Aviva 2007 Annual Report Download - page 203
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Please find page 203 of the 2007 Aviva annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.46 – Pension obligations continued
(d) Charges to the income statement
The total pension costs of the Group’s defined benefit and defined contribution schemes were:
2007 2006
£m £m
UK defined benefit schemes 137 150
UK defined contribution schemes 44 51
Overseas defined benefit schemes 54 63
Overseas defined contribution schemes 19 20
254 284
There were no significant contributions outstanding or prepaid as at either 31 December 2007 or 2006.
(e) 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.
Including the deficit funding in the UK schemes discussed above, total employer contributions for these schemes in 2008
are expected to be £568 million.
(i) Assumptions on scheme liabilities
The projected unit credit method
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.
Alternative measurement methods
There are alternative 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 future salary increases) or on a solvency
basis, using the cost of buy out benefits at a particular date. A buy-out valuation will almost always be the highest
estimate of the pension deficit, as it assumes that the entire liability will be settled in one payment, with all obligations
transferred to an insurance company. However, there are only a limited number of organisations that would be able to buy
out the pension liabilities in schemes of the size and geographical spread of those in our Group, and they would naturally
seek to make a profit on the transaction. The full buy-out cost would only be known if quotes were obtained from such
organisations but, to illustrate the cost of a buy-out valuation, an estimate for the main UK scheme is that the year end
liabilities of £7.2 billion could be valued some £3.7 billion higher, at £10.9 billion.
IAS 19 requires us to use the projected unit credit method to measure our pension scheme liabilities. Neither of the
alternative methods is considered appropriate in presenting fairly the Group’s obligations to the members of its pension
schemes on an ongoing basis, so they are not considered further.
Valuations and assumptions
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
2007. The updating was made by actuaries in each country who, other than the actuary of the Aviva Staff Pension
Scheme and Dutch arrangements, were independent of the Group. Scheme assets are stated at their fair values at
31 December 2007.
The main actuarial assumptions used to calculate scheme liabilities under IAS 19 are:
UK Netherlands Canada Ireland
2007 2006 2007 2006 2007 2006 2007 2006
Inflation rate 3.4% 3.1% 2.0% 1.9% 2.5% 2.5% 2.5% 2.25%
General salary increases 5.2% 4.9% 3.0% 2.4%* 3.75% 3.75% 4.25% 4.0%
Pension increases 3.4% 3.1% 2.0/2.4%** 1.9% 1.25% 1.25% 2.4% 2.15%
Deferred pension increases 3.4% 3.1% 2.0/2.4%** 1.9% ––2.4% 2.15%
Discount rate 5.8% 5.1% 5.5% 4.6% 5.25% 5.0% 5.6% 4.7%
Basis of discount rate AA-rated AA-rated Eurozone AA-rated AA-rated Eurozone
corporate bonds corporate bonds corporate bonds corporate bonds
* Age-related scale increases plus 3% (2006: 2.4%).
** 2.0% until 2011 and 2.4% thereafter (2006: 1.9% and 1.9% respectively).
The discount rate and inflation rate are the 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 £1.5 billion.
Aviva plc
Annual Report and
Accounts 2007
199
Financial
statements