30 Post-retirement benefits

Pensions
The Group’s pension schemes are mainly of the defined benefit type and the assets of the schemes are held in separate trustee administered funds.

The pension cost relating to the UK schemes is assessed in accordance with SSAP 24 ‘Accounting for Pension Costs’, based on the advice of independent qualified actuaries using the projected unit method. The latest actuarial valuations of the principal schemes were as at March 31, 2004 (for the Vickers Group Pension Scheme), April 5, 2004 (for the Rolls-Royce Group Pension Scheme), and March 31, 2003 (for the Rolls-Royce Pension Fund). The principal assumptions used for the purpose of SSAP 24, were that in the long term the average returns on investments would be 2% per annum higher than the average increase in pay and 3.6% per annum higher than the average increase in pensions. Assets were valued on a market related basis for the Vickers Group Pension Scheme and the Rolls-Royce Group Pension Scheme and on an actuarial basis for the Rolls-Royce Pension Fund.

The pension cost relating to overseas schemes is calculated in accordance with local best practice and regulations.

The total pension cost for the Group was £123m (2003 £95m) of which £25m (2003 £23m) relates to overseas schemes.

The aggregate of the market values of the UK schemes at the dates of the latest actuarial valuations was £3,804m. The actuarial value of the assets of the principal schemes represented respectively 92% (for the Rolls-Royce Pension Fund), 79% (for the Vickers Group Pension Scheme) and 89% (for the Rolls-Royce Group Pension Scheme) of the value of the projected accrued liabilities.

The difference between the value of the assets and the value of the projected accrued liabilities of the three principal schemes (after allowing for expected future increases in earnings and pension increases) is being amortised over periods of between 8.5 and 12 years, being the average expected remaining service lives of the pensionable employees.

Prepayments of £263m (2003 £239m) are included in debtors and accruals of £22m (2003 £29m) are included in provisions for liabilities and charges, being the differences between the accumulated amounts paid into the pension funds and the accumulated pension costs.

Post-retirement benefits other than pensions
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. In the USA, 540 retired employees currently benefit from these provisions and it is estimated that 4,385 current employees will be eligible on retirement.

The cost of post-retirement benefits other than pensions for the Group was £15m (2003 £17m). Provisions for the benefit obligations at December 31, 2004 amounted to £124m (2003 £119m) and are included in provisions for liabilities and charges. There were no plan assets at either December 31, 2004 or December 31, 2003. The future costs of benefits are assessed in accordance with the advice of independent qualified actuaries and are based on a weighted average discount rate of 5.8% and a weighted average assumed healthcare costs trend rate of 8% grading down to 5% over seven years.

FRS 17 disclosures
The full implementation of FRS17 ‘Retirement Benefits’ has been deferred, however certain disclosures are required which are included below.

The valuations with respect to UK schemes have been based on the most recent actuarial valuation (as noted above) and updated by the scheme actuary to December 31, 2004 taking account of the requirements of FRS 17. For the material overseas defined benefit schemes the last formal actuarial valuations have been updated to December 31, 2004 by a qualified actuary taking account of the requirements of FRS 17.

The principal actuarial assumptions were as follows:
    2004   2003   2002
  UK
schemes
%		 Overseas
schemes
%1		 UK
schemes
%		 Overseas
schemes
%		 UK
schemes
%		 Overseas
schemes
%1
Rate of increase in salaries 4.4 2.4 4.3 2.8 3.8 2.9
Rate of increase of pensions in payment and deferment 2.6 0.2 2.6 0.2 2.3 0.4
Discount rate 5.3 5.7 5.4 6.1 5.5 6.6
Inflation assumption 2.9 2.8 2.8 2.7 2.3 2.9
1 Weighted average percentage.

The assets in the principal schemes and the expected rates of return at December 31 were as follows:
    2004
UK schemes		   2003
UK schemes		   2002
UK schemes
  Expected
long-term
rate of return
%		 Market value £m Expected
long-term
rate of return
%		 Market value
£m		 Expected
long-term
rate of return
%		 Market value
£m
Equities 7.6 3,007 8.3 2,884 8 2,524
Sovereign debt 4.6 699 4.8 692 4.4 644
Corporate bonds 5.1 644 5.1 580 5 492
Other 5.3 188 5.4 116 5.9 144
Total market value of assets — 4,538 — 4,272 — 3,804
Present value of scheme liabilities — (5,688) — (5,493) — (5,400)
Deficit in the schemes — (1,150) — (1,221) — (1,596)
Related deferred tax asset — 345 — 366 — 479
Net pension liability — (805) — (855) — (1,117)
 
    2004
Overseas schemes		   2003
Overseas schemes		   2002
Overseas schemes
  Expected
long-term
rate of return
%		 Market value
£m		 Expected
long-term
rate of return
%		 Market value
£m		 Expected
long-term
rate of return
%		 Market value
£m
Equities 8.3 99 8.3 86 9.4 63
Sovereign debt — — — — — —
Corporate bonds 5.6 58 5.7 49 6.5 45
Other 6.8 14 6.7 13 6.5 9
Total market value of assets — 171 — 148 — 117
Present value of scheme liabilities — (419) — (383) — (360)
Deficit in the schemes — (248)1 — (235)1 — (243)1
Related deferred tax asset — 77 — 79 — 85
Net pension liability — (171) — (156) — (158)
 
1 Provisions of £159m (2003 £160m, 2002 £158m) exist primarily for overseas post-employment benefits and pensions (see note 22).

Amounts charged to profit and loss account
    2004   2003
  UK
schemes
£m		 Overseas
schemes
£m		 UK
schemes
£m		 Overseas
schemes
£m
Operating profit
  Current service charge 75 19 81 19
  Gain resulting from curtailment (2) — (567)1 —
  73 19 (486) 19
Finance income
  Expected return on pension scheme assets (303) (11) (257) (10)
  Interest on pension scheme liabilities 292 23 292 25
  (11) 12 35 15
Total (credit)/charge 62 31 (451) 34
 
1 Results from agreed benefit reductions.

Movement in scheme deficits during the year
    2004   2003
  UK
schemes
£m		 Overseas
schemes
£m		 UK
schemes
£m		 Overseas
schemes
£m
At January 1 (1,221) (235) (1,596) (243)
Exchange adjustments — 14 — 18
Current service cost (75) (19) (81) (19)
Curtailment 2 — 567 —
Contributions 111 29 101 27
Finance income 11 (12) (35) (15)
Actuarial loss 22 (25) (177) (3)
At December 31 (1,150) (248) (1,221) (235)

History of experience gains and losses and amount recognised in statement of total recognised gains and losses
    2004   2003
  UK
schemes
£m		 Overseas
schemes
£m		 UK
schemes
£m		 Overseas
schemes
£m
Difference between the expected and actual return
on scheme assets
  Amount 130 2 350 10
  Percentage of scheme assets 3% 1% 8% 7%
Experience gains and losses on scheme liabilities
  Amount 59 10 (147) 14
  Percentage of the present value of scheme liabilities 1% 2% (3%) 4%
Effect of changes in assumptions underlying the present
value of scheme liabilities
  Amount (167) (37) (380) (27)
  Percentage of the present value of scheme liabilities (3%) (9%) (7%) (7%)
Exchange adjustments — 14 — 18
Total amount recognised in the statement of total
recognised gains and losses
  Amount 22 (11) (177) 15
  Percentage of the present value of scheme liabilities 0 (3%) (3%) 4%

Net assets
If the above net pensions liabilities had been recognised in the financial statements, the net assets and profit and loss reserve would be as follows:
  2004
£m		 Restated
2003
£m		 Restated
2002
£m
Net assets per balance sheet 2,307 2,143 2,034
Net pension liability (976) (1,011) (1,275)
Pension prepayment1 (186) (168) (143)
Provisions for pensions and other post retirement benefits2 107 104 101
Total FRS 17 pension adjustment (1,055) (1,075) (1,317)
Net assets under FRS 17 1,252 1,068 717
 
1 Pension prepayment currently recorded: Group £263m (2003 £239m, 2002 £204m) less related deferred tax liability of £77m (2003 £71m, 2002 £61m).
2 Provisions currently recorded £159m (2003 £160m, 2002 £158m) less related deferred tax asset of £52m (2003 £56m, 2002 £57m).

Profit and loss reserve
  2004
£m		 Restated
2003
£m		 Restated
2002
£m
Profit and loss reserve 1,787 1,707 780
Total FRS 17 pension adjustment (1,055) (1,075) (1,317)
Profit and loss reserve under FRS 17 732 632 (537)