Aviva 2006 Annual Report Download - page 185

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 181
42 – Pension obligations continued
(c) Charges to the income statement
The total pension costs of the Group’s defined benefit and defined contribution schemes were:
2006 2005
£m£m
UK defined benefit schemes 150 141
UK defined contribution schemes 51 33
Overseas defined benefit schemes 63 17
Overseas defined contribution schemes 20 14
284 205
There were no significant contributions outstanding or prepaid as at either 31 December 2006 or 2005.
(d) IAS 19 disclosures
Disclosures under IAS 19 for the material defined benefit schemes in the UK, the Netherlands, Canada and Ireland are given below.
Where schemes provide both defined benefit and defined contribution pensions, the assets and liabilities shown exclude those relating
to defined contribution pensions.
Excluding the deficit funding in the UK schemes discussed above, total employer contributions for these schemes in 2007 are expected
to be £270 million.
(i) Assumptions on scheme liabilities
The inherent uncertainties affecting the measurement of scheme liabilities require these to be measured on an actuarial basis.
This involves discounting the best estimate of future cash flows to be paid out by the scheme using the projected unit credit method.
This is an accrued benefits valuation method which calculates the past service liability to members and makes allowance for their
projected future earnings. It is based on a number of actuarial assumptions, which vary according to the economic conditions of the
countries in which the relevant businesses are situated, and changes in these assumptions can materially affect the measurement of the
pension obligations.
Therearealternative methods of measuring liabilities, for example by calculating an accumulated benefit obligation (the present value
of benefits for service already rendered but with no allowance for futuresalary increases) or on a solvency basis, using the cost of buying
out benefits at a particular date with a suitable insurer. However, neither of these is considered appropriate in presenting fairly the Group’s
obligations to the members of its pension schemes on an ongoing basis.
The valuations used for accounting under IAS 19 have been based on the most recent full actuarial valuations, updated to take account
of that standard’s requirements in order to assess the liabilities of the material schemes at 31 December 2006. The updating was made
by actuaries in each country who, other than the actuary of the Aviva StaffPension Scheme and Dutch arrangements, wereindependent
of the Group. Scheme assets are stated at their fair values at 31 December 2006.
The main actuarial assumptions used to calculate scheme liabilities under IAS 19 are:
UK Netherlands Canada Ireland
2006 2005 2006 2005 2006 2005 2006 2005
Inflation rate 3.1% 2.8% 1.9% 1.4% 2.5% 2.5% 2.25% 2.0%
General salary increases 4.9% 4.6% 2.4%*1.4%* 3.75% 3.75% 4.0% 3.75%
Pension increases 3.1% 2.8% 1.9% 1.4% 1.25% 1.25% 2.15% 1.9%
Deferred pension increases 3.1% 2.8% 1.9% 1.4% 0% 0% 2.15% 1.9%
Discount rate 5.1% 4.8% 4.6% 4.0% 5.0% 5.0% 4.7% 4.2%
Basis of discount rate AA-rated AA-rated AA-rated AA-rated Eurozone
corporate bonds corporate bonds corporate bonds corporate bonds
*Age-related scale increases plus 2.4% (2005: 1.4%).
The discount rate and inflation rate arethe two assumptions that have the largest impact on the value of the liabilities, with the
difference between them being known as the net discount rate. For each country, the discount rate is based on current average
yields of high quality debt instruments taking account of the maturities of the defined benefit obligations. A 1% increase in this rate
(and therefore the net discount rate) would reduce the liabilities by £1.7 billion.