Notes to the consolidated financial statements - supplementary information
31. Actuarial information on pensions and other post-retirement benefits
UK pension schemes
National Grid’s defined benefit pension schemes are funded with assets held in separate trustee administered funds. The schemes are subject to independent actuarial valuations at least every three years, on the basis of which the qualified actuary certifies the rate of employers’ contribution, which, together with the specified contributions payable by the employees and proceeds from the schemes’ assets, are expected to be sufficient to fund the benefits payable under the schemes.
National Grid UK Pension Scheme
The National Grid UK Pension Scheme provides final salary defined benefits for employees who joined prior to 31 March 2002 and defined contribution benefits for employees joining from 1 April 2002.
The latest full actuarial valuation was carried out by Watson Wyatt LLP as at 31 March 2007. The market value of the scheme’s assets was £12,923m and the value of the assets represented 97% of the actuarial value of benefits due to members, calculated on the basis of pensionable earnings and service at 31 March 2007 on an ongoing basis and allowing for projected increases in pensionable earnings. There was a funding deficit of £442m (£318m net of tax) on the valuation date in the light of which the Company agreed a recovery plan with the trustees.
The actuarial valuation showed that, based on long-term financial assumptions, the contribution rate required to meet future benefit accrual was 32.4% of pensionable earnings (29.4% employers and 3% employees). In addition, the employers pay an allowance for administration expenses which was 3.2% of pensionable earnings for 2008/09, giving a total Company rate of 32.6% of pensionable earnings. These contribution rates will be reviewed at the next valuation on 31 March 2010.
In accordance with the recovery plan agreed with the trustees at the 2007 valuation, the Company paid contributions of £295m (£212m net of tax) in the year to 31 March 2009 and a further payment of £59m (£42m net of tax) in April 2009 along with payments made in the previous year to ensure that the deficit reported at the 2007 valuation is paid in full.
Electricity Supply Pension Scheme
The Electricity Supply Pension Scheme is a funded scheme which is divided into sections, one of which is National Grid’s section. National Grid’s section of the scheme provides final salary defined benefits and was closed to new entrants on 1 April 2006.
The latest full actuarial valuation was carried out by Hewitt Associates as at 31 March 2007. The market value of the scheme’s assets was £1,345m and the value of the assets represented 77% of the actuarial value of benefits due to members, calculated on the basis of pensionable earnings and service at 31 March 2007 on an ongoing basis and allowing for projected increases in pensionable earnings. There was a funding deficit of £405m (£292m net of tax) on the valuation date in the light of which the Company agreed a recovery plan with the trustees.
The actuarial valuation showed that, based on long-term financial assumptions, the contribution rate required to meet future benefit accrual was 26.5% of pensionable earnings (20.5% employers and 6% employees). These contribution rates will be reviewed at the next valuation on 31 March 2010.
Following the 2007 actuarial valuation, the Company and the trustees agreed a recovery plan which will see the remaining deficit paid off by March 2017. The Company paid deficit repair contributions of £90m (£65m net of tax) in the year to 31 March 2009 and a further payment of £90m (£65m net of tax) in April 2009.
As part of the 2007 valuation, National Grid arranged for banks to provide the trustees with letters of credit, including triggers to bring forward payment of the outstanding deficit plus interest. The conditions under which payment of the outstanding deficit would be made are if National Grid Electricity Transmission plc (NGET) ceases to hold the licence granted under the Electricity Act 1989 or NGET’s credit rating by two out of three specified agencies falls below an agreed level for a period of 40 days.
US pension plans
National Grid’s defined benefit pension plans in the US provide annuity or lump sum payments for all vested employees. In addition, employees are provided with matched defined contribution benefits. The assets of the plans are held in separate trustee administered funds.
Employees do not contribute to the defined benefit plans. Employer contributions are made in accordance with the rules set out by the US Internal Revenue Code. These contributions vary according to the funded status of the plans and the amounts that are tax deductible. At present, there is some flexibility in the amount that is contributed on an annual basis. The policy for the New York plans, including the acquired KeySpan plans is to set the contribution amount equal to the amount that is collected in rates. These contributions are expected to meet the requirements of the Pension Protection Act of 2006.
US retiree healthcare and life insurance plans
National Grid provides healthcare and life insurance benefits to eligible retired US employees. Eligibility is based on certain age and length of service requirements and in most cases retirees contribute to the cost of their coverage.
In the US, there is no governmental requirement to pre fund post-retirement health and welfare plans. However, there may be requirements under the various state regulatory agreements to contribute to these plans. Depending upon the rate jurisdiction and the plan, the funding level may be: equal to the expense as determined under SFAS 106; equal to the amount collected in rates; equal to the maximum tax deductible contribution; or zero. These requirements may change as rate agreements are reset.
National Grid expects to contribute approximately £445m to the US pension and post-retirement benefit plans from 1 April 2009 to 31 March 2010, although this figure may vary due to changes in market conditions and regulatory recovery.
Asset allocations and actuarial assumptions
The major categories of plan assets as a percentage of total plan assets were as follows:
| UK pensions | US pensions | US other post-retirement benefits | |||||||||
| 2009 % |
2008 % |
2007 % |
2009 % |
2008 % |
2007 % |
2009 % |
2008 % |
2007 % |
|||
| Equities (i) | 35.2 | 35.9 | 35.8 | 50.4 | 60.6 | 63.7 | 63.7 | 63.1 | 68.5 | ||
| Corporate bonds (ii) | 32.7 | 25.0 | 18.6 | 42.3 | 33.6 | 33.5 | 34.2 | 32.3 | 31.1 | ||
| Gilts | 22.2 | 29.8 | 33.9 | – | – | – | – | – | – | ||
| Property | 5.4 | 6.7 | 8.5 | – | – | – | – | – | – | ||
| Other | 4.5 | 2.6 | 3.2 | 7.3 | 5.8 | 2.8 | 2.1 | 4.6 | 0.4 | ||
| Total | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | ||
- (i)
- Included within equities at 31 March 2009 were ordinary shares of National Grid plc with a value of £17m (2008: £24m; 2007: £24m).
- (ii)
- Included within corporate bonds at 31 March 2008 was an investment in a bond issued by a subsidiary undertaking with a value of £20m.
In respect of UK schemes, the expected long-term rate of return on assets has been set reflecting the price inflation expectation, the expected real return on each major asset class and the long-term asset allocation strategy adopted for each scheme. The expected real returns on specific asset classes reflect historical returns, investment yields on the measurement date and general future return expectations, and have been set after taking advice from the schemes’ actuaries. The current target asset allocation for the National Grid UK Pension Scheme is 34% equities, 58% bonds and 8% property and other. The current target asset allocation for National Grid’s section of the Electricity Supply Pension Scheme is 55% equities, 38% bonds, 7% property and other.
In respect of US plans, the estimated rate of return for various passive asset classes is based both on analysis of historical rates of return and forward-looking analysis of risk premiums and yields. Current market conditions, such as inflation and interest rates, are evaluated in connection with the setting of our long-term assumptions. A small premium is added for active management of both equity and fixed income. The rates of return for each asset class are then weighted in accordance with our target asset allocation. The long-term target asset allocation for the National Grid US pension plans is 60% equities, 40% bonds and cash. The long-term target asset allocation for other National Grid US post-retirement benefit plans is 67% equities and 33% bonds. The long-term target asset allocation for other KeySpan post-retirement benefit plans is 70% equities and 30% bonds and cash.
The principal actuarial assumptions used were:
| UK pensions | US pensions | US other post-retirement benefits | |||||||||
| 2009 % |
2008 % |
2007 % |
2009 % |
2008 % |
2007 % |
2009 % |
2008 % |
2007 % |
|||
| Discount rate (i) | 6.8 | 6.6 | 5.4 | 7.3 | 6.5 | 5.8 | 7.3 | 6.5 | 5.8 | ||
| Expected return on plan assets | 6.2 | 6.4 | 6.1 | 7.8 | 7.9 | 8.3 | 7.4 | 7.6 | 8.3 | ||
| Rate of increase in salaries (ii) | 3.8 | 4.6 | 4.2 | 3.5 | 4.0 | 4.1 | 3.5 | 4.0 | 4.1 | ||
| Rate of increase in pensions | |||||||||||
| in payment | 3.0 | 3.8 | 3.3 | – | – | – | n/a | n/a | n/a | ||
| Rate of increase in pensions | |||||||||||
| in deferment | 2.9 | 3.7 | 3.2 | – | – | – | n/a | n/a | n/a | ||
| Rate of increase in retail price | |||||||||||
| index or equivalent | 2.9 | 3.7 | 3.2 | 2.3 | 3.0 | 2.5 | n/a | n/a | n/a | ||
| Initial healthcare cost trend rate | n/a | n/a | n/a | n/a | n/a | n/a | 9.0 | 10.0 | 10.0 | ||
| Ultimate healthcare cost trend rate | n/a | n/a | n/a | n/a | n/a | n/a | 5.0 | 5.0 | 5.0 | ||
- (i)
- The discount rates for pension liabilities have been determined by reference to appropriate yields on high quality corporate bonds prevailing in the UK and US debt markets at the balance sheet date.
- (ii)
- A promotional age related scale has also been used where appropriate.
The assumed life expectations for a retiree at age 65 are:
| 2009 | 2008 | ||||
| UK years |
US years |
UK years |
US years |
||
| Today: | |||||
| Males | 21.0 | 18.2 | 20.9 | 18.2 | |
| Females | 23.3 | 20.5 | 23.1 | 20.5 | |
| In 20 years: | |||||
| Males | 23.3 | 18.2 | 23.2 | 18.2 | |
| Females | 25.6 | 20.5 | 25.4 | 20.5 | |
Sensitivities analysed – all other assumptions held constant:
| Change in pensions and other post-retirement obligation |
Change in annual pension cost |
||||
| 2009 £m |
2008 £m |
2009 £m |
2008 £m |
||
| 0.1% increase in discount rate | 233 | 251 | 4 | 4 | |
| 0.5% increase in long-term rate of increase in salaries | 116 | 131 | 5 | 5 | |
| Increase of one year to life expectations at age 60 | 541 | 588 | 5 | 4 | |
Assumed healthcare cost trend rates have a significant impact on the amounts recognised in the income statement. A one percentage point change in assumed healthcare cost trend rates would have the following effects:
| 2009 £m |
2008 £m |
2007 £m |
|
|---|---|---|---|
| Increase | |||
| Effect on the aggregate of the service costs and interest costs | 29 | 16 | 14 |
| Effect on defined benefit obligations | 294 | 251 | 170 |
| Decrease | |||
| Effect on the aggregate of the service costs and interest costs | (24) | (13) | (12) |
| Effect on defined benefit obligations | (254) | (214) | (147) |
The history of experience adjustments is as follows:
| 2009 £m |
2008 £m |
2007 £m |
2006 £m |
2005 £m |
|
|---|---|---|---|---|---|
| Details of experience gains/(losses) for all plans | |||||
| Present value of funded and unfunded obligations | (18,299) | (18,175) | (17,253) | (17,839) | (16,837) |
| Fair value of plan assets | 15,519 | 17,273 | 15,999 | 15,909 | 14,565 |
| (2,780) | (902) | (1,254) | (1,930) | (2,272) | |
| Difference between the expected and actual return on plan assets | (3,952) | (911) | (81) | 1,521 | 405 |
| Experience (losses)/gains on plan liabilities | (125) | 152 | 9 | 192 | 42 |
| Actuarial gains/(losses) on plan liabilities | 1,934 | 1,343 | 446 | (1,340) | (152) |