3. Pension costs
Members of the Group sponsor a number of pension schemes in the UK and overseas, predominantly of the defined benefit type, whose assets are independent of the Group’s finances. Defined benefit pensions generally provide a pension of one-sixtieth of final pensionable salary for each year of service prior to retirement. Employees do not make contributions for basic pensions but may make voluntary contributions to secure additional benefits on a money-purchase basis. Since October 2006 The Royal Bank of Scotland Group Pension Fund (‘Main scheme’) has been closed to new entrants.
The Group also provides post-retirement benefits other than pensions, principally through subscriptions to private healthcare schemes in the UK and the US and unfunded post-retirement benefit plans. Provision for the costs of these benefits is charged to the income statement over the average remaining future service lives of eligible employees. The amounts are not material.
Interim valuations of the Group’s schemes were prepared to 31 December by independent actuaries, using the following assumptions:
| Main scheme | All schemes | |||||
| Principal actuarial assumptions at 31 December | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 |
| weighted average | ||||||
| Discount rate | 5.3% | 4.8% | 5.4% | 5.3% | 4.8% | 5.4% |
| Expected return on plan assets (weighted average) | 6.9% | 6.5% | 6.7% | 6.9% | 6.5% | 6.8% |
| Rate of increase in salaries | 4.2% | 4.0% | 4.0% | 4.1% | 3.9% | 3.9% |
| Rate of increase in pensions in payment | 2.9% | 2.7% | 2.7% | 2.8% | 2.6% | 2.7% |
| Inflation assumption | 2.9% | 2.7% | 2.7% | 2.9% | 2.7% | 2.7% |
| Main scheme | All schemes | |||||
| Major classes of plan assets as a percentage of total plan assets | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 |
| Equities | 60.5% | 61.3% | 56.7% | 60.7% | 61.6% | 57.2% |
| Index-linked bonds | 17.3% | 18.1% | 16.5% | 16.1% | 16.8% | 15.3% |
| Government fixed interest bonds | 2.5% | 1.8% | 2.1% | 3.3% | 2.6% | 2.8% |
| Corporate and other bonds | 14.0% | 14.6% | 12.5% | 13.9% | 14.6% | 12.7% |
| Property | 4.3% | 3.6% | 3.1% | 4.5% | 3.7% | 3.2% |
| Cash and other assets | 1.4% | 0.6% | 9.1% | 1.5% | 0.7% | 8.8% |
Ordinary shares of the company with a fair value of £89 million (2005 – £78 million; 2004 – £73 million), are held by the Group’s pension schemes; £87 million (2005 – £76 million; 2004 – £71 million) in the Main scheme which also holds other financial instruments issued by the Group with a value of £258 million (2005 – £299 million; 2004 – £726 million).
The expected return on plan assets at 31 December is based upon the weighted average of the following assumed returns on the major classes of plan assets:
| Main scheme | All schemes | |||||
| 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |
| Equities | 8.1% | 7.7% | 8.1% | 8.1% | 7.7% | 8.1% |
| Index-linked bonds | 4.5% | 4.1% | 4.5% | 4.5% | 4.1% | 4.5% |
| Government fixed interest bonds | 4.5% | 4.1% | 4.5% | 4.5% | 4.1% | 4.5% |
| Corporate and other bonds | 5.3% | 4.8% | 5.4% | 5.3% | 4.8% | 5.4% |
| Property | 6.3% | 5.9% | 6.3% | 6.3% | 5.9% | 6.3% |
| Cash and other assets | 4.6% | 4.2% | 4.6% | 4.4% | 3.7% | 4.5% |
The expected return on Main scheme assets at 31 December 2004 was adjusted to reflect the investment, in early January 2005, of payments made to the fund on 31 December 2004 and included as cash and other assets at that date.
| Post-retirement mortality assumptions (Main scheme) | 2006 | 2005 | 2004 |
| Longevity at age 60 for current pensioners (years) | |||
| Males | 26.0 | 25.4 | 25.4 |
| Females | 28.9 | 28.2 | 28.2 |
| Longevity at age 60 for future pensioners (years) | |||
| Males | 26.8 | 26.2 | 26.2 |
| Females | 29.7 | 29.0 | 29.0 |
| Main scheme | All schemes | |||||
| Changes in value of net pension liability | Fair value of plan assets £m |
Present value of defined benefit obligations £m |
Net pension liability £m |
Fair value of plan assets £m |
Present value of defined benefit obligations £m |
Net pension liability £m |
| At 1 January 2005 | 13,569 | 16,051 | 2,482 | 14,798 | 17,738 | 2,940 |
| Currency translation and other adjustments | — | — | — | 26 | 26 | — |
| Income statement | ||||||
| Expected return | 930 | (930) | 1,017 | (1,017) | ||
| Interest cost | 865 | 865 | 953 | 953 | ||
| Current service cost | 447 | 447 | 522 | 522 | ||
| Past service cost | 3 | 3 | 4 | 4 | ||
| 930 | 1,315 | 385 | 1,017 | 1,479 | 462 | |
| Statement of recognised income and expense: | ||||||
| Actuarial gains and losses | 1,556 | 2,273 | 717 | 1,660 | 2,459 | 799 |
| Disposal of subsidiaries | — | — | — | — | (14) | (14) |
| Contributions by employer | 380 | (380) | 452 | (452) | ||
| Contributions by plan participants | — | — | 4 | 4 | ||
| Benefits paid | (504) | (504) | (550) | (550) | ||
| Expenses included in service cost | (17) | (17) | (19) | (19) | ||
| At 1 January 2006 | 15,914 | 19,118 | 3,204 | 17,388 | 21,123 | 3,735 |
| Currency translation and other adjustments | — | — | — | (59) | (65) | (6) |
| Income statement | ||||||
| Expected return | 1,022 | (1,022) | 1,073 | (1,073) | ||
| Interest cost | 918 | 918 | 985 | 985 | ||
| Current service cost | 571 | 571 | 645 | 645 | ||
| Past service cost | 15 | 15 | 23 | 23 | ||
| 1,022 | 1,504 | 482 | 1,073 | 1,653 | 580 | |
| Statement of recognised income and expense: | ||||||
| Actuarial gains and losses | 552 | (1,077) | (1,629) | 587 | (1,194) | (1,781) |
| Contributions by employer | 427 | — | (427) | 536 | — | (536) |
| Benefits paid | (515) | (515) | — | (538) | (538) | — |
| Expenses included in service cost | (26) | (26) | — | (28) | (28) | — |
| At 31 December 2006 | 17,374 | 19,004 | 1,630 | 18,959 | 20,951 | 1,992 |
The Group expects to contribute £464 million to its defined benefit pension schemes in 2007 (Main scheme – £408 million). Of the net pension liability, £106 million (2005 – £104 million) relates to unfunded schemes.
Cumulative net actuarial losses of £619 million (2005 – £2,400 million; 2004 – £1,601 million) have been recognised in the statement of recognised income and expense, of which £521 million (2005 – £2,150 million; 2004 – £1,433 million) relate to the Main scheme.
| Main scheme | All schemes | |||||||
| History of defined benefit schemes | 2006 £m |
2005 £m |
2004 £m |
2003 £m |
2006 £m |
2005 £m |
2004 £m |
2003 £m |
| Present value of defined benefit obligations | 19,004 | 19,118 | 16,051 | 13,594 | 20,951 | 21,123 | 17,738 | 14,898 |
| Fair value of plan assets | 17,374 | 15,914 | 13,569 | 11,797 | 18,959 | 17,388 | 14,798 | 12,862 |
| Net deficit | 1,630 | 3,204 | 2,482 | 1,797 | 1,992 | 3,735 | 2,940 | 2,036 |
| Experience losses on plan liabilities | (4) | (41) | (624) | (19) | (68) | (631) | ||
| Experience gains on plan assets | 552 | 1,556 | 392 | 587 | 1,660 | 408 | ||
| Actual return on pension schemes assets | 1,574 | 2,486 | 1,230 | 1,660 | 2,677 | 1,328 | ||
© 2007