21. Pensions and other post-employment benefits

Pension costs2016
£000
2015
£000
UK and overseas defined benefit scheme1,4791,257
UK defined contribution schemes3,3672,309
Total charged to operating expenses (note 4)4,8463,566
Net interest included in other finance income (note 9)667144
Total cost of pensions charged to income statement5,5133,710

During the year, the Group operated five pension schemes: one in the UK, one in Italy and three in Germany. Pension benefits are provided by defined benefit schemes, whereby retirement benefits are based on employee pensionable remuneration and length of service, and by defined contribution schemes, whereby retirement benefits are determined by the value of funds arising from contributions paid in respect of each employee.

The Group's UK defined benefit pension scheme, the Bespak plc Staff Retirement Benefits Scheme ("Bespak") was closed to new entrants with effect from 30 June 2002. As at 30 April 2016, the IAS 19 'Employee Benefits' deficit was £23.4m compared with £17.8m as at 30 April 2015. The movement was primarily due to lower return on plan assets and a review of other actuarial assumptions. The scheme was closed with effect from 31 March 2016 via a deed of amendment between the Group and the Trust. Following the scheme closure, all former active members became deferred members, and the provision of pension benefits was migrated to a defined contribution pension scheme which is also available to new employees. The accrued pension for active members will remain linked to their future salary, and so the closure did not have any impact on the accrued benefit obligation. The incremental costs of £0.3m in relation to the closure of the scheme have been classified as special items.

The Group also operated four additional defined benefit pension schemes during the year, three of which were operated by Aesica Pharmaceuticals GmbH in Germany and one which was operated by Aesica Pharmaceuticals Srl in Italy. The four schemes are the Retirement Benefit Obligations Scheme (the "RBO"), the Early Retirement Scheme (the "ATZ"), the Long Term Service Scheme (the "Jubilee") and the Aesica Italy Scheme. The ATZ Scheme is now closed as there are no further liabilities. The RBO Scheme is closed to new members whereas the Jubilee Scheme continues to be open to all employees of Aesica Pharmaceuticals GmbH. The Aesica Italy Scheme is open to all employees of Aesica Pharmaceuticals Srl and Consort Medical Srl. These schemes had a total net IAS 19 deficit of £3.8m at 30 April 2016.

In relation to Bespak, increases to pensions in payment and in deferment in respect of future service are capped at 2.5% p.a. The members' share of the cost of the scheme is 8% of pensionable salaries, which is generally paid via a "salary sacrifice" arrangement. The Group meets the full cost of accrual, but members receive a reduction in their salary equal to their share of the cost of the scheme. Members have the right to opt out of this arrangement if they wish to receive their full salary and not contribute to the scheme, in which case the Group's contributions to the scheme are reduced.

Contributions to each of the Group's defined benefit schemes are determined in accordance with the advice of an independent, professionally qualified actuary. Pension costs of defined benefit schemes for accounting purposes have been assessed in accordance with independent actuarial advice, using the projected unit credit method. Liabilities are assessed annually in accordance with the advice of an independent actuary. Formal, independent, actuarial valuations of the Group's defined benefit scheme are undertaken, normally every three years.

The disclosures below are an aggregate of the Bespak and Aesica schemes.

Present
value of
obligation
£000
Fair value
of plan
assets
£000
Total
£000
At 1 May 2015116,201(95,054)21,147
Current service cost1,4791,479
Interest expense/(income) (note 9)4,038(3,371)667
Amount charged/(credited) to the income statement5,517(3,371)2,146
Return on plan assets (excluding amounts included within interest)5,7285,728
Effect of demographic adjustments(568)(568)
Gain from changes in financial assumptions2151216
Amount credited to equity(353)5,7295,376
Contributions:
– employers(102)(1,674)(1,776)
– plan participants1(1)
Payments from plans:
– benefit payments(2,189)2,183(6)
Effects of foreign exchange rates339(69)270
At 30 April 2016119,414(92,257)27,157
At 1 May 201485,606(83,530)2,076
Acquisition of subsidiary4,305(961)3,344
Current service cost1,2571,257
Interest expense/(income)3,969(3,825)144
Amount charged/(credited) to the income statement5,226(3,825)1,401
Return on plan assets (excluding amounts included within interest)(7,081)(7,081)
Effect of experience adjustments(850)(850)
Loss from changes in financial assumptions23,70323,703
Amount credited to equity22,853(7,081)15,772
Contributions:
– employers(61)(1,385)(1,446)
– plan participants2(2)
Payments from plans
– benefit payments(1,730)1,730
At 30 April 2015116,201(95,054)21,147
Components of defined benefit pension cost2016
£000
2015
£000
Current service cost1,4791,257
Net interest expense667144
Total defined benefit pension cost recognised in the income statement2,1461,401
Actuarial losses immediately recognised5,37615,772
Total pension expense recognised in the statement of comprehensive income5,37615,772
Cumulative amount of actuarial losses immediately recognised28,38423,008

Explanation of the relationship between Consort Medical plc and the trustees of the schemes

The assets of each scheme are held in separate trustee-administered funds to meet long-term pension liabilities to past and present employees. The trustees of the schemes are required to act in the best interests of the schemes' beneficiaries. The Bespak scheme has a policy that one-third of all trustees should be nominated by members of the scheme, whilst there is no such provision for the Aesica GmbH or Italy schemes.

Disclosure of principal assumptions

The principal actuarial assumptions adopted at the balance sheet date were:

AesicaBespak
Italy
2016
RBO &
Jubilee
2016
Italy
2015
RBO &
Jubilee
2015
20162015
Discount rate1.9% p.a.1.8% p.a.1.6% p.a.1.5% p.a.3.4% p.a.3.6% p.a.
Inflation assumption1.5% p.a.*2.0% p.a.2.0% p.a.*2.0% p.a.n/an/a
Future RPI inflationn/an/an/an/a3.1% p.a.3.2% p.a.
Future CPI inflationn/an/an/an/a2.1% p.a.2.2% p.a.
Future salary increasesn/a2.5% p.a.n/a2.5% p.a.2.6% p.a.3.2% p.a.
Rate of pension increases
RPI inflation capped at 5% p.a.n/an/an/an/a3.0% p.a.3.1% p.a.
RPI inflation capped at 5% p.a. with a minimum of 3% p.a.n/an/an/an/a3.4% p.a.3.5% p.a.
RPI inflation capped at 2.5% p.a.n/an/an/an/a2.2% p.a.2.2% p.a.

* Applies to the RBO scheme only.

The IAS 19 accounting standard 'Employee Benefits' requires that the discount rate used be determined by reference to market yields at the balance sheet date on high-quality fixed income investments. The currency and term of these should be consistent with the currency and estimated term of the post-employment obligations.

Bespak

The discount rate has been developed from a spot yield curve based on UK Government bonds, adjusted to reflect the credit spread between AA-rated corporate bonds and Government bonds.

The expected rate of inflation is an important building block for the salary growth and pension increase assumption. A rate of inflation is "implied" by the difference between the yields on fixed-interest and index-linked Government bonds.

For the majority of members, pension accrued before 6 April 1997 does not receive any guaranteed increases and it is assumed that no discretionary increases will be awarded. Pension accrued between 6 April 1997 and 30 April 2009 receives increases in line with inflation subject to a maximum of 5% per annum (for which the Company has assumed future increases will be 3.1% per annum). Some members receive fixed increases of 3% per annum on pension accrued before 6 April 1997 and increases in line with inflation subject to a minimum of 3% per annum and a maximum of 5% per annum on pension accrued between 6 April 1997 and 30 April 2009 (for which the Company has assumed future increases will be 3.5% per annum). For all members, pension accrued after 1 May 2009 receives increases in line with inflation subject to a maximum of 2.5% per annum (for which the Company has assumed future increases will be 2.2% per annum).

One of the key assumptions made in valuing the pension scheme's liabilities is the mortality rates used to assess how long pensions will be paid for. The mortality rates used to calculate the scheme's liabilities were updated as part of the scheme's actuarial valuation in 2014 to reflect the results of surveys. These mortality tables are referred to as 95% (males)/85% (females) of the S2PA tables with improvements assumed to be in line with the CMI_2013 model with a 1.25% p.a. long-term rate of improvement.

The current life expectancies (in years) underlying the value of the accrued liabilities for the Bespak scheme are:

20162015
Life expectancy at age 65MaleFemaleMaleFemale
Member currently aged 6522.925.823.225.7
Member currently aged 4524.827.825.027.6

The split of the pension scheme's investments between principal asset categories is as follows:

20162015
Asset categoryTotal
assets
Of which
quoted
%Total
assets
Of which
quoted
%
Debt instruments43,13547.242,33045.2
Equity instruments40,26312,76544.142,79913,64545.7
Hedge funds8,3513428.9
Cash and cash equivalents7,9218.71940.2
Overall91,31912,76510093,67413,987100.0

Sensitivity analysis of the principal assumptions used to measure the Bespak and Aesica scheme liabilities

The sensitivity of each scheme's liabilities to changes in the principal assumptions used to measure these liabilities is illustrated below. The illustrations consider the single change shown with the other assumptions assumed to be unchanged. In practice, changes in one assumption may be accompanied by offsetting changes in another assumption (this is not always the case).

The Group liability is the difference between the schemes' liabilities and the schemes' assets. Certain changes in the assumptions will be as a result of changes in market yields. Where this is the case, the market value of schemes' assets may change simultaneously, which may or may not offset the change in assumptions. For example, a fall in interest rates will increase each scheme's liability, but may also trigger an offsetting increase in the market value of assets so that the net effect on the Group liability is reduced.

Bespak
Assumption
Change in assumptionImpact on scheme's accrued liabilities
Discount rateDecrease by 0.25% p.a.Increase by 6.0%
Rate of inflation and salary increaseDecrease by 0.25% p.a.Decrease by 5.9%
Rate of inflation and salary increaseIncrease by 0.25% p.a.Increase by 6.3%
Rate of mortalityMembers assumed to live one year longerIncrease by 2.5%
Aesica schemes
Assumption
Change in assumptionImpact on schemes' accrued liabilities
Discount rateIncrease by 0.5% p.a.Decrease by 7.5%
Discount rateDecrease by 0.5% p.a.Increase by 8.3%
Rate of inflation and salary increaseDecrease by 0.5% p.a.Decrease by 5.4%
Rate of inflation and salary increaseIncrease by 0.5% p.a.Increase by 5.9%

How the liabilities arising from the Bespak scheme are measured

The Group provides retirement benefits via the Bespak scheme to some of its former employees and approximately 30% of current UK employees. The level of retirement benefit is principally based on salary earned in the final three years of employment and period of service as a scheme member.

The projected liabilities of the scheme are apportioned between members' past and future service using the projected unit actuarial cost method. The deficit in the consolidated balance sheet is the difference between the projected liability allocated to past service (the defined benefit obligation) and the market value of the assets of the scheme. The defined benefit obligation makes allowance for future earnings growth.

An alternative measure of liability is the cost of buying out benefits at the balance sheet date with a suitable insurer. This amount represents the amount that would be required to settle the scheme liabilities at the balance sheet date rather than the Group continuing to fund the ongoing liabilities of the scheme. The latest estimate of the amount required to settle the scheme's liabilities was calculated as part of the triennial valuation at 30 April 2014. This indicated that the amount required was £66.3m in excess of the assets held by the scheme.

Future funding obligations in relation to the Bespak scheme

The trustees have selected a funding target based on the scheme being closed to new members, with the link to final salaries being maintained. The agreed funding objective is to reach, and then maintain, assets equal to 100% of the value of the projected past service liabilities, assessed on an ongoing basis, allowing for future salary increases for active members.

The most recently completed triennial actuarial valuation of the scheme was performed by an independent actuary for the trustees of the scheme and was carried out as at 30 April 2014. In September 2015, the Company and the Trustees agreed the actuarial valuation deficit of £13.8m. As part of that agreement, the Company agreed to make deficit recovery contributions at the rate of £1.5m per annum until 2028.

The weighted average duration of the defined benefit obligation is 24 years (2015: 24 years). The next triennial valuation is expected to take place with an effective date no later than 30 April 2017.

Nature and extent of the risks arising from financial instruments held by the Bespak scheme

The expected return on the scheme's assets is based on market expectations at the beginning of the financial year for returns over the life of the related obligation. The expected yield on bond investments with fixed interest rates can be derived exactly from their market value. Some of these bond investments are issued by the UK Government and the risk of default on these is very small. The trustees also hold bond investments issued by public companies. There is a more significant risk of default on these which is assessed by various rating agencies. The trustees also have a substantial holding of equity and hedge fund investments, with a target of 60% of the scheme's assets being invested in these funds. The investment return related to these is variable, and they are generally considered much "riskier" investments. It is generally accepted that the yield on these investments will contain a premium ("the equity risk premium") to compensate investors for the additional risk of holding this type of investment. There is significant uncertainty about the likely size of this risk premium.

The majority of the equities held by the scheme are in international blue-chip entities. The aim is to hold a globally diversified portfolio of equities, with a target of 22% of equities being held in the UK, 27% in the rest of Europe, 20% in North American equities, 10% in each of Japanese and Pacific Basin equities and 11% in emerging markets.

As part of the investment strategy review, the trustees, in conjunction with the Group, have carried out an asset-liability review for the scheme. These studies are used to assist the trustees and the Group in determining the optimal long-term asset allocation with regard to the structure of liabilities within the scheme. The results of the study are used to assist the trustees in managing the volatility in the underlying investment performance and the risk of a significant increase in the scheme's deficit by providing information used to determine the pension scheme's investment strategy.