The Group operates a number of defined benefit and defined contribution retirement plans throughout the world. For the defined benefit plans, benefits are based on employees’ length of service and final pensionable pay. Defined contribution benefits are based on the amount of contributions paid in respect of an individual member, the investment returns earned and the amount of pension this money will buy when a member retires.
The largest plan is the Pearson Group Pension Plan (‘UK Group plan’) with both defined benefit and defined contribution sections. From 1 November 2006, all sections of the UK Group plan were closed to new members with the exception of a defined contribution section that was opened in 2003. This section is available to all new employees of participating companies. The other major defined benefit plans are based in the US.
Other defined contribution plans are operated principally overseas with the largest plan being in the US. The specific features of these plans vary in accordance with the regulations of the country in which employees are located.
Pearson also has several post-retirement medical benefit plans (PRMBs), principally in the US. PRMBs are unfunded but are accounted for and valued similarly to defined benefit pension plans.
The principal assumptions used for the UK Group plan and the US PRMB are shown below. Weighted average assumptions have been shown for the other plans, which primarily relate to US pension plans.
| % | 2010 | 2009 | ||||
|---|---|---|---|---|---|---|
| UK Group plan | Other plans | PRMB | UK Group plan | Other plans | PRMB | |
| Inflation | 3.5 | 2.5 | 2.5 | 3.5 | 2.5 | 2.5 |
| Rate used to discount plan liabilities | 5.5 | 5.1 | 5.1 | 5.7 | 5.3 | 5.5 |
| Expected return on assets | 6.0 | 6.6 | – | 6.0 | 6.8 | – |
| Expected rate of increase in salaries | 4.7 | 4.0 | – | 5.0 | 4.0 | – |
| Expected rate of increase for pensions in payment and deferred pensions | 2.6 to 4.4 | – | – | 2.6 to 4.4 | – | – |
| Initial rate of increase in healthcare rate | – | – | 8.0 | – | – | 8.5 |
| Ultimate rate of increase in healthcare rate | – | – | 5.0 | – | – | 5.0 |
The UK discount rate is based on the annualised yield on the iBoxx over 15-year AA-rated corporate bond index, adjusted to reflect the duration of liabilities. The US discount rate is set by reference to a US bond portfolio matching model. The expected return on assets is based on market expectations of long-term asset returns for the defined portfolio at the end of the year.
The inflation rate of 3.5% reflects the RPI rate. In line with changes to legislation certain benefits have been calculated with reference to CPI as the inflationary measure and in these instances a rate of 2.8% has been used. The change from RPI to CPI for deferred revaluation and Post 88 GMP pension increases in payment has been included in these results, resulting in a gain of £23m, taken as an actuarial gain on the obligation.
The expected rates of return on categories of plan assets are determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the plan’s investment portfolio, plus a diversification premium.
The expected rate of increase in salaries has been set at 4.7% for 2010 with a short-term assumption of 3.3% for two years.
In 2008 the UK mortality assumptions were derived by adjusting standard mortality tables (PMFA 92 tables projected forward with medium cohort improvement factors). In 2009 the Group changed its mortality assumptions in the UK. The mortality base table assumptions have been derived from the SAPS ‘all pensioners’ tables for males and the SAPS ‘normal health pensioners’ tables for females, adjusted to reflect the observed experience of the plan, with medium cohort improvement factors. In 2008 a 1% improvement floor on the medium cohort was applied. In 2009 this was changed to 1.5% for males and 1.25% for females, with tapering.
For the US plans, the assumptions used were based on standard US mortality tables. In 2008 a switch from GAM94 to RP2000 was made, to reflect the mortality assumption now more prevalent in the US, and in 2010 a 10 year projection was added.
Using the above tables, the remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date for the UK and US Group plans is as follows:
| UK | US | |||
|---|---|---|---|---|
| 2010 | 2009 | 2010 | 2009 | |
| Male | 22.8 | 22.7 | 18.4 | 17.6 |
| Female | 23.6 | 23.5 | 20.6 | 20.2 |
The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, for the UK and US Group plans is as follows:
| UK | US | |||
|---|---|---|---|---|
| 2010 | 2009 | 2010 | 2009 | |
| Male | 25.4 | 25.3 | 18.4 | 17.6 |
| Female | 25.7 | 25.6 | 20.6 | 20.2 |
The amounts recognised in the income statement are as follows:
| All figures in £ millions | 2010 | |||||
|---|---|---|---|---|---|---|
| UK Group plan | Defined benefit other | Sub-total | Defined contribution | PRMB | Total | |
| Current service cost | 21 | 2 | 23 | 68 | 2 | 93 |
| Curtailments | (5) | – | (5) | – | – | (5) |
| Total operating expense | 16 | 2 | 18 | 68 | 2 | 88 |
| Expected return on plan assets | (93) | (7) | (100) | – | – | (100) |
| Interest on plan liabilities | 100 | 9 | 109 | – | 3 | 112 |
| Net finance expense | 7 | 2 | 9 | – | 3 | 12 |
| Net income statement charge | 23 | 4 | 27 | 68 | 5 | 100 |
| Actual return on plan assets | 177 | 13 | 190 | – | – | 190 |
| All figures in £ millions | 2009 | |||||
|---|---|---|---|---|---|---|
| UK Group plan | Defined benefit other | Sub-total | Defined contribution | PRMB | Total | |
| Current service cost | 14 | 3 | 17 | 62 | 2 | 81 |
| Past service cost | – | 1 | 1 | – | – | 1 |
| Total operating expense | 14 | 4 | 18 | 62 | 2 | 82 |
| Expected return on plan assets | (83) | (5) | (88) | – | – | (88) |
| Interest on plan liabilities | 89 | 8 | 97 | – | 3 | 100 |
| Net finance expense | 6 | 3 | 9 | – | 3 | 12 |
| Net income statement charge | 20 | 7 | 27 | 62 | 5 | 94 |
| Actual return on plan assets | 136 | 8 | 144 | – | – | 144 |
Included within the 2010 results are discontinued operations of £5m relating to the curtailment credit, a £1m charge relating to defined benefit schemes and a £2m charge relating to defined contribution schemes (2009: £2m charge relating to defined benefit schemes and £2m charge relating to defined contribution schemes).
The amounts recognised in the balance sheet are as follows:
| All figures in £ millions | 2010 | 2009 | ||||||
|---|---|---|---|---|---|---|---|---|
| UK Group plan | Other funded plans | Other unfunded plans | Total | UK Group plan | Other funded plans | Other unfunded plans | Total | |
| Fair value of plan assets | 1,847 | 135 | – | 1,982 | 1,609 | 118 | – | 1,727 |
| Present value of defined benefit obligation | (1,852) | (158) | (20) | (2,030) | (1,798) | (151) | (18) | (1,967) |
| Net pension liability | (5) | (23) | (20) | (48) | (189) | (33) | (18) | (240) |
| Other post-retirement medical benefit obligation | (72) | (65) | ||||||
| Other pension accruals | (28) | (34) | ||||||
| Net retirement benefit obligations | (148) | (339) | ||||||
| Analysed as: | ||||||||
| Retirement benefit assets | – | – | ||||||
| Retirement benefit obligations | (148) | (339) |
The following gains/(losses) have been recognised in other comprehensive income:
| All figures in £ millions | 2010 | 2009 |
|---|---|---|
| Amounts recognised for defined benefit plans | 75 | (295) |
| Amounts recognised for post-retirement medical benefit plans | (5) | (4) |
| Total recognised in year | 70 | (299) |
| Cumulative amounts recognised | (176) | (246) |
The fair value of plan assets comprises the following:
| % | 2010 | 2009 | ||||
|---|---|---|---|---|---|---|
| UK Group plan | Other funded plans | Total | UK Group plan | Other funded plans | Total | |
| Equities | 27.0 | 3.3 | 30.3 | 27.4 | 2.4 | 29.8 |
| Bonds | 49.3 | 2.7 | 52.0 | 47.2 | 2.1 | 49.3 |
| Properties | 11.2 | 0.1 | 11.3 | 9.4 | 0.0 | 9.4 |
| Other | 5.6 | 0.8 | 6.4 | 10.4 | 1.1 | 11.5 |
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:
| All figures in £ millions | 2010 | 2009 | ||||
|---|---|---|---|---|---|---|
| UK Group plan | Other plans | Total | UK Group plan | Other plans | Total | |
| Fair value of plan assets | ||||||
| Opening fair value of plan assets | 1,609 | 118 | 1,727 | 1,478 | 100 | 1,578 |
| Exchange differences | – | 4 | 4 | – | (6) | (6) |
| Expected return on plan assets | 93 | 7 | 100 | 83 | 5 | 88 |
| Actuarial gains | 84 | 6 | 90 | 53 | 3 | 56 |
| Contributions by employer | 132 | 13 | 145 | 64 | 26 | 90 |
| Contributions by employee | 3 | – | 3 | 3 | – | 3 |
| Benefits paid | (74) | (13) | (87) | (72) | (10) | (82) |
| Closing fair value of plan assets | 1,847 | 135 | 1,982 | 1,609 | 118 | 1,727 |
| Present value of defined benefit obligation | ||||||
| Opening defined benefit obligation | (1,798) | (169) | (1,967) | (1,429) | (165) | (1,594) |
| Exchange differences | – | (5) | (5) | – | 14 | 14 |
| Current service cost | (21) | (2) | (23) | (14) | (3) | (17) |
| Past service cost | – | – | – | – | (1) | (1) |
| Curtailment | 5 | – | 5 | – | – | – |
| Interest cost | (100) | (9) | (109) | (89) | (8) | (97) |
| Actuarial losses | (9) | (6) | (15) | (335) | (16) | (351) |
| Contributions by employee | (3) | – | (3) | (3) | – | (3) |
| Benefits paid | 74 | 13 | 87 | 72 | 10 | 82 |
| Closing defined benefit obligation | (1,852) | (178) | (2,030) | (1,798) | (169) | (1,967) |
Changes in the value of the US PRMB are as follows:
| All figures in £ millions | 2010 | 2009 |
|---|---|---|
| Opening defined benefit obligation | (65) | (68) |
| Exchange differences | (2) | 8 |
| Current service cost | (2) | (2) |
| Interest cost | (3) | (3) |
| Actuarial losses | (5) | (4) |
| Benefits paid | 5 | 4 |
| Closing defined benefit obligation | (72) | (65) |
The history of the defined benefit plans is as follows:
| All figures in £ millions | 2010 | 2009 | 2008 | 2007 | 2006 |
|---|---|---|---|---|---|
| Fair value of plan assets | 1,982 | 1,727 | 1,578 | 1,853 | 1,633 |
| Present value of defined benefit obligation | (2,030) | (1,967) | (1,594) | (1,811) | (1,810) |
| Net pension (liability)/asset | (48) | (240) | (16) | 42 | (177) |
| Experience adjustments on plan assets | 90 | 56 | (268) | 29 | 74 |
| Experience adjustments on plan liabilities | (15) | (351) | 194 | 50 | 28 |
The UK Group plan is self-administered with the plan’s assets being held independently of the Group. The trustees of the plan are required to act in the best interest of the plan’s beneficiaries. The most recent triennial actuarial valuation for funding purposes was completed as at 1 January 2009 and this valuation revealed a funding shortfall. The Group has agreed that the funding shortfall will be eliminated by 31 December 2020. In 2010 the Group contributed £41m (2009: £42m) towards the funding shortfall and has agreed to contribute a similar amount per annum until 2020 in excess of regular contributions. Regular contributions to the plan are estimated to be £22m for 2011.
Under UK law (section 75 debt) a company that participates in a multi-employer defined benefit plan is liable, on withdrawal from that pension plan, for its share of the total deficit in the plan calculated on a ‘solvency’ or ‘buy out’ basis. The Interactive Data sale and the termination of Interactive Data Corporation (Europe) Ltd’s participation in the UK Group plan triggered this ‘section 75’ liability. £68m was contributed to the plan in respect of this liability.
The Group expects to contribute $94m in 2011 and $97m in 2012 to its US pension plans.
The net retirement benefit obligations are calculated using a number of assumptions, the most significant being the discount rate used to calculate the defined benefit obligation. The effect of a one percentage point increase and decrease in the discount rate on the defined benefit obligation and the total pension expense is as follows:
| All figures in £ millions | 2010 | |
|---|---|---|
| 1% increase | 1% decrease | |
| Effect on: | ||
| (Decrease)/increase in defined benefit obligation – UK Group plan | (262.0) | 324.0 |
| (Decrease)/increase of aggregate of service cost and interest cost – UK Group plan | (13.7) | 16.3 |
| (Decrease)/increase in defined benefit obligation – US plan | (2.5) | 1.3 |
The effect of members living one year more or one year less on the defined benefit obligation is as follows:
| All figures in £ millions | 2010 | |
|---|---|---|
| 1 year increase | 1 year decrease | |
| Effect on: | ||
| Increase/(decrease) in defined benefit obligation – UK Group plan | 52.7 | (50.5) |
| Increase/(decrease) in defined benefit obligation – US plan | 1.6 | (1.7) |
The effect of a one percentage point increase and decrease in the assumed medical cost trend rates is as follows:
| All figures in £ millions | 2010 | |
|---|---|---|
| 1% increase | 1% decrease | |
| Effect on: | ||
| Increase/(decrease) in post-retirement medical benefit obligation | 3.1 | (2.8) |
| Increase/(decrease) of aggregate of service cost and interest cost | 0.1 | (0.1) |