7. Pension scheme funding

UK: The majority of pensions for UK employees are funded through the industry-wide scheme, the Electricity Supply Pension Scheme (ESPS) which is a defined benefit scheme with assets invested in separate trustee administered funds. The ESPS is divided into sections, and the International Power Group of ESPS was opened to members on 1 April 2002 and employees' past service rights were transferred into the Group later that year. For 2002 SSAP 24 disclosures, the pension expense was taken to be equal to the total contributions paid, as assets and liabilities in respect of members' pensionable service prior to 1 April 2002 were not transferred to the Group until late 2002. Pension costs for 2003 have been calculated using assumptions consistent with those used to assess the initial rate of contributions paid by the Group, and based on market conditions at the start of the accounting period. The pension cost for 2003 is £3.1 million, comprising £2.6 million regular cost and £0.5 million variation cost. The principal assumptions used to calculate these pension costs are set out below:

Pre-retirement investment return		6.5% pa
Post-retirement investment return		5.0% pa
Salary increases		3.8% pa
Pension increases in deferment		2.5% pa
Pension increases in payment		2.5% pa


The actuarial value of assets as at 31 March 2003, the date of the first formal actuarial valuation, was £33 million. The accrued liabilities valued on the projected unit method using assumptions set out below, were £43 million. The market value of assets was, therefore, 77% of accrued liabilities. Arrangements have been made to make good the past service deficit over the average future working lifetime of the membership (calculated to be approximately 12 years). The principal assumptions used for the 31 March 2003 valuation are:

Pre-retirement investment return		6.6% pa
Post-retirement investment return		5.1% pa
Salary increases		4.1% pa
Pension increases in deferment		2.7% pa
Pension increases in payment		2.7% pa


AUSTRALIA: Employees at Hazelwood participate in a standard Australian superannuation fund called Equipsuper. This plan provides benefits primarily for employees in the electricity, gas and water industry, and was developed from the scheme sponsored by the State Electricity Commission of Victoria. At 31 December 2003, the actuarial value of assets was 104% of accrued liabilities. The assets were £54 million and liabilities £52 million. The pension cost for 2003 was £2 million. The principal assumptions are set out below:
Valuation date		31 December
		2003
Principal assumptions:
Investment return		7.5% pa
Salary increases		5.0% pa
Pensions increases		n/a


In other countries employees are members of local social security schemes and in some cases defined contribution plans. The charge for 2003 in respect of defined contribution plans was £1 million.

FRS17 In accordance with the requirements of FRS 17 (Retirement Benefits), this note discloses the main financial assumptions made in valuing the liabilities of the schemes and the fair value of assets held. However, as permitted by FRS 17, the costs, accruals and prepayments recorded in the financial statements continue to be reported under the requirements of SSAP 24 (Accounting for Pension Costs). The valuation used for FRS 17 disclosures for the UK schemes has been based on the most recent actuarial valuations at 30 November 2001, 31 March 2002 and 31 March 2003, and updated by qualified independent actuaries to take account of the requirements of FRS 17 to assess the liabilities of the schemes at 31 December 2003. The Group operates a number of defined benefit schemes for employees of its overseas businesses. Full actuarial valuations of these schemes have been carried out within the last three years and results have been updated to 31 December 2003 by qualified independent actuaries. The assumptions used to calculate scheme liabilities under FRS 17 are:

	31 December 2003		31 December 2002		31 December 2001

	UK	Australia	UK	Australia	UK	Australia
	%	%	%	%	%	%
Financial assumptions
Discount rate	5.40	7.50	5.50	7.00	5.80	7.25
Rate of increase in salaries	4.30	4.00	3.80	4.00	4.00	4.00
Inflation rate	2.80	3.00	2.30	3.50	2.50	3.00
Increase to deferred benefits during deferment	2.90	n/a	2.50	n/a	2.60	n/a
Increases to pensions payments	2.90	n/a	2.50	n/a	2.60	n/a

The amounts required to be disclosed by FRS 17 in respect of the performance statements were:
Analysis of amounts that would have been charged to operating profit in respect of defined benefit schemes	Group 2003	Group 2002
	£m	£m
Current service	(5)	(3)
Past service cost	–	(1)

Total operating charge	(5)	(4)


Analysis of amounts that would have been credited to other finance income	Group 2003	Group 2002
	£m	£m
Expected return on schemes’ assets	5	5
Interest on schemes’ liabilities	(5)	(4)

Net return	–	1


Analysis of amounts that would have been recognised in the consolidated statement of total recognised gains and losses	Group 2003	Group 2002
	£m	£m
Actual return less expected return on schemes’ assets	5	(11)
Experience gains/(losses) arising on schemes’ liabilities	(3)	(1)
Changes in the assumptions underlying the present value of schemes’ liabilities	(7)	(5)
Currency translation adjustment	1	–

Actuarial loss recognised in the consolidated statement of total recognised gains and losses	(4)	(17)


History of experience gains and losses	Group 2003	Group 2002
Difference between the actual and expected return on schemes’ assets:
Amount (£m)	5	(11)
Percentage of schemes’ assets	5%	15%
Experience gains and losses on schemes’ liabilities:
Amount (£m)	(3)	(1)
Percentage of schemes’ liabilities	3%	1%
Total amount recognised in the consolidated statement of total recognised gains and losses:
Amount (£m)	(4)	(17)
Percentage of the present value of schemes’ liabilities	4%	22%


		31 December 2003			31 December 2002			31 December 2001
		UK	Australia		UK	Australia		UK	Australia
		%	%		%	%		%	%
The assets in the schemes and expected rates of return (weighted averages) were:
Long-term rate of return expected
Equities		7.8	7.6		7.0	7.5		7.4	7.5
Bonds		5.1	4.8		4.5	5.5		4.9	5.5
Other		6.6	6.1		4.8	5.5		–	5.5

	UK	Australia	Total	UK	Australia	Total	UK	Australia	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Assets in schemes
Equities	36	35	71	27	24	51	19	23	42
Bonds	5	14	19	4	12	16	16	12	28
Other	4	5	9	3	4	7	–	5	5

Total market value of assets	45	54	99	34	40	74	35	40	75
Present value of scheme liabilities	(58)	(50)	(108)	(43)	(36)	(79)	(39)	(25)	(64)

(Deficit)/surplus in the scheme	(13)	4	(9)	(9)	4	(5)	(4)	15	11
Related deferred tax asset/(liability)	4	(1)	3	3	(1)	2	1	(5)	(4)

Net pension (liability)/asset	(9)	3	(6)	(6)	3	(3)	(3)	10	7

Other assets principally comprise property and cash.

If the above amounts had been recognised in the financial statements, the Group‘s net assets and profit and loss reserve at 31 December would be as follows:

	Group	Group	Group
	2003	2002	2001
	£m	£m	£m
Net assets
Net assets excluding pension asset/(liability)	1,562	1,769	1,697
FRS 17 pension (liability)/asset	(6)	(3)	7

Net assets including FRS 17 pension (liability)/asset	1,556	1,766	1,704


Reserves
Profit and loss reserve excluding net pension (liability)/asset	113	330	260
Net pension (liability)/asset	(6)	(3)	7

Profit and loss reserve including FRS 17 pension (liability)/asset	107	327	267

	Group	Group
	2003	2002
	£m	£m
Movement in (deficit)/surplus during the year:
(Deficit)/surplus in the schemes at the beginning of the year	(5)	11
Current service cost	(5)	(3)
Contributions	5	4
Past service cost	–	(1)
Other finance income	–	1
Actuarial loss	(4)	(17)

Deficit in the schemes at the end of the year	(9)	(5)

7. Pension scheme funding

FRS17