Aviva 2009 Annual Report Download - page 232

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Aviva plc Notes to the consolidated financial statements continued
Annual Report and Accounts 2009
47 – Pension obligations continued
In 2006, 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 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 up to a total of £130 million. This has resulted in movements between
the unallocated divisible surplus (UDS) and retained earnings via the statement of comprehensive income of £24 million in 2009
(2008: £78 million) to reflect actuarial movements in the deficit during the year and therefore a change in the amount recoverable
from the with-profit product companies.
(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 up to 30 June 2009 were 8% of pensionable
salaries, together with further contributions up to 4% where members contributed, and the cost of the death-in-service benefits.
With effect from 1 July 2009, members of this section have contributed at least 1% of their pensionable salaries and, depending
on the percentage chosen, the Company’s contribution has increased up to a maximum 14%. These contribution rates are
unchanged for 2010.
(d) Charges to the income statement
The total pension costs of the Group’s defined benefit and defined contribution schemes were:
2009 2008
£m £m
UK defined benefit schemes 84 115
Overseas defined benefit schemes 103 60
Total defined benefit schemes (note 10b) 187 175
UK defined contribution schemes
Overseas defined contribution schemes
53 46
20 19
Total defined contribution schemes (note 10b) 73
260 240
There were no significant contributions outstanding or prepaid as at either 31 December 2007, 2008 or 2009.
(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. Total employer contributions for these schemes in 2010, including the ASPS deficit
funding, are expected to be £565 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 securing the benefits at a particular date with an insurance company or one of the growing market of alternative buy-out
providers. This could take the form of a buy-out, in which the entire liability will be settled in one payment with all obligations
transferred to an insurance company or buy-out provider, or a buy-in, in which annuities or other insurance products are purchased
to cover a part or all of the liability. A valuation of the liabilities in either of these cases will almost always result in a higher
estimate of the pension deficit than under an ongoing approach, as they assume that the sponsor immediately transfers the
majority, if not all, of the risk to another provider who would be seeking to make a profit on the transaction. However, there are
only a limited number of organisations that would be able to offer these options for schemes of the size of those in our Group.
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 £8.4 billion could be valued some £3.6 billion
higher, at £12.0 billion.
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