Notes to the financial statements
31 Retirement benefit obligations
Retirement benefit obligations relate to two funded defined benefit schemes, the J Sainsbury Pension and Death Benefit Scheme (“JSPDBS”) and the J Sainsbury Executive Pension Scheme (“JSEPS”) and an unfunded pension liability relating to senior employees. The defined benefit schemes were closed to new employees on 31 January 2002. The assets of these schemes are held separately from the Group’s assets.
The defined benefit schemes were subject to a triennial valuation carried out by Watson Wyatt, the schemes’ independent actuaries, at March 2006 on the projected unit basis. The results of this valuation are expected to be approved by the schemes’ trustees in June 2007. The retirement benefit obligations at 24 March 2007 has been calculated, where appropriate, on a basis consistent with this draft valuation.
The unfunded pension liability is unwound when each employee reaches retirement and takes their pension from the Group payroll or is crystallised in the event of an employee leaving or retiring and choosing to take the provision as a one-off cash payment. As part of the £350 million one-off contribution to the defined benefit schemes, the Group made the second tranche payment of £240 million on 19 May 2006 (2006: £110 million paid on 24 March 2006).
The amounts recognised in the balance sheet are as follows:
| 2007 £m |
2006 £m |
|
|---|---|---|
| Present value of funded obligations | (4,395) | (4,361) |
| Fair value of plan assets | 4,298 | 3,710 |
| (97) | (651) | |
| Present value of unfunded obligations | (6) | (7) |
| Retirement benefit obligations | (103) | (658) |
| Deferred income tax asset | 48 | 227 |
| Net retirement benefit obligations | (55) | (431) |
The retirement benefit obligations and the associated deferred income tax asset are shown within different line items on the face of the balance sheet.
The amounts recognised in the income statement are as follows:
| 2007 £m |
2006 £m |
|
|---|---|---|
| Current service cost – funded schemes | (76) | (68) |
| Current service cost – unfunded scheme | — | (1) |
| Past service cost | (11) | (12) |
| Included in employee costs (note 6) | (87) | (81) |
| Past service gains on defined benefit schemes (note 6) | 72 | — |
| Total included in employee costs | (15) | (81) |
| Interest cost on pension scheme liabilities | (212) | (190) |
| Expected return on plan assets | 253 | 213 |
| Total included in finance income (note 5) | 41 | 23 |
| Total income statement income/(expense) | 26 | (58) |
Of the expense recognised in operating profit, £11 million (2006: £65 million) is included in cost of sales and £4 million (2006: £16 million) is included in administrative expenses.
The actual return on pension scheme assets net of expenses was £342 million (2006: £644 million).
The amounts recognised in the statement of recognised income and expense are as follows:
| 2007 £m |
2006 £m |
|
|---|---|---|
| Net actuarial gains/(losses) recognised during the year |
179 | (255) |
| Cumulative actuarial gains/(losses) recognised | 52 | (127) |
The movements in the funded retirement benefit obligations are as follows:
| 2007 £m |
2006 £m |
|
|---|---|---|
| Beginning of year |
(4,361) | (3,503) |
| Current service cost | (76) | (68) |
| Past service cost | (11) | (12) |
| Past service gains (note 7) | 72 | — |
| Interest cost | (212) | (190) |
| Contributions by plan participants | (11) | (8) |
| Actuarial gains/(losses) | 90 | (683) |
| Benefits paid | 127 | 103 |
| Transfer from provisions (note 22) | (13) | — |
| End of year | (4,395) | (4,361) |
The movements in the fair value of plan assets are as follows:
| 2007 £m |
2006 £m |
|
|---|---|---|
| Beginning of year | 3,710 | 2,976 |
| Expected return on plan assets | 253 | 213 |
| Actuarial gains | 89 | 428 |
| Contributions by employer | 362 | 188 |
| Contributions by plan participants | 11 | 8 |
| Benefits paid | (127) | (103) |
| End of year | 4,298 | 3,710 |
The principal actuarial assumptions used at the balance sheet date are as follows:
| 2007 % |
2006 % |
|
|---|---|---|
| Discount rate | 5.3 | 4.9 |
| Expected return on plan assets | 6.6 | 6.6 |
| Future salary increases | 3.00 | 2.85 |
| Future pension increases | 2.35-3.00 | 2.50-2.85 |
A movement of 0.5 per cent in the discount rate would increase or decrease the retirement benefit obligations by £500 million.
The combined life expectancy for both the schemes operated at the balance sheet date for a pensioner at normal retirement age is as follows:
| 2007 years |
2006 years |
|
|---|---|---|
| Male pensioner |
21.4 | 19.3 |
| Female pensioner | 22.9 | 21.7 |
In line with the scheme’s experience and the generally observed trend amongst the population, a greater allowance for future longevity has been adopted in respect of the current mortality of pensioners. The effect of this change is to assume that a typical pensioner will live a further 0.9 years from normal retirement age. This allowance has had the impact of increasing the retirement benefit obligations by £196 million compared to using the previous mortality assumptions.
The profile of members and the salary and pension increase assumptions have been updated from the last triennial valuation. The impact of these changes is to reduce the retirement benefit obligations by £59 million. Movements in financial assumptions have resulted in a reduction in retirement benefit obligations of £108 million with a further actuarial gain on plan assets of £89 million.
Based on past experience, the Group has made the assumption that 80 per cent of the schemes’ members will elect to surrender one quarter of their pension for a cash lump sum payment. The impact of this commutation assumption is to reduce the retirement benefit obligations by £119 million.
These items have been recognised in the Group statement of recognised income and expense.
In addition, following changes introduced by the Finance Act effective from 6 April 2006, the defined benefit schemes have implemented revised terms to provide members with the option to surrender a greater proportion of their pension for a tax-free cash lump sum payment. The impact of this change and other minor changes to scheme rules has been to reduce retirement benefit obligations by £72 million. This change has resulted in past service gains of £72 million being recognised in the income statement (note 7).
The major categories of plan assets as a percentage of total plan assets are as follows:
| 2007 % |
2006 % |
|
|---|---|---|
| Equities |
52 | 62 |
| Bonds | 37 | 33 |
| Property | 4 | 4 |
| Other | 7 | 1 |
| 100 | 100 |
The expected return on assets has been derived as the weighted average of the expected returns from each of the main asset classes. The expected return for each asset class reflects a combination of historical performance analysis, the forward looking view of the financial markets (as suggested by the yield available) and the views of investment organisations.
The history of experience adjustments on the plans for the current and previous financial years is as follows:
| 2007 £m |
2006 £m |
2005 £m |
|
|---|---|---|---|
| Present value of retirement benefit obligations | (4,401) | (4,368) | (3,512) |
| Fair value of plan assets | 4,298 | 3,710 | 2,976 |
| Deficit | (103) | (658) | (536) |
| Experience loss on plan liabilities | (236) | (27) | (6) |
| Experience gain on plan assets | 89 | 428 | 134 |
The expected contributions to defined benefit schemes for the next financial year beginning 25 March 2007 are £105 million.