Aviva 2013 Annual Report Download - page 209

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
207
Notes to the consolidated financial statements continued
49 – Pension obligations continued
Sensitivity analysis
Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation rate and
mortality. The sensitivities analyses below have been determined based on reasonably possible changes of the respective
assumptions, holding all other assumptions constant. The following table summarises how the defined benefit obligation of
£12,159 million (2012: £11,675 million) would have increased (decreased) as a result of the change in the respective assumptions:
Impact on present value of defined benefit obligation
Discount
rate
+1%
£m
Discount
rate
-1%
£m
Inflation
rate
+1%
£m
Inflation
rate
-1%
£m
1 year
younger1
£m
Impact on present value of defined benefit obligation at 31 December 2013 (1,968) 2,616 2,388 (1,824) 324
Impact on present value of defined benefit obligation at 31 December 2012 (1,954) 2,591 2,334 (1,790) 293
1 The effect of assuming all members in the schemes were one year younger.
The sensitivity analyses presented above may not be representative as in practice it is unlikely that the change in assumptions
would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, the present value of the
defined benefit obligation has been calculated using the projected unit credit method, which is the same as that applied in
calculating the defined benefit obligation liability recognised within the consolidated statement of financial position.
Maturity profile of the defined benefit obligation
The discounted scheme liabilities have an average duration of 20 years in ASPS, 19 years in the RAC scheme, 20 years in the Irish
scheme and 12 years in the Canadian scheme. The expected undiscounted benefits payable from the main UK defined benefit
scheme, ASPS, is shown in the chart below:
400
500
700
600
0
100
200
300
Undiscounted benet payments
(£m)
2014 2044 2074 2104
Deferred member cash ows Pensioner cash ows
(iv) Risk management and asset allocation strategy
As noted above, 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. To meet those objectives, each scheme’s assets are invested in a portfolio consisting
primarily (nearly 75%) of debt securities, as detailed in section (b)(ii). The investment strategy will continue to evolve over time and
is expected to match to the liability profile increasingly closely.
Main UK scheme
The Company works closely with the trustee, who is required to consult it on the investment strategy.
Interest rate and inflation risks are managed using a combination of liability-matching assets and swaps. Exposure to equity risk
has been reducing over time and credit risk is managed within risk appetite. Currency risk is relatively small and is largely hedged.
The other principal risk is longevity risk. On 5 March 2014, ASPS entered into a longevity swap covering approximately £5 billion
of pensioner in payment scheme liabilities. The swap transfers longevity risk to three external reinsurers.
Other schemes
The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme.
(v) Funding
Formal actuarial valuations normally take place every three years and where there is a deficit, the Company and the trustee would
agree a deficit recovery plan. The assumptions adopted for triennial actuarial valuations are determined by the trustee and agreed
with the Company and are normally more prudent than the assumptions adopted for IAS19 purposes, which are best estimate.
For ASPS, following the latest formal actuarial valuation (with an effective date of 31 March 2012) a new deficit recovery plan
was agreed, to make good the deficit over a period of time, consistent with the requirements of the UK pension regulations. Under
this agreement, the deficit funding payment for the next annual period is estimated to be £252 million (of which £98 million
relates to contributions deferred from 2013). As at 31 December 2013, the funding deficit was estimated at £0.6 billion.
Total employer contributions for all schemes in 2014 are currently expected to be £380 million, which includes the £98 million
of deficit funding contributions deferred for ASPS from 2013.