Defined contribution schemes
The Group operates two defined contribution retirement benefit schemes. The assets of the schemes are held separately from those of the Group in funds under the control of trustees.
The total cost charged to income of £4,160,000 (2022: £4,307,000) represents contributions payable to these schemes by the Group at rates specified in the rules of the plans. As at 25 March 2023, contributions of £765,000 (2022: £519,000) due in respect of the current reporting period had not been paid over to the schemes.
Defined benefit schemes
The Group has a defined benefit scheme which is now closed to new members and no defined benefit membership rights will accrue under the scheme.
The scheme exposes the Group to actuarial and other risks, the most significant of which are considered to be:
| Investment risk | The present values of the scheme liabilities are calculated using a discount rate determined by reference to corporate bond yields; if the return on scheme assets is below this rate, it will create a plan deficit. The Group holds a significant proportion of growth assets (bonds, gilts and equities) to leverage the return generated by the scheme. |
| Interest risk | A decrease in the corporate bond interest rate will increase the scheme liabilities, although this will be partially offset by an increase in the return on the scheme's assets. |
| Longevity risk | The present values of the scheme liabilities are calculated by reference to the best estimate of the mortality of scheme participants which reflect continuing improvements in life expectancy. An increase in the life expectancy of the scheme participants will increase the scheme's liabilities. |
The most recent actuarial valuations of plan assets and the present value of the defined benefit obligation was carried out at 25 March 2023 by Mr Chris Hunter, Fellow of the Institute of Actuaries. The present value of the defined benefit obligation, the related current service cost and past service cost were measured using the projected unit credit method.
| 2023
% | 2022
% |
| Key assumptions used: | | |
| Discount rate | 4.6 | 2.9 |
| Inflation (RPI) | 3.1 | 3.6 |
When considering mortality assumptions, a life expectancy to 86 at age 65 has been used for the year ended 25 March 2023 (2022: 86). For the year ended 25 March 2023, the Group updated the allowance for future mortality improvements from the CMI 2020 model to the CMI 2021 model. No adjustment has been made for the impact of COVID-19 on mortality assumptions as it is too early to conclude on any evidence to support the impact.
The discount rate and RPI inflation assumptions for the 2023 disclosures in this note have been calculated using a cash flow weighted single-equivalent approach based on the iBoxx Corporate AA index yield curve and the Bank of England's inflation yield curve, respectively, in line with the prior year.
Impact on scheme liabilities of changes to key assumptions:
| Assumption | Change in assumption | Impact on scheme liabilities |
| Discount rate | Increase/decrease by 0.5% | Decrease/increase by 6.7% |
| Rate of mortality | Reducing by 10% | Increase by 2.9% |
| Price inflation | Increase/decrease by 0.5% | Increase/decrease by 4.6% |
Amounts recognised in income in respect of these defined benefit schemes are as follows:
| 2023
£000 | 2022
£000 |
| Interest cost | 1,217 | 940 |
| Interest income | (844) | (538) |
| 373 | 402 |
The charge for the year has been included in operating costs. Actuarial gains and losses have been reported in the statement of comprehensive income. The cumulative actuarial gains and losses recognised amount to a loss of £19,600,000 (2022: £18,899,000).
The actual return on scheme assets were a loss of £8,990,000 (2022: £478,000 gain).
The amount included in the balance sheet arising from the Group's obligations in respect of the defined benefit retirement scheme is as follows:
| 2023
£000 | 2022
£000 |
| Present value of defined benefit obligations | (33,933) | (43,562) |
| Fair value of scheme assets | 21,062 | 29,166 |
| (12,871) | (14,396) |
The major categories of scheme assets as a percentage of the total scheme assets are as follows:
| 2023
£000 | 2022
£000 | 2023
% | 2022
% |
| Equities | 3,307 | 5,921 | 15.7 | 20.3 |
| Bonds and gilts | 5,287 | 6,403 | 25.1 | 22.0 |
| Cash | 1,598 | 4,394 | 7.6 | 15.1 |
| Property | 2,534 | 3,103 | 12.0 | 10.6 |
| LDI funds | 4,993 | 6,952 | 23.7 | 23.8 |
| Other | 3,343 | 2,393 | 15.9 | 8.2 |
| 21,062 | 29,166 | 100.0 | 100.0 |
Bonds and gilts include a mixture of corporate and government bonds and fixed and index-linked gilts. Approximately 18 per cent of bonds have a sub-investment grade credit rating (BB+ or lower) and approximately 92 per cent of gilts are index-linked, with 8 per cent being fixed.
Movements in the present value of defined benefit obligations were as follows:
| 2023
£000 | 2022
£000 |
| At start of year | (43,562) | (50,316) |
| Interest cost | (1,217) | (940) |
| Actuarial gains | 9,133 | 5,998 |
| Benefits paid | 1,713 | 1,696 |
| At end of year | (33,933) | (43,562) |
Actuarial gains arising from changes in demographic assumptions, changes in financial assumptions and gains or losses arising from experience were gains of £19,000 (2022: gains of £43,000), gains of £10,464,000 (2022: gains of £6,112,000) and losses of £1,350,000 (2022: losses of £157,000) respectively. The large gain on 'changes in financial assumptions' is driven by an increase in the discount rate. The present value of defined benefit obligations at the year end is as follows:
| 2023
£000 | 2022
£000 |
| Liability in respect of deferred members | (19,811) | (26,163) |
| Liability in respect of pensioner members | (14,122) | (17,399) |
| (33,933) | (43,562) |
Movements in the fair value of scheme assets were as follows:
| 2023
£000 | 2022
£000 |
| At start of year | 29,166 | 27,937 |
| Interest income | 844 | 538 |
| Actuarial losses | (9,834) | (60) |
| Employer contributions | 2,599 | 2,447 |
| Benefits paid | (1,713) | (1,696) |
| At end of year | 21,062 | 29,166 |
During the course of 2022 government bond yields increased markedly as central banks raised interest rates in an attempt to reduce inflationary pressures. The present value (PV) of the Scheme liabilities are explicitly linked to bond yields and as these increase the PV of the liabilities reduces, due to it increasing the discount rate. Likewise the Scheme's investment strategy also adopts a liability driven investing (LDI) strategy which invest in bonds/bond type instruments in order to hedge a proportion of the expected movement in the value of the liabilities. Correspondingly Scheme assets also fell during the period largely due to the fall in the value of the LDI portfolio.
The Group expects to contribute £224,000 (2022: £210,000) per month to its defined benefit pension scheme in the year to 30 March 2024.
History of experience of gains and losses:
| 2023 | 2022 | 2021 | 2020 | 2019 |
| Experience (losses)/gains on scheme assets (£000) | (9,834) | (60) | 2,222 | (1,093) | 651 |
| Percentage of scheme assets | (46.7%) | (0.2%) | 8.0% | (4.3%) | 2.5% |
| | | | | |
| Experience gains/(losses) on scheme liabilities (£000) | 1,350 | 157 | 419 | (1,007) | 16 |
| Percentage of the present value of scheme liabilities | 4.0% | 0.4% | 0.8% | (2.2%) | 0.0% |
| | | | | |
| Total amount recognised in the consolidated statement of comprehensive income (£000) | (701) | 5,938 | (4,906) | 255 | (3,702) |
| Percentage of the present value of scheme liabilities | 2.1% | 13.6% | (9.8%) | 0.6% | (8.1%) |
The weighted average period over which benefits are expected to be paid, or the duration of the liabilities, is currently 14 years (2022: 17 years). The reduction in duration is due to the increase in discount rates.
The Scheme's investments in the Newton Real Return and M&G Alpha Opportunities Funds are quoted on a recognisable exchange with respective stock market identifiers. However, the assets invested with Legal & General in their Liability Driven Investing (LDI) Funds and the Standard Life Pooled Property Fund are not publicly quoted.
The Scheme invests in several pooled LDI funds, through unit linked insurance policies, with Legal & General which themselves invest in a combination of gilts, gilt repos (synthetic gilts) and swap based instruments of varying duration and interest rate/inflation characteristics. The composition of the funds is designed so as to hedge a proportion of the Scheme's liabilities and specifically the sensitivity of the liabilities to both changes in interest rates and longer term inflation expectations. Such funds adopt a moderate degree of leverage (on average x.2) and as such depending on market movements the funds may call and/or distribute additional capital in order to maintain leverage within a particular range set by the pooled fund manager.
The recognition of a pension scheme surplus is determined by IAS 19 and applying IFRIC 14 which is an interpretation providing further guidance about when a surplus can be recognised. The group considers that under the Pension scheme rules, the group has an unconditional right to a refund of surplus after all pension payments have been made. Hence if the scheme was ever in a surplus, it would be recognised accordingly.