Annual report and accounts 2008

Notes contentsNotes to consolidated financial statements

25. Retirement benefit and other post-retirement obligations

Background
The Group operates a number of defined benefit and defined contribution retirement plans throughout the world. For the defined benefit plans, benefits are based on employees’ length of service and final pensionable pay. Defined contribution benefits are based on the amount of contributions paid in respect of an individual member, the investment returns earned and the amount of pension this money will buy when a member retires.

The largest plan is the Pearson Group Pension Plan (‘UK Group plan’) with both defined benefit and defined contribution sections. From 1 November 2006, all sections of the UK Group plan were closed to new members with the exception of a defined contribution section that was opened in 2003. This section is available to all new employees of participating companies. The other major defined benefit plans are based in the US.

Other defined contribution plans are operated principally overseas with the largest plan being in the US. The specific features of these plans vary in accordance with the regulations of the country in which employees are located.

Pearson also has several post-retirement medical benefit plans (PRMBs), principally in the US. PRMBs are unfunded but are accounted for and valued similarly to defined benefit pension plans.

Assumptions
The principal assumptions used for the UK Group plan and the US PRMB are shown below. Weighted average assumptions have been shown for the other plans, which primarily relate to US pension plans.

%			2008				2007
	UK Group plan	Other plans	PRMB		UK Group plan	Other plans	PRMB
Inflation	2.80	2.80	2.80		3.30	2.93	3.00
Rate used to discount plan liabilities	6.40	6.25	6.25		5.80	6.01	6.05
Expected return on assets	6.33	7.60	—		6.50	7.27	—
Expected rate of increase in salaries	4.30	4.50	—		5.00	4.36	—
Expected rate of increase for pensions in payment and deferred pensions	2.30 to 4.20	—	—		2.50 to 4.30	—	—
Initial rate of increase in healthcare rate	—	—	9.00		—	—	9.50
Ultimate rate of increase in healthcare rate	—	—	5.00		—	—	5.00

The UK discount rate is based on the annualised yield on the iBoxx over 15-year AA-rated corporate bond index, adjusted to reflect the duration of our liabilities. The US discount rate is set by reference to a US bond portfolio matching model. The expected return on assets is based on market expectations of long-term asset returns for the defined portfolio at the end of the year.

The expected rates of return on categories of plan assets are determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the plan’s investment portfolio.

The UK mortality assumptions have been derived by adjusting standard mortality tables (PMFA 92 tables projected forward with medium cohort improvement factors). The Group changed its mortality assumptions in the UK in 2007 to reflect an assumed increased life expectancy of pensioners by adding a 1% floor to the medium cohort projections.

For the US plans, the assumptions used were based on standard US mortality tables. In 2007 GAM94 was used, and in 2008 this was updated to RP2000 to reflect the mortality assumption now more prevalent in the US.

Using the above tables, the remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date for the UK and US Group plans is as follows:

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		UK			UK			US
	2008	2007		2008	2007
Male	21.5	21.3		17.6	17.9
Female	21.8	21.6		20.2	21.3

The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, for the UK and US Group plans is as follows:

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		UK			UK			US
	2008	2007		2008	2007
Male	23.3	23.1		17.6	17.9
Female	23.8	23.6		20.2	21.3

Financial statement information

The amounts recognised in the income statement are as follows:

All figures in £ millions						2008
	UK Group plan	Defined benefit other	Sub-total	Defined contribution	PRMB	Total
Current service cost	33	3	36	41	1	78
Past service cost	—	1	1	—	5	6
Total operating expense	33	4	37	41	6	84
Expected return on plan assets	(104)	(7)	(111)	—	—	(111)
Interest on plan liabilities	93	7	100	—	3	103
Net finance (income)/expense	(11)	—	(11)	—	3	(8)
Net income statement charge	22	4	26	41	9	76
Actual (loss)/return on plan assets	(130)	(27)	(157)	—	—	(157)

All figures in £ millions						2007
	UK Group plan	Defined benefit other	Sub-total	Defined contribution	PRMB	Total
Current service cost	29	2	31	39	1	71
Total operating expense	29	2	31	39	1	71
Expected return on plan assets	(96)	(7)	(103)	—	—	(103)
Interest on plan liabilities	84	7	91	—	2	93
Net finance (income)/expense	(12)	—	(12)	—	2	(10)
Net income statement charge	17	2	19	39	3	61
Actual (loss)/return on plan assets	128	4	132	—	—	132

The total operating charge is included in administrative and other expenses. The UK Group plan current service cost includes £14m (2007: £10m) relating to defined contribution sections.

The amounts recognised in the balance sheet are as follows:

All figures in £ millions				2008					2007
	UK Group plan	Other funded plans	Other unfunded plans	Total		UK Group plan	Other funded plans	Other unfunded plans	Total
Fair value of plan assets	1,478	100	—	1,578		1,744	109	—	1,853
Present value of defined benefit obligation	(1,429)	(149)	(16)	(1,594)		(1,682)	(117)	(12)	(1,811)
Net pension (liability)/asset	49	(49)	(16)	(16)		62	(8)	(12)	42
Other post-retirement medical benefit obligation				(68)					(47)
Other pension accruals				(34)					(28)
Net retirement benefit obligations				(118)					(33)
Analysed as:
Retirement benefit assets				49					62
Retirement benefit obligations				(167)					(95)

The following (losses)/gains have been recognised in the statement of recognised income and expense:

All figures in £ millions	2008	2007
Amounts recognised for defined benefit plans	(74)	79
Amounts recognised for post-retirement medical benefit plans	3	1
Total recognised in year	(71)	80
Cumulative amounts recognised	53	124

The fair value of plan assets comprises the following:

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%			2008	%			2008				2007
	UK Group plan	Other funded plans	Total		UK Group plan	Other funded plans	Total
Equities	28.0	3.1	31.1		34.3	3.4	37.7
Bonds	40.8	2.2	43.0		34.9	2.0	36.9
Properties	7.4	0.1	7.5		7.7	—	7.7
Other	17.5	0.9	18.4		17.2	0.5	17.7

The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.

Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:

All figures in £ millions			2008				2007
	UK Group plan	Other plans	Total		UK Group plan	Other plans	Total
Fair value of plan assets
Opening fair value of plan assets	1,744	109	1,853		1,528	105	1,633
Exchange differences	—	23	23		—	1	1
Expected return on plan assets	104	7	111		96	7	103
Actuarial gains and (losses)	(234)	(34)	(268)		32	(3)	29
Contributions by employer	54	3	57		152	5	157
Contributions by employee	9	—	9		8	—	8
Benefits paid	(72)	(8)	(80)		(72)	(6)	(78)
Other movements	(127)	—	(127)		—	—	—
Closing fair value of plan assets	1,478	100	1,578		1,744	109	1,853
Present value of defined benefit obligation
Opening defined benefit obligation	(1,682)	(129)	(1,811)		(1,683)	(127)	(1,810)
Exchange differences	—	(38)	(38)		—	1	1
Current service cost	(33)	(3)	(36)		(29)	(2)	(31)
Past service cost	—	(1)	(1)		—	—	—
Interest cost	(93)	(7)	(100)		(84)	(7)	(91)
Actuarial gains and (losses)	189	5	194		50	—	50
Contributions by employee	(9)	—	(9)		(8)	—	(8)
Benefits paid	72	8	80		72	6	78
Other movements	127	—	127		—	—	—
Closing defined benefit obligation	(1,429)	(165)	(1,594)		(1,682)	(129)	(1,811)

During 2008 changes made to the administration of the plan assets has enabled assets relating to the defined contribution sections of the UK Group plan to be identified separately from those of the defined benefit section, for accounting purposes. Defined contribution assets will no longer be disclosed as part of the UK Group plan assets. The other movements in both the change in value of plan assets and liabilities over the year represent the separation out of these defined contribution assets.

Changes in the value of the US PRMB are as follows:

All figures in £ millions	2008	2007
Opening defined benefit obligation	(47)	(48)
Exchange differences	(19)	—
Current service cost	(1)	(1)
Past service cost	(5)	—
Interest cost	(3)	(2)
Actuarial gains and (losses)	3	1
Benefits paid	4	3
Closing defined benefit obligation	(68)	(47)

The history of the defined benefit plans is as follows:

All figures in £ millions	2008	2007	2006	2005	2004
Fair value of plan assets	1,578	1,853	1,633	1,500	1,280
Present value of defined benefit obligation	(1,594)	(1,811)	(1,810)	(1,803)	(1,615)
Net pension asset/(liability)	(16)	42	(177)	(303)	(335)
Experience adjustments on plan assets	(268)	29	74	140	67
Experience adjustments on plan liabilities	194	50	28	(119)	(127)

Funding

The UK Group plan is self-administered with the plan’s assets being held independently of the Group. The trustees of the plan are required to act in the best interest of the plan’s beneficiaries. The most recently completed triennial actuarial valuation for funding purposes was completed as at 1 January 2006 and revealed a funding shortfall. The Group has agreed that the funding shortfall will be eliminated by 31 December 2014. In 2008 the Group contributed £21m (2007: £121m including a special contribution of £100m) and has agreed to contribute £21.9m per annum thereafter in excess of an estimated £30m of regular contributions.

The Group expects to contribute $92m in 2009 and $86m in 2010 to its US pension plans.

Sensitivities

The net retirement benefit obligations are calculated using a number of assumptions, the most significant being the discount rate used to calculate the defined benefit obligation. The effect of a one percentage point increase and decrease in the discount rate on the defined benefit obligation and the total pension expense is as follows:

All figures in £ millions		2008
	1% increase	1% decrease
Effect on:
(Decrease)/increase in defined benefit obligation — UK Group plan	(180.1)	209.6
(Decrease)/increase of aggregate of service cost and interest cost — UK Group plan	(2.2)	1.1
(Decrease)/increase in defined benefit obligation — US plan	(12.2)	14.5

The effect of a one percentage point increase and decrease in the assumed medical cost trend rates is as follows:

All figures in £ millions		2008
	1% increase	1% decrease
Effect on:
Increase/(decrease) in post-retirement medical benefit obligation	3.3	(2.9)
Increase/(decrease) of aggregate of service cost and interest cost	0.2	(0.1)