- Financial Statements
Notes to the Consolidated Financial Statements
for the year to 31 December 2007
23. Retirement benefit schemes
Retirement benefit obligation comprises gross pension liability of £216.4m (2006: £205.9m) and gross post-retirement health care liability of £2.7m (2006: £2.7m).
The Group operates Defined Benefit and Defined Contribution pension schemes. In the UK the Taylor Woodrow Group Pension and Life Assurance Fund (TWGP&LAF), the George Wimpey Staff Pension Scheme (GWSPS) and the Taylor Woodrow NHS Pension Scheme (TWNHSPS) are funded Defined Benefit schemes. 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. With the exception of the TWNHSPS, the 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 Woodrow 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. Contributions of £11.2m (2006: £6.7m) were charged to income in respect of defined contributions schemes. The Group also operates a number of overseas pension schemes of the defined benefit and defined contribution type.
The pension scheme assets of TWGP&LAF, GWSPS and TWNHSPS 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, including at least one member by current pensioners.
The most recent formal actuarial valuation of the TWGP&LAF was carried out at 1 June 2004 and updated to 1 September 2004 to take account of subsequent mergers. The TWNHSPS commenced in December 2003 and the Actuary completed his initial valuation with an effective date of 31 December 2003. The most recent formal actuarial valuation of the GWSPS was carried out at 31 March 2005. 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, TWNHSPS and GWSPS are taking place at 1 June 2007, 31 December 2006 and 31 March 2008 respectively. These will be undertaken in accordance with new legislation and have not yet been completed.
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.
As part of the discussions with the Trustees of the TWGP&LAF around the closure of the scheme to future accrual, the Group has agreed to increase deficit reduction payments to £20m p.a. for 10 years. These payments will be reviewed at each valuation. The first such payment was made on 19 December 2006.
Following the valuation of the GWSPS as at 31 March 2005, the ordinary contribution rate increased to 15.7% of pensionable salaries. The Group has agreed with the trustees it will aim to eliminate the deficit over the next 16 years by means of contributions of £15m per annum paid monthly.
The contribution rate to the TWNHSPS has been agreed as 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 | TWNHSPS | GWSPS |
| RPI Inflation | 2.5% p.a. | 2.5% p.a. | 2.75% p.a. |
| Discount rate – pre/post retirement | 5.0/3.0% p.a. | 3.0/3.0% p.a. | 4.25/2.25% p.a. |
| General real pay inflation | N/A | 1.0% p.a. | 2.0% p.a. |
| Real pension Increases | 0% p.a. | 0% p.a. | 0% p.a. |
| Valuation results | TWGP&LAF | TWNHSPS | GWSPS |
| Market value of assets | £563.3m | £0.05m | £591.0m |
| Past service liabilities | £627.9m | £0.09m | £739.0m |
| Scheme funding levels | 90% | 58% | 80% |
The valuations of the Group’s pension schemes have been updated to 31 December 2007 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:
| UnitedKingdom | North America | |||
| 2007 | 2006 | 2007 | 2006 | |
| As at 31 December | ||||
| Discount rate for scheme liabilities | 5.80% | 5.10% | 5.30-5.80% | 5.0-5.7% |
| Expected return on scheme assets | 6.20-6.25% | 5.87% | 5.50-6.60% | 5.5-6.6% |
| General pay inflation | 4.60% | 2.75% | 2.60% | 3.5-4.0% |
| Deferred pension increases | 3.10% | 3.00% | 0% | 2.5-3.5% |
| Pension increases | 2.25-3.35% | 2.75% | 0-3.00% | 3.5-4.0% |
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:
| Life expectancy at age 65 | Male | Female |
| Member currently age 65 | 19.4 | 22.2 |
| Member currently age 45 | 20.3 | 23.1 |
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 2007 | |||||
| Assets: | |||||
| Equities | 8.1% | 488.0 | 8.3 | 496.3 | 35% |
| Bonds/Gilts | 5.8/4.6% | 836.0 | 4.4 | 840.4 | 58% |
| Other assets | 5.5% | 97.5 | – | 97.5 | 7% |
| 1,421.5 | 12.7 | 1,434.2 | 100% | ||
| Present value of defined benefit obligations | 1,638.7 | 11.9 | 1,650.6 | ||
| Surplus/(deficit)in schemes recognised as non-current liability | (217.2) | 0.8 | (216.4) | ||
| 31 December 2006 | |||||
| Assets: | |||||
| Equities | 8.0% | 346.9 | 7.5 | 354.4 | 47% |
| Bonds/Gilts | 5.1%/4.5% | 376.4 | 4.0 | 380.4 | 51% |
| Other assets | 5.12% | 14.7 | 0.2 | 14.9 | 2% |
| 738.0 | 11.7 | 749.7 | 100% | ||
| Present value of defined benefit obligations | (944.4) | (11.2) | (955.6) | ||
| Surplus/(deficit) in schemes recognised as non-current liability | (206.4) | 0.5 | (205.9) | ||
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 was 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 | 15% | 18% |
| Non-UK Equities | 30% | 12% |
| Index-Linked Gilts | 15% | 30% |
| Fixed-Interest Gilts | 10% | 20% |
| Other UK bonds | 25% | 20% |
| Property | 5% | 0% |
| 2007 £m |
2006 £m |
|
| Amount (charged against)/credited to income: | ||
| Current service cost | (5.1) | (10.3) |
| Curtailment gain | – | 2.4 |
| Settlement loss | – | (1.2) |
| Operating cost | (5.1) | (9.1) |
| Expected return on scheme assets | 66.1 | 40.1 |
| Interest cost on scheme liabilities | (69.9) | (42.8) |
| Finance charges | (3.8) | (2.7) |
| (8.9) | (11.8) |
Of the charge for the year, £1.0m (2006:£6.8m) has been included in cost of sales and £4.1m (2006: £3.5m) has been included in administrative expenses. The actual return on scheme assets was £53.4m (2006:£64.3m)
| 2007 £m |
2006 £m |
|
|---|---|---|
| Actuarial (losses)/gains in the statement of recognised income and expenses: | ||
| Difference between actual and expected return on scheme assets | (12.7) | 24.2 |
| Experience gains arising on scheme liabilities | 26.7 | 0.2 |
| Changes in assumptions | 77.3 | (26.0) |
| Total gains/(loss) recognised in the statement of recognised income and expense | 91.3 | (1.6) |
2007 £m |
2006 £m |
|
| Movement in present value of defined benefit obligations | ||
| 1 January | 955.6 | 925.9 |
| Changes in exchange rates | 0.4 | (1.6) |
| Service cost | 5.1 | 10.3 |
| Curtailment gain | – | (2.4) |
| Plan settlements | – | (5.9) |
| Benefits paid and expenses | (58.6) | (41.3) |
| Contributions | 1.2 | 2.0 |
| Interest cost | 69.9 | 42.8 |
| Acquisition of George Wimpey Plc | 781.0 | – |
| Actuarial (gains)/losses | (104.0) | 25.8 |
| 31 December | 1,650.6 | 955.6 |
| 2007 £m |
2006 £m |
|
| Movement in fair value of scheme assets | ||
| 1 January | 749.7 | 706.1 |
| Changes in exchange rates | 0.8 | (1.6) |
| Expected return on scheme assets and expenses | 63.6 | 36.7 |
| Contributions | 31.2 | 29.3 |
| Benefits paid | (56.1) | (37.9) |
| Plan settlements | – | (7.1) |
| Acquisition of George Wimpey Plc | 657.7 | – |
| Actuarial gains/(losses) | (12.7) | 24.2 |
| 31 December | 1,434.2 | 749.7 |
| 2007 £m |
2006 £m |
2005 £m |
2004 £m |
2003 £m |
|
| History of experience gains and losses: | |||||
| Fair value of scheme assets | 1,434.2 | 749.7 | 706.1 | 627.0 | 581.6 |
| Present value of defined benefit obligations | (1,650.6) | (955.6) | (925.9) | (769.5) | (764.7) |
| Deficit in the scheme | (216.4) | (205.9) | (219.8) | (142.5) | (183.1) |
| Difference between actual and expected return on scheme assets | |||||
| Amount | (12.7) | 24.2 | 61.4 | 22.0 | 44.9 |
| Percentage of scheme assets | 1% | 3% | 9% | 4% | 8% |
| Experience adjustments on scheme liabilities | |||||
| Amount | 26.7 | 0.2 | (32.6) | (6.5) | (43.6) |
| Percentage of scheme liabilities | 2.0% | 0.0% | 4.0% | 0.8% | 5.7% |
The estimated amounts of contributions expected to be paid to the TWGP&LAF during 2008 is £20.0m, to the GWSPS is £19.9m and to the TWNHSPS is £0.3m.
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 £m |
| Discount rate | Increase by 0.1% p.a. | Decrease by 25.2 |
| Rate of inflation | Increase by 0.1% p.a. | Increase by 23.3 |
| Rate of pay inflation | Increase by 0.1% p.a. | Increase by 1.6 |
| Rate of mortality | Members assumed to live 1 year longer | Increase by 45.7 |
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 £22m.
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 on-going liabilities of the scheme. The Group estimates the amount required to settle the schemes’ liabilities at the balance sheet date is £1,177m in excess of the assets held by the schemes.
The gross post-retirement liability also includes £2.7m at 31 December 2007 (2006: £2.7m) in respect of continuing post-retirement health care 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 2007. The cost is calculated assuming a discount rate of 5 per cent per annum and an increase in medical expenses of 10 per cent per annum. The premium cost to the Group in respect of the retired long-service employees for 2007 was £0.2m (2006:£0.2m).