21. Pensions and other post-employment benefits

Pension costs2014
£000
2013*
£000
UK defined benefit scheme1,3511,086
UK defined contribution schemes1,2981,258
Total charged to operating expenses (note 4)2,6492,344
Net interest included in other finance costs (note 9)485144
Total cost of pensions charged to income statement3,1342,488

* 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 are 2.2% p.a. to 3.6% p.a. and pension increases in deferment in respect of future retirees are 2.3% p.a. The members' share of the cost of the Scheme is 8% of pensionable salaries and is generally paid via a 'salary sacrifice' 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 prior year (see note 28). The pension cost associated with this scheme of £nil (2013: £41,000) have been reported within discontinued operations.

Present value
of obligation
£000
Fair value of
plan assets
£000
Total
£000
At 1 May 201391,276(79,510)11,766
Current service cost1,3511,351
Interest expense/(income)3,897(3,412)485
Amount charged/(credited) to the income statement5,248(3,412)1,836
Return on plan assets (excluding amounts included within interest)(940)(940)
Gain from changes in demographic assumptions(1,639)(1,639)
Gain from changes in financial assumptions(7,982)(7,982)
Amount credited to equity(9,621)(940)(10,561)
Contributions:
— employers(965)(965)
— plan participants2(2)
Payments from plans:
— benefit payments(1,299)1,299
At 30 April 201485,606(83,530)2,076
Present value
of obligation*
£000
Fair value of
plan assets*
£000
Total*
£000
At 1 May 201271,528(68,161)3,367
Current service cost1,0861,086
Interest expense/(income)3,544(3,400)144
Amount charged/(credited) to the income statement4,630(3,400)1,230
Return on plan assets (excluding amounts included within interest)(8,258)(8,258)
Loss from changes in financial assumptions16,41616,416
Amount charged/(credited) to equity16,416(8,258)8,158
Contributions:
— employers(989)(989)
— plan participants2(2)
Payments from plans:
— benefit payments(1,300)1,300
At 30 April 201391,276(79,510)11,766
Components of defined benefit pension cost2014
£000
2013*
£000
Current service cost1,3511,086
Net interest expense485144
Total defined benefit pension cost recognised in the income statement1,8361,230
Actuarial (gains)/losses immediately recognised(10,561)8,158
Total pension (income)/charge recognised in the statement of comprehensive income(10,561)8,158
Cumulative amount of actuarial losses immediately recognised7,23617,797

* Restated (see note 1).

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

The Scheme's 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:

20142013
Discount rate4.6% p.a.4.3% p.a.
Future RPI inflation3.3% p.a.3.3% p.a.
Future CPI inflation2.3% p.a.2.3% p.a.
Future salary increases3.3% p.a.3.8% p.a.
Rate of pension increases
RPI inflation capped at 5% p.a.3.2% p.a.3.2% p.a.
RPI inflation capped at 5% p.a. with a minimum of 3% p.a.3.6% p.a.3.6% p.a.
RPI inflation capped at 2.5% p.a.2.2% p.a.2.2% 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% p.a. (for which the Company has assumed future increases will be 3.2% p.a.). Some members receive fixed increases of 3% p.a. on pension accrued before 6 April 1997 and increases in line with inflation subject to a minimum of 3% p.a. and a maximum of 5% p.a. on pension accrued between 6 April 1997 and 30 April 2009 (for which the Company has assumed future increases will be 3.6% p.a.). For all members, pension accrued after 1 May 2009 receives increases in line with inflation subject to a maximum of 2.5% p.a. (for which the Company has assumed future increases will be 2.2% p.a.).

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 2011 and used a base table of 90% of the S1NA year of birth tables with a long term projection using the CMI 2009 projections and a long-term rate of improvement of 1.5% p.a.. The calculation of the Scheme's liabilities under IAS 19 (Revised) uses the same assumptions but with a long-term rate of improvement of 1.25% p.a..

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

20142013
Life expectancy at age 65MaleFemaleMaleFemale
Member currently aged 6523.125.623.625.9
Member currently aged 4524.927.525.928.2

The split of the pension scheme's investments between principal asset categories is as follows:

Asset fair value 2014Asset fair value 2013
Asset categoryTotal
assets
£000
Of which
quoted
£000
Total
%
Total
assets
£000
Of which
quoted
£000
Total
%
Debt instruments37,27344.633,61442.3
Equity instruments38,16213,04545.738,44512,60948.4
Hedge funds7,8437,8439.47,1407,1409.0
Cash2520.33110.4
Overall83,53020,888100.079,51019,749100.0

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 5.9%
Rate of inflation and salary increaseDecrease by 0.25% p.a.Decrease by 4.8%
Rate of inflation and salary increaseIncrease by 0.25% p.a.Increase by 5.1%
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 26% 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. Based on the last triennial valuation at 30 April 2011, 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's 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. The next actuarial valuation, which is being carried out as at 30 April 2014, is currently in progress and, as a result, the Group is unable to determine the specific contributions during the 2015 financial year. The weighted average duration of the defined benefit obligation is 24 years (2013: 27 years).

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.