35 Pension costs
The Company operates two funded principal defined benefit pension schemes in the UK, the Airways Pension Scheme (APS) and the New Airways Pension Scheme (NAPS) both of which are closed to new members. APS has been closed to new members since March 31, 1984 and NAPS closed to new members on March 31, 2003. From April 1, 2003 the Company commenced a new defined contribution scheme, the British Airways Retirement Plan (BARP), of which all new permanent employees over the age of 18 employed by the Company and certain subsidiary undertakings in the UK may become members. The assets of the scheme are held in separate trustee-administered funds. Benefits provided under APS are based on final average pensionable pay and, for the majority of members, are subject to increases in payment in line with the Retail Price Index (RPI). Those provided under NAPS are based on final average pensionable pay reduced by an amount (the ‘abatement’) not exceeding one and a half times the government’s lower earnings limit. NAPS benefits are subject to RPI increases in payment up to a maximum of 5 per cent in any one year.
In February 2007, following consultation with members and agreement with the Trustees, the Group amended NAPS for future service to restrict future increases in pensionable pay to RPI and increase the normal retirement age to 65. The change in scheme rules to restrict future increases in pensionable pay was treated as a curtailment under IAS 19, resulting in a £396 million credit, due to the reduction of the Defined Benefit Obligation for NAPS. In addition, the Group agreed to make a one-off cash injection of £800 million into NAPS, of which £240 million was paid in February 2007, with the remaining balance of £560 million paid in April 2007 and an additional £50 million was paid in March 2008. The Group also agreed to make annual contributions of approximately £280 million a year for the next 10 years, and issued guarantees of up to £100 million over the next two years, subject to financial performance. The Group also issued to APS, guarantees of up to £230 million over the next nine years.
Most employees engaged outside the UK are covered by appropriate local arrangements. The Company provides certain additional post-retirement healthcare benefits to eligible employees in the US. The Company participates in a multi-employer defined benefit plan operated in the US by the International Association of Machinists (IAM) and presents the plan in the financial statements as if it were a defined contribution plan as it is not possible to allocate the assets and liabilities of the scheme due to the nature of the scheme. Contributions to the IAM plan were £1.9 million (2007: £1.8 million).
Pension contributions for APS and NAPS were determined by actuarial valuations made as at March 31, 2006 using assumptions and methodologies agreed between the Company and the Trustees of each scheme. At the date of the actuarial valuation, the market values of the assets of APS and NAPS amounted to £6,650 million and £5,832 million respectively. The value of the assets represented 100 per cent (APS) and 74 per cent (NAPS) of the value of the benefits that had accrued to members after allowing for assumed increases in earnings. These valuations showed that employer contributions at an average rate of 34.6 per cent of pensionable pay for APS and 20.7 per cent of pensionable pay for NAPS were appropriate from April 1, 2007 (from April 1, 2006 to March 31, 2007 the contributions were expressed as a multiple of standard employees’ contributions, 3.75 times for APS, 2.8 times for NAPS). For NAPS, the contribution rate to be paid by the employer from April 1, 2007 depends on the normal retirement age chosen by members.
Employer contributions in respect of overseas employees have been determined in accordance with best local practice.
Total employer contributions to defined contribution pension plans both in the UK and overseas for the year were £17 million (2007: £14 million). The Company’s contributions to APS and NAPS in the next year as determined by the actuarial review completed in March 2006 and agreement with the Trustees, are expected to be approximately £305 million.
Employee benefit obligations comprise:
| Group | ||
|---|---|---|
| £ million | 2008 | 2007 |
| Obligations arising under defined benefit pension plans and post-retirement benefits | 204 | 1,021 |
| Obligations arising under post-retirement medical benefit plans | 116 | 109 |
| Total obligations arising under post-retirement benefits | 320 | 1,130 |
| Other employee benefit obligations | 10 | 12 |
| 330 | 1,142 | |
The assets and liabilities of the schemes at March 31 are:
Year ended March 31, 2008
| Employee benefit obligations | Employee benefit assets | |||||
|---|---|---|---|---|---|---|
| £ million | NAPS | Other schemes | Total | APS | Other schemes | Total |
| Scheme assets at fair value | ||||||
| Equities | 4,488 | 147 | 4,635 | 1,033 | 20 | 1,053 |
| Bonds | 1,882 | 68 | 1,950 | 5,079 | 15 | 5,094 |
| Others | 978 | 6 | 984 | 556 | 556 | |
| Fair value of scheme assets | 7,348 | 221 | 7,569 | 6,668 | 35 | 6,703 |
| Present value of scheme liabilities | 7,705 | 384 | 8,089 | 5,432 | 29 | 5,461 |
| (357) | (163) | (520) | 1,236 | 6 | 1,242 | |
| APS irrecoverable surplus | 1,159 | 1,159 | ||||
| Net pension (liability)/asset | (357) | (163) | (520) | 77 | 6 | 83 |
| Net pension (liability)/asset represented by: | ||||||
| Net pension (liability)/asset recognised | (148) | (172) | (320) | 77 | 8 | 85 |
| Cumulative actuarial (losses)/gains not recognised | (209) | 9 | (200) | (2) | (2) | |
| (357) | (163) | (520) | 77 | 6 | 83 | |
Year ended March 31, 2007
| Employee benefit obligations | Employee benefit assets | |||||
|---|---|---|---|---|---|---|
| £ million | NAPS | Other schemes | Total | APS | Other schemes | Total |
| Scheme assets at fair value | ||||||
| Equities | 4,359 | 169 | 4,528 | 1,610 | 20 | 1,630 |
| Bonds | 1,604 | 67 | 1,671 | 4,023 | 14 | 4,037 |
| Others | 590 | 2 | 592 | 858 | 858 | |
| Fair value of scheme assets | 6,553 | 238 | 6,791 | 6,491 | 34 | 6,525 |
| Present value of scheme liabilities | 8,110 | 397 | 8,507 | 6,076 | 27 | 6,103 |
| (1,557) | (159) | (1,716) | 415 | 7 | 422 | |
| APS irrecoverable surplus | 306 | 306 | ||||
| Net pension (liability)/asset | (1,557) | (159) | (1,716) | 109 | 7 | 116 |
| Net pension (liability)/asset represented by: | ||||||
| Net pension (liability)/asset recognised | (964) | (166) | (1,130) | 109 | 7 | 116 |
| Cumulative actuarial (losses)/gains not recognised | (593) | 7 | (586) | |||
| (1,557) | (159) | (1,716) | 109 | 7 | 116 | |
The pension plans have not invested in any of the Group’s own financial instruments nor in properties or other assets used by the Group.
The amounts recognised in the income statement for the year are analysed as follows:
Year ended March 31, 2008
| Employee benefit obligations | Employee benefit assets | |||||
|---|---|---|---|---|---|---|
| £ million | NAPS | Other schemes | Total | APS | Other schemes | Total |
| Current service cost | 170 | 7 | 177 | 20 | 20 | |
| Past service cost | 1 | 1 | 1 | 1 | ||
| Recognised in arriving at operating profit | 171 | 7 | 178 | 21 | 21 | |
| Expected return on scheme assets | (495) | (18) | (513) | (341) | (2) | (343) |
| Immediate recognition of losses and the effect of the asset ceiling | 55 | 55 | ||||
| Interest costs on scheme liabilities | 425 | 23 | 448 | 318 | 1 | 319 |
| Other finance cost | (70) | 5 | (65) | 32 | (1) | 31 |
Year ended March 31, 2007
| Employee benefit obligations | Employee benefit assets | |||||
|---|---|---|---|---|---|---|
| £ million | NAPS | Other schemes | Total | APS | Other schemes | Total |
| Current service cost | 264 | 7 | 271 | 23 | 23 | |
| Past service cost | 29 | 29 | 10 | 10 | ||
| Credit arising on changes to pension scheme | (396) | (396) | ||||
| Recognised in arriving at operating profit | (103) | 7 | (96) | 33 | 33 | |
| Expected return on scheme assets | (392) | (18) | (410) | (330) | (2) | (332) |
| Immediate recognition of losses and the effect of the asset ceiling | 64 | 64 | ||||
| Interest costs on scheme liabilities | 388 | 23 | 411 | 284 | 1 | 285 |
| Amortisation of actuarial losses in excess of the corridor | 1 | 1 | ||||
| Other finance cost | (4) | 6 | 2 | 18 | (1) | 17 |
The amount of unrecognised cumulative actuarial gains and losses is as follows:
| Employee benefit obligations | Employee benefit assets | |||||
|---|---|---|---|---|---|---|
| £ million | NAPS | Other schemes | Total | Other schemes | Total | |
| Amount of unrecognised actuarial losses at April 1, 2006 | (483) | (16) | (499) | |||
| Actual return on scheme assets | 357 | (3) | 354 | (1) | (1) | |
| Less: Expected return on scheme assets | (392) | (18) | (410) | (2) | (2) | |
| (35) | (21) | (56) | (3) | (3) | ||
| Other actuarial (losses)/gains | (113) | 52 | (61) | 3 | 3 | |
| Settlement of BRAL scheme | (9) | (9) | ||||
| Charge arising due to changes to pension scheme | 38 | 38 | ||||
| Amortisation of actuarial losses in excess of the corridor | 1 | 1 | ||||
| Cumulative unrecognised actuarial losses at March 31, 2007 | (593) | 7 | (586) | |||
| Actual return on scheme assets | 6 | (8) | (2) | 3 | 3 | |
| Less: Expected return on scheme assets | (495) | (18) | (513) | (2) | (2) | |
| (489) | (26) | (515) | 1 | 1 | ||
| Other actuarial gains/(losses) | 873 | 28 | 901 | (3) | (3) | |
| Cumulative unrecognised actuarial losses at March 31, 2008 | (209) | 9 | (200) | (2) | (2) | |
Scheme assets and liabilities are measured by qualified actuaries. Scheme assets are stated at their market values at the respective balance sheet dates and overall expected rates of return are established by applying published brokers’ forecasts to each category of scheme assets.
| Group | ||||||
|---|---|---|---|---|---|---|
| At March 31, 2008 | At March 31, 2007 | |||||
| Per cent per annum | NAPS | APS* | Other schemes | NAPS | APS | Other schemes |
| Inflation | 3.5 | 3.5 | 3.0-5.0 | 3.0 | 3.0 | 3.0-4.0 |
| Rate of increase in salaries | 3.5 | 4.0 | 1.5-5.5 | 3.5 | 3.5 | 3.0-6.0 |
| Rate of increase of pensions in payment | 3.4 | 3.5 | 1.5-11.0 | 2.9 | 2.9 | 2.0-11.0 |
| Discount rate | 6.6 | 7.0 | 2.0-6.6 | 5.3 | 5.4 | 2.0-7.0 |
| Expected rate of return on scheme assets | 6.9 | 5.2 | 4.0-7.6 | 6.9 | 5.4 | 5.5-8.3 |
*Rate of increase in salaries is 4.0 per cent per annum for three years, 1.0 per cent in excess of RPI to March 2016 and 1.5 per cent in excess of RPI thereafter (2006/07: Rate of increase in salaries is 4.0 per cent to March 2016 and 4.5 per cent thereafter).
Rate of increase in healthcare costs are based on medical trend rates of 11 per cent grading down to 5 per cent over six years (2006/07: 11 per cent to 5 per cent over six years).
In the UK, mortality rates are calculated using the 00-series standard mortality tables for APS and the PA80 standard mortality tables for NAPS (the two largest Group and Company schemes). The standard mortality tables were selected based on the the actual recent mortality experience of members and were adjusted to allow for future mortality changes. In the US, mortality rates were based on the 1994 GAM Static tables. If the post-retirement mortality tables used for APS and NAPS were to be changed such that the life expectancy of members was increased by one year, the defined benefit obligations would increase by approximately £120 million in APS and £150 million in NAPS.
If the discount rate were to be decreased by 0.1 per cent without changing any other assumptions, the defined benefit obligations would increase by approximately £60 million in APS and £130 million in NAPS.
A one percentage point change in the assumed rate of increase in healthcare costs would have the following effects:
| £ million | Increase | Decrease |
|---|---|---|
| Effect on aggregate service cost and interest cost | (2) | 2 |
| Effect on defined benefit obligation | (21) | 17 |
Changes in the present value of the defined benefit pension obligations are analysed as follows:
| Employee benefit obligations | Employee benefit assets | |||||
|---|---|---|---|---|---|---|
| £ million | NAPS | Other schemes | Total | APS | Other schemes | Total |
| As at April 1, 2006 | 7,902 | 538 | 8,440 | 5,867 | 30 | 5,897 |
| Current service cost | 264 | 7 | 271 | 23 | 23 | |
| Past service cost | 29 | 29 | 10 | 10 | ||
| Interest cost | 388 | 23 | 411 | 284 | 1 | 285 |
| Benefits paid | (210) | (15) | (225) | (388) | (1) | (389) |
| Employee contributions | 58 | 58 | 8 | 8 | ||
| Settlement of BRAL scheme* | (104) | (104) | ||||
| Credit arising on changes to pension scheme | (434) | (434) | ||||
| Actuarial losses/(gains) | 113 | (52) | 61 | 272 | (3) | 269 |
| As at March 31, 2007 | 8,110 | 397 | 8,507 | 6,076 | 27 | 6,103 |
| Current service cost | 170 | 7 | 177 | 20 | 20 | |
| Past service cost | 1 | 1 | 1 | 1 | ||
| Interest cost | 425 | 23 | 448 | 318 | 1 | 319 |
| Benefits paid | (202) | (15) | (217) | (375) | (2) | (377) |
| Employee contributions | 74 | 74 | 8 | 8 | ||
| Actuarial (gains)/losses | (873) | (28) | (901) | (616) | 3 | (613) |
| As at March 31, 2008 | 7,705 | 384 | 8,089 | 5,432 | 29 | 5,461 |
* As a result of the sale of BA Connect, the Company issued to the BRAL scheme a guarantee of £50 million over the next two years.
The defined benefit obligation comprises £7 million (2007: £7 million) arising from unfunded plans and £8,082 million (2007: £8,500 million) from plans that are wholly or partly funded.
Changes in the fair value of plan assets are analysed as follows:
| Employee benefit obligations | Employee benefit assets | |||||
|---|---|---|---|---|---|---|
| £ million | NAPS | Other schemes | Total | APS | Other schemes | Total |
| As at April 1, 2006 | 5,832 | 318 | 6,150 | 6,650 | 36 | 6,686 |
| Expected return on plan assets | 392 | 18 | 410 | 330 | 2 | 332 |
| Employer contributions | 508 | 6 | 514 | 29 | 29 | |
| Contributions by employees | 58 | 58 | 8 | 8 | ||
| Benefits paid | (210) | (15) | (225) | (388) | (1) | (389) |
| Settlement of BRAL scheme | (68) | (68) | ||||
| Actuarial losses | (27) | (21) | (48) | (138) | (3) | (141) |
| As at March 31, 2007 | 6,553 | 238 | 6,791 | 6,491 | 34 | 6,525 |
| Expected return on plan assets | 495 | 18 | 513 | 341 | 2 | 343 |
| Employer contributions | 917 | 6 | 923 | 21 | 21 | |
| Contributions by employees | 74 | 74 | 8 | 8 | ||
| Benefits paid | (202) | (15) | (217) | (375) | (2) | (377) |
| Actuarial (losses)/gains | (489) | (26) | (515) | 182 | 1 | 183 |
| As at March 31, 2008 | 7,348 | 221 | 7,569 | 6,668 | 35 | 6,703 |
History of experience gains and losses:
| Employee benefit obligations | Employee benefit assets | |||||
|---|---|---|---|---|---|---|
| £ million | NAPS | Other schemes | Total | APS | Other schemes | Total |
| As at March 31, 2008 | ||||||
| Fair value of scheme assets | 7,348 | 221 | 7,569 | 6,668 | 35 | 6,703 |
| Present value of defined benefit obligation | (7,705) | (384) | (8,089) | (5,432) | (29) | (5,461) |
| APS irrecoverable surplus | (1,159) | (1,159) | ||||
| (Deficit)/surplus in the scheme | (357) | (163) | (520) | 77 | 6 | 83 |
| Experience adjustments arising on plan liabilities | (873) | (28) | (901) | (616) | 3 | (613) |
| Experience adjustments arising on plan assets | (489) | (26) | (515) | 182 | 1 | 183 |
| As at March 31, 2007 | ||||||
| Fair value of scheme assets | 6,553 | 238 | 6,791 | 6,491 | 34 | 6,525 |
| Present value of defined benefit obligation | (8,110) | (397) | (8,507) | (6,076) | (27) | (6,103) |
| APS irrecoverable surplus | (306) | (306) | ||||
| (Deficit)/surplus in the scheme | (1,557) | (159) | (1,716) | 109 | 7 | 116 |
| Experience adjustments arising on plan liabilities | (113) | 52 | (61) | (272) | 3 | (269) |
| Experience adjustments arising on plan assets | (27) | (21) | (48) | (138) | (3) | (141) |
| As at March 31, 2006 | ||||||
| Fair value of scheme assets | 5,832 | 318 | 6,150 | 6,650 | 36 | 6,686 |
| Present value of defined benefit obligation | (7,902) | (538) | (8,440) | (5,867) | (30) | (5,897) |
| APS irrecoverable surplus | (652) | (652) | ||||
| (Deficit)/surplus in the scheme | (2,070) | (220) | (2,290) | 131 | 6 | 137 |
| Experience adjustments arising on plan liabilities | (920) | (25) | (945) | (285) | (5) | (290) |
| Experience adjustments arising on plan assets | 794 | 35 | 829 | 581 | 5 | 586 |
| As at March 31, 2005 | ||||||
| Fair value of scheme assets | 4,554 | 266 | 4,820 | 6,031 | 29 | 6,060 |
| Present value of defined benefit obligation | (6,523) | (488) | (7,011) | (5,603) | (24) | (5,627) |
| APS irrecoverable surplus | (296) | (296) | ||||
| (Deficit)/surplus in the scheme | (1,969) | (222) | (2,191) | 132 | 5 | 137 |
The directors are unable to determine how much of the pension scheme surplus or deficit recognised on transition to IFRS and taken directly to equity is attributable to actuarial gains and losses since inception of those pension schemes.