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Defined benefit schemes
The Group operates a number of defined benefit schemes. For the UK defined benefit schemes, the assets are held in separate trustee administered funds, and employees are entitled to retirement benefits based on their final salaries and length of service.
Overseas defined benefit schemes are a mixture of funded and unfunded plans. Additionally in the USA, and to a lesser extent in some other countries, the Group's employment practices include the provision of healthcare and life insurance benefits for retired employees. These schemes are unfunded.
The valuations of the schemes are based on the most recent funding valuations, updated by the scheme actuaries to December 31, 2005. The most recent funding valuations of the main UK schemes were:
Rolls-Royce Pension Fund - March 31, 2003
Rolls-Royce Group Pension Scheme - April 5, 2004
Vickers Group Pension Scheme - March 31, 2004
The principal actuarial assumptions used at the balance sheet date were as follows:
| 2005 | 2004 | ||||
|---|---|---|---|---|---|
| UK schemes % |
Overseas schemes % |
UK schemes % |
Overseas schemes % |
||
| Rate of increase in salaries | 4.4 | 3.4 | 4.4 | 2.4 | |
| Rate of increase of pensions in payment | 2.61 | 0.2 | 2.6 | 0.2 | |
| Discount rate | 4.7 | 5.3 | 5.3 | 5.7 | |
| Expected rate of return on scheme assets | 6.2 | 7.0 | 6.6 | 7.3 | |
| Inflation assumption | 2.9 | 2.6 | 2.9 | 2.8 | |
- Benefits accruing after April 5, 2005 are assumed to increase in payment at a rate of 2.1 per cent.
The mortality assumptions used for the Rolls-Royce Pension Fund (the largest scheme in the Group) are based upon actual recent mortality experiences of members within the scheme and also allow for future mortality improvements.
The future costs of healthcare benefits are based on an assumed healthcare costs trend rate of nine per cent grading down to five per cent over seven years.
Amounts recognised in the income statement:
| 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|
| UK schemes £m |
Overseas schemes £m |
Total £m |
UK schemes £m |
Overseas schemes £m |
Total £m |
||
| Operating cost | |||||||
| Current service cost | 79 | 22 | 101 | 75 | 19 | 94 | |
| Past service cost | — | 8 | 8 | — | — | — | |
| Curtailment/settlement | — | — | — | (2) | — | (2) | |
| 79 | 30 | 109 | 73 | 19 | 92 | ||
| Finance income expense | |||||||
| Expected return on assets | (298) | (14) | (312) | (303) | (11) | (314) | |
| Interest on liabilities | 295 | 26 | 321 | 292 | 23 | 315 | |
| (3) | 12 | 9 | (11) | 12 | 1 | ||
| Total income statement charge | 76 | 42 | 118 | 62 | 31 | 93 | |
The actual return on scheme assets was £900m (2004 £440m).
The operating cost is charged as follows:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Cost of sales | 77 | 65 |
| Commercial and administrative costs | 25 | 21 |
| Research and development | 7 | 6 |
Actuarial losses of £282m (2004 £7m) have been reported in the statement of recognised income and expense. Cumulative actuarial losses from January 1, 2004 reported in the statement of recognised income and expense are £289m (2004 £7m).
Amounts recognised in the balance sheet:
| 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|
| UK schemes £m |
Overseas schemes £m |
Total £m |
UK schemes £m |
Overseas schemes £m |
Total £m |
||
| Present value of funded obligations | (6,661) | (296) | (6,957) | (5,688) | (219) | (5,907) | |
| Fair value of scheme assets | 5,343 | 220 | 5,563 | 4,527 | 171 | 4,698 | |
| (1,318) | (76) | (1,394) | (1,161) | (48) | (1,209) | ||
| Present value of unfunded obligations | — | (263) | (263) | — | (200) | (200) | |
| Irrecoverable surplus | — | (2) | (2) | — | — | — | |
| Net liability recognised in the balance sheet | (1,318) | (341) | (1,659) | (1,161) | (248) | (1,409) | |
Changes in present value of defined benefit obligations:
| 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|
| UK schemes £m |
Overseas schemes £m |
Total £m |
UK schemes £m |
Overseas schemes £m |
Total £m |
||
| At January 1 | (5,688) | (419) | (6,107) | (5,493) | (383) | (5,876) | |
| Exchange adjustments | — | (49) | (49) | — | 20 | 20 | |
| Current service cost | (79) | (22) | (101) | (75) | (19) | (94) | |
| Past service cost | — | (8) | (8) | — | — | — | |
| Finance cost | (295) | (26) | (321) | (292) | (23) | (315) | |
| Contributions | (35) | (1) | (36) | (33) | (2) | (35) | |
| Net benefits paid out | 253 | 13 | 266 | 270 | 13 | 283 | |
| Actuarial loss | (817) | (53) | (870) | (108) | (25) | (133) | |
| Settlements/curtailment | — | 6 | 6 | 43 | — | 43 | |
| At December 31 | (6,661) | (559) | (7,220) | (5,688) | (419) | (6,107) | |
The defined benefit obligation relating to post-retirement medical benefits would increase by £23m if the healthcare trend rate increases by one per cent, and reduce by £41m if it decreases by one per cent.
Changes in fair value of scheme assets:
| 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|
| UK schemes £m |
Overseas schemes £m |
Total £m |
UK schemes £m |
Overseas schemes £m |
Total £m |
||
| At January 1 | 4,527 | 171 | 4,698 | 4,262 | 148 | 4,410 | |
| Exchange adjustments | — | 22 | 22 | — | (3) | (3) | |
| Expected return on assets | 298 | 14 | 312 | 303 | 11 | 314 | |
| Contributions - employer | 146 | 31 | 177 | 112 | 30 | 142 | |
| Contributions - employee | 35 | 1 | 36 | 33 | 2 | 35 | |
| Benefits paid out | (253) | (13) | (266) | (270) | (13) | (283) | |
| Actuarial gain/(loss) | 590 | (2) | 588 | 128 | (2) | 126 | |
| Settlements/curtailment | — | (6) | (6) | (41) | (2) | (43) | |
| At December 31 | 5,343 | 218 | 5,561 | 4,527 | 171 | 4,698 | |
The fair value of the scheme assets in the principal schemes and the expected rates of return at December 31 were as follows:
UK schemes:
| 2005 | 2004 | ||||
|---|---|---|---|---|---|
| Expected rate of return % |
Market value £m |
Expected rate of return % |
Market value £m |
||
| Equities | 7.1 | 3,654 | 7.6 | 2,998 | |
| Sovereign debt | 4.1 | 565 | 4.6 | 699 | |
| Corporate bonds | 4.5 | 978 | 5.1 | 642 | |
| Other | 4.3 | 146 | 5.3 | 188 | |
| 5,343 | 4,527 | ||||
Overseas schemes:
| 2005 | 2004 | ||||
|---|---|---|---|---|---|
| Expected rate of return % |
Market value £m |
Expected rate of return % |
Market value £m |
||
| Equities | 8.6 | 131 | 8.3 | 99 | |
| Corporate bonds | 4.5 | 72 | 5.6 | 58 | |
| Other | 4.6 | 17 | 6.8 | 14 | |
| 220 | 171 | ||||
The scheme assets do not include any of the Group's own financial instruments, nor any property occupied by, or other assets used by, the Group.
The expected rates of return on individual categories of scheme assets are determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the schemes' investment portfolios.
History of plans
The history of the plans for the current and prior years is as follows:
Balance sheet:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Present value of defined benefit obligation | (7,220) | (6,107) |
| Fair value of scheme assets | 5,561 | 4,698 |
| Deficit | (1,659) | (1,409) |
Experience gains/losses:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Actuarial gain on scheme assets | 588 | 126 |
| Experience losses on scheme liabilities | (870) | (133) |
| Total amount recognised in the statement of recognised income and expense | (282) | (7) |
In accordance with the transitional provisions for the amendments to IAS 19 Employee Benefits in December 2004, the disclosures above are determined prospectively from 2004.
The Group expects to contribute approximately £180m to its defined benefit schemes in 2006.
Defined contribution schemes
The Group operates a number of defined contribution schemes.
The total expense recognised in the income statement was £14m (2004 £10m).