appointment of trustees is determined by each scheme's trust documentation. The Group has a policy that at least one-third of all trustees should be nominated by members of the scheme.

The most recent formal actuarial valuation of the TWGP&LAF was carried out at 1 June 2007. The most recent formal actuarial valuation of the GWSPS was carried out at 31 March 2007. The projected unit method was used in all valuations and assets were taken into account using market values.

The next formal valuations of the TWGP&LAF and GWSPS are taking place as at 31 March 2010. The statutory funding objective is that each scheme has sufficient and appropriate assets to pay its benefits as they fall due. The general principles adopted by the trustees will be that the assumptions used, taken as a whole, will be sufficiently prudent for pensions and benefits already in payment to continue to be paid, and to reflect the commitments which will arise from members' accrued pension rights.

Contributions of £10.6m (2008: £8.9m) were charged to income in respect of defined contribution schemes.

In 2008 the Group agreed revised funding schedules with the Trustees of both schemes under which the Group will make annual funding contributions of £20m over eight years in respect of the TWGP&LAF and £25m over 10 years in respect of the GWSPS. Following the last valuation of the GWSPS, the ordinary contribution rate was set at 18% of pensionable salaries.

The main financial assumptions, which were used for the triennial funding valuation and are all relative to the inflation assumption, are as set out below:

Assumptions TWGP&LAF GWSPS
RPI inflation 3.15% 3.15%
Discount rate – pre/post-retirement 5.60% 6.75%-4.75%
General pay inflation 5.15%
Real pension increases 0.00% 0.00%
Valuation results TWGP&LAF GWSPS
Market value of assets £764m £668m
Past service liabilities £926m £883m
Scheme funding levels 82% 76%

The valuations of the Group's pension schemes have been updated to 31 December 2009 and the position of overseas schemes has been included within the IAS 19 disclosures. The principal actuarial assumptions used in the calculation of the disclosure items are as follows:

  United Kingdom North America
  2009 2008 2009 2008
As at 31 December
Discount rate for scheme liabilities 5.70% 6.30% 5.94%-6.00% 5.80-7.00%
Expected return on scheme assets 5.90%-6.20% 5.80-6.45% 6.50%-8.00% 5.50-8.00%
General pay inflation 4.30% 4.30% 3.00%-3.50% 3.00%
Deferred pension increases 3.30% 2.80% 0.00% 0.00%
Pension increases 2.30%-3.20% 2.15-3.35% 0.00%-3.00% 0.00-3.00%

The basis for the above assumptions are prescribed by IAS 19 and do not reflect the assumptions that may be used in future funding valuations of the Group's pension schemes.

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

  2009 2008
Life expectancy at age 65 Male Female Male Female
Member currently age 65 86 89 86 89
Member currently age 45 87 90 87 90

The fair value of assets and present value of obligations of the Group's defined benefit pension schemes are set out below:

  Expected rate of
return
% p.a
United
Kingdom
£m
North
America
£m
Total plans
£m
Percentage of
total plan
assets held
31 December 2009
Assets:
Equities 7.90% 527.9 9.8 537.7 38%
Bonds 5.70% 294.0 5.4 299.4 21%
Gilts 4.40% 444.8 444.8 32%
Other assets 3.30%-7.90% 129.7 0.7 130.4 9%
    1,396.4 15.9 1,412.3 100%
Present value of defined benefit obligations (1,797.8) (20.9) (1,818.7)  
Deficit in schemes recognised as non-current liability (401.4) (5.0) (406.4)  
31 December 2008
Assets:
Equities 6.90% 422.2 9.3 431.5 34%
Bonds 6.50% 324.2 5.8 330.0 26%
Gilts 3.40% 474.8 474.8 37%
Other assets 2.00% 44.2 44.2 3%
    1,265.4 15.1 1,280.5 100%
Present value of defined benefit obligations (1,533.7) (24.0) (1,557.7)  
Deficit in schemes recognised as non-current liability (268.3) (8.9) (277.2)  

To develop the expected long term rate of return on assets assumption, the Group considered the current level of expected returns on investments (particularly government bonds), 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 were then weighted based on the asset allocation to develop the expected long term rate of return on assets assumption for the portfolio.

The expected return on scheme 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. The risk of default on these is very small. The trustees also hold bonds 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 investments. The investment return related to these is variable, and they are generally considered 'riskier' investments.

It is generally accepted that the yield on equity 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.

A summary of the target asset allocations of the major defined benefit schemes are shown below:

  TWGP&LAF GWSPS
UK Equities 17% 18%
Non-UK Equities 30% 12%
Index-Linked Gilts 15% 25%
Fixed-Interest Gilts 10% 16%
Other UK bonds 25% 24%
GTAA 5%
Property 3%

  2009
£m
2008
£m
Amount charged against income:
Current service cost (4.1) (5.5)
Curtailment loss (0.9)
Settlement loss
Operating cost (4.1) (6.4)
Expected return on scheme assets 61.2 82.0
Interest cost on scheme liabilities (95.5) (93.7)
Finance charges (34.3) (11.7)
Total charge (38.4) (18.1)

The actual return on scheme assets was a gain of £41.5m (2008: loss of £128.4m).

  2009
£m
2008
£m
Actuarial (losses)/gains in the statement of recognised income and expenses:
Difference between actual and expected return on scheme assets 102.7 (210.4)
Experience gains/(losses) arising on scheme liabilities 29.1 (22.1)
Changes in assumptions (273.6) 142.3
Total loss recognised in the statement of recognised income and expense (141.8) (90.2)

The cumulative amount of actuarial losses recognised in the statement of comprehensive income is £215.6m loss (2008: £73.8m loss).

  2009
£m
2008
£m
Movement in present value of defined benefit obligations
1 January 1,557.7 1,650.6
Changes in exchange rates (1.6) 5.6
Service cost 4.1 5.5
Curtailment gain 0.9
Benefits paid and expenses (83.1) (80.4)
Contributions – employee 1.6 2.0
Interest cost 95.5 93.7
Actuarial gains/(losses) 244.5 (120.2)
31 December 1,818.7 1,557.7
  2009
£m
2008
£m
Movement in fair value of scheme assets
1 January 1,280.5 1,434.2
Changes in exchange rates (0.7) 3.0
Expected return on scheme assets and expenses 61.2 82.0
Contributions – employer and employee 51.7 52.5
Benefits paid (83.1) (80.8)
Actuarial gains/(losses) 102.7 (210.4)
31 December 1,412.3 1,280.5
  2009
£m
2008
£m
2007
£m
2006
£m
2005
£m
History of experience gains and losses:
Fair value of scheme assets 1,412.3 1,280.5 1,434.2 749.7 706.1
Present value of defined benefit obligations (1,818.7) (1,557.7) (1,650.6) (955.6) (925.9)
Deficit in the scheme (406.4) (277.2) (216.4) (205.9) (219.8)
Difference between actual and expected return on scheme assets:
Amount 102.7 (210.4) (12.7) 24.2 61.4
Percentage of scheme assets 7.3% 16.4% 1.0% 3.0% 9.0%
Experience adjustments on scheme liabilities:
Amount 29.1 (22.1) 26.7 0.2 (32.6)
Percentage of scheme liabilities 1.6% 1.4% 2.0% 0.0% 4.0%

The estimated amounts of contributions expected to be paid to the TWGP&LAF during 2010 are £20.0m, to the GWSPS are £28.7m.

The Group liability is the difference between the scheme liabilities and the scheme assets. Changes in the assumptions may occur at the same time as changes in the market value of scheme assets. These 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 so there is no net effect on the Company liability.

Assumption Change in assumption Impact on scheme liabilities
Discount rate Increase by 0.1% p.a. Decrease by £27.8m
Rate of inflation Increase by 0.1% p.a. Increase by £17.7m
Rate of pay inflation Increase by 0.1% p.a. Increase by £1.1m
Rate of mortality Members assumed to live 1 year longer Increase by £51.7m

The projected liabilities of the defined benefit scheme are apportioned between members' past and future service using the projected unit actuarial cost method. The defined benefit obligation makes allowance for future earnings growth. If all active members were assumed to leave the Company and the allowance for future earnings growth was replaced by an allowance for statutory revaluation, the liabilities would reduce by £11.0m (2008: £15.0m).

The gross post-retirement liability also includes £2.9m at 31 December 2009 (2008: £2.6m) in respect of continuing post-retirement healthcare insurance premiums for retired long-service employees. The liability is based upon the actuarial assessment of the remaining cost by a qualified actuary on a net present value basis at 31 December 2008.

The cost is calculated assuming a discount rate of 3.6% per annum (2008: 5.0%) and an increase in medical expenses of 10.0% per annum (2008: 10.0%). The premium cost to the Group in respect of the retired long-service employees for 2009 was £0.2m (2008: £0.2m).