Aviva 2006 Annual Report Download - page 184

Aviva plc
Annual Report and Accounts 2006 180
Notes to the consolidated financial statements continued
42 – Pension obligations
(a) Introduction
The Group operates a large number of pension schemes around the world, whose members receive benefits on either a defined
benefit basis (generally related to a member’s final salary and length of service) or a defined contribution basis (generally related to the
amount invested, investment return and annuity rates). The only material defined benefit schemes are in the UK, the Netherlands,
Canada and Ireland and, of these, the main UK scheme is by far the largest.
The assets of the main UK, Irish and Canadian schemes are held in separate trustee-administered funds to meet long-term pension
liabilities to past and present employees. In the Netherlands, the main scheme is held in a separate foundation which invests in the life
funds of the Group. In all schemes, the appointment of trustees of the funds is determined by their trust documentation, and they are
required to act in the best interests of the funds’ beneficiaries. The long-term investment objectives of the trustees and the employers
are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent
with an acceptable level of risk so as to control the long-term costs of these schemes.
An actuarial report has been submitted for each of the defined benefit schemes within the last three years, using appropriate methods
for the respective countries on local funding bases.
(b) Main UK scheme
In the UK, the Group operates two main pension schemes, the Aviva Staff Pension Scheme (ASPS) and the smaller RAC (2003) Pension
Scheme. New entrants join the defined contribution section of the ASPS, as the defined benefit section is closed to new employees.
This scheme is operated by a trustee company,with 11 trustee directors, comprising representatives of the employers, staff, pensioners
and an independent trustee (referred to below as the trustees).
(i) Defined benefit section of the ASPS
The Company works closely with the trustees who are required to consult it on the funding of the scheme and its investment strategy.
At 31 March 2005, the date of the last actuarial valuation, this section of the scheme had an excess of obligations over available assets.
The Company is currently discussing with the trustees the period over which it will aim to eliminate the funding deficit and will monitor
funding levels on an annual basis.
The employing companies’ contributions to the defined benefit section of the ASPS throughout 2006 were35% of employees’
pensionable salaries, together with the cost of redundancies during the year, and additional deficit funding payments totalling £200
million. As this section of the scheme is closed to new entrants and the contribution rate is determined using the projected unit credit
method, it is expected that the percentage cost of providing futureservice benefits will continue to increase as the membership ages,
leading to higher pension costs, and the number of members falls, leading to a higher charge per member. The employers’ contribution
rate for 2007 has therefore been increased to 37% of pensionable salaries (expected to be £120 million), pending finalisation of the April
2006 valuation. The Group is also expecting to make further contributions of some £400 million into the ASPS prior to March 2008.
Active members of this section of the ASPS contribute 5% of their pensionable salaries.
In 2005, the Group’s UK life business carried out an investigation into the allocation of costs in respect of funding the ASPS, to identify
the deficit that arose in respect of accruals prior to the introduction of the current management services agreements (MSAs) and to
propose a split between individual product companies based on an allocation of the deficit into pre-and post-MSA amounts. The results
of this review were updated during 2006 and agreed by the relevant company boards and accepted by the UK regulator. Consequently,
with effect from 1 January 2006, the Company’s UK with-profit product companies are liable for a share, currently 12%, of the additional
payments for deficit funding referred to above. This has resulted in a transfer of £130 million from the unallocated divisible surplus (UDS)
to the income statement, to reflect the position at the start of the year, and a movement of £30 million back to the UDS via the
statement of recognised income and expense to reflect actuarial movements in the deficit during the year and therefore a change in the
amount recoverable from the with-profit product companies.
For funding purposes, the scheme’s valuation as at 1 April 2006 is currently being completed, with the obligations calculated using the
Projected Unit Method (which is described below).
(ii) Defined contribution (money purchase) section of the ASPS
The trustees have responsibility for selecting a range of suitable funds in which the members can choose to invest and for monitoring the
performance of the available investment funds. Members are responsible for reviewing the level of contributions they pay and the choice
of investment fund to ensure these are appropriate to their attitude to risk and their retirement plans. The employers’ contribution rates
for members of the defined contribution section throughout 2006 were 8% of pensionable salaries, together with further contributions
up to 4% where members contribute, and the cost of the death-in-service benefits. These contribution rates are unchanged for 2007.
Financial statements continued