Tesco 2015 Annual Report Download - page 130

The fair value of share options is estimated at the date of grant using the Black-Scholes option pricing model. The following table gives the assumptions
applied to the options granted in the respective periods shown. No assumption has been made to incorporate the effects of expected early exercise.
2015 2014
SAYE Nil cost SAYE Nil Cost
Expected dividend yield (%) 2.4% 0.0% 4.6% 0.0%
Expected volatility (%) 22–24% 24% 21–23% 27%
Risk-free interest rate (%) 0.9 –1.3% 1.8% 1.2–1.8% 1.7%
Expected life of option (years) 3 or 5 6 3 or 5 6
Weighted average fair value of options granted (pence) 43.72 219.67 47.64 364.85
Probability of forfeiture (%) 14–16% 0% 14–16% 0%
Share price (pence) 187.0 0 219.67 362.00 364.85
Weighted average exercise price (pence) 150.00 0.00 322.00 0.00
Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in the Group’s option pricing
models is the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. In estimating the future
volatility of the Company’s share price, the Board considers the historical volatility of the share price over the most recent period that is generally
commensurate with the expected term of the option, taking into account the remaining contractual life of the option.
Share bonus schemes
Eligible UK colleagues are able to participate in Shares In Success, an all-employee profit-sharing scheme. Each year, shares may be awarded to colleagues
as a percentage of earnings, up to a statutory maximum of £3,600 per annum in 2014/15. Eligible Republic of Ireland colleagues are able to participate in
a Share Bonus Scheme, an all-employee profit-sharing scheme. Each year, colleagues receive an award of either cash or shares based on a percentage of
their earnings.
Selected executives participate in the Group Bonus Plan, a performance-related bonus scheme. The amount paid to colleagues is based on a percentage
of salary and is paid partly in cash and partly in shares. Bonuses are awarded to selected executives who have completed a required service period and
depend on the achievement of corporate and individual performance targets.
Selected executives participate in the Performance Share Plan (2011). Awards made under this plan will normally vest on the vesting date(s) set on the date
of the award for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets over a three-year performance
period and/or continuous employment.
The Executive Directors participate in short-term and long-term bonus schemes designed to align their interests with those of shareholders. Full details of
these schemes can be found in the Directors’ Remuneration Report.
The fair value of shares awarded under these schemes is their market value on the date of award. Expected dividends are not incorporated into the fair value.
The number and weighted average fair value (‘WAFV’) of share bonuses awarded during the financial year were:
2015 2014
Number of
shares
WAFV
pence
Number of
shares
WAFV
pence
Shares In Success 18,949,708 307.15 14,776, 516 383.55
Irish Share Bonus Scheme 84,454 292.00 96,668 384.55
Group Bonus Plan 2,808,053 285.43 598,842 375.18
Performance Share Plan 27,211,291 283.51 30,506,080 361.13
Note 26 Post-employment benefits
Pensions
The Group operates a variety of post-employment benefit arrangements, covering both funded and unfunded defined benefit schemes and funded defined
contribution schemes. The most significant of these are the funded defined benefit pension schemes for the Group’s employees in the UK, the Republic of
Ireland, Thailand and South Korea. Of these schemes, the UK represents 95% of the defined benefit deficit (2014: 95%).
Defined contribution plans
The contributions payable for defined contribution schemes of £24m (2014: £32m) have been recognised in the Group Income Statement.
Defined benefit plans
United Kingdom
The principal plan within the Group is the Tesco PLC Pension Scheme (the ‘Scheme’), which is a funded defined benefit pension scheme in the UK, the assets
of which are held as a segregated fund and administered by the Trustee.
The Scheme is established under trust law and has a corporate trustee that is required to run the Scheme in accordance with the Scheme’s Trust Deed and
Rules and to comply with the Pension Scheme Act 1993, Pensions Act 1995, Pensions Act 2004, Pensions Act 2014 and all the relevant legislation.
Responsibility for governance of the Scheme lies with the Trustee. The Trustee is a company whose directors comprise of:
a) representatives of the Group; and
b) the Scheme participants, in accordance with its articles of association and UK pension law.
All members are eligible to join the Career Average section of the Scheme (‘Pension Builder’), where benefits are based on a member’s salary and their length
of service. There is a Final Salary section of the Scheme which was closed to new entrants in 2001.
Following the year end, the Group has entered consultation on the closure of the UK defined benefit pension scheme to new entrants and future accrual.
This has had no impact on the results for the year ended 28 February 2015.
Note 25 Share-based payments continued
128 Tesco PLC Annual Report and Financial Statements 2015
Notes to the Group financial statements continued