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Note 36: 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 five 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. 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. Additionally, guarantees are issued in respect of APS, £230 million and NAPS, £100 million.

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 £2.1 million (2008: £1.9 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 determined employer contribution rates of an average of 34.6 per cent of pensionable pay for APS and 20.7 per cent of pensionable pay for NAPS. For NAPS, the contribution rate to be paid by the employer 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 ended March 31, 2009, were £25 million (2008: £17 million). The Company’s contributions to APS and NAPS in the next year as determined by the actuarial review completed in March 2006 are expected to be approximately £320 million.

a  Employee benefit schemes recognised on the balance sheet

  Employee benefit obligations   Employee benefit assets
£ million 2009 2008   2009 2008
Arising under defined benefit pension plans and post-retirement benefits 57 204   340 320
Arising under post-retirement medical benefit plans 123 116      
Total arising under post-retirement benefits 180 320   340 320
Other employee benefit obligations 11 10      
At March 31 191 330   340 320

At March 31, 2009, NAPS was recognised on the balance sheet as an asset. However, due to the level of unrecognised losses it holds, its net position is a liability and therefore on all future tables within this note, it is included as an employee benefit obligation.

Employee benefit assets refer to the Group and Company in all instances. Employee benefit obligations include £9 million (2008: £8 million) relating to British Airways Holidays Limited with the remainder relating to the Company.

b  Scheme assets and liabilities

  2009
  Employee benefit obligations   Employee benefit assets
£ million NAPS Other schemes Total   APS Other schemes Total
Scheme assets at fair value:              
Equities 3,780 122 3,902   898 16 914
Bonds 1,665 76 1,741   4,679 12 4,691
Others 604 5 609   348   348
Fair value of scheme assets 6,049 203 6,252   5,925 28 5,953
Present value of scheme liabilities 7,216 497 7,713   5,065 28 5,093
Net pension (liability)/asset (1,167) (294) (1,461)   860 860
Net pension asset/(liability) represented by:              
Net pension asset/(liability) recognised 26 (180) (154)   304 10 314
Tax effect of APS surplus recognised         135   135
Cumulative actuarial (losses)/gains not recognised (1,193) (114) (1,307)   421 (10) 411
  (1,167) (294) (1,461)   860 860
 
2008
Restated
  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
Net pension (liability)/asset (357) (163) (520)   1,236 6 1,242
Net pension (liability)/asset represented by:              
Net pension (liability)/asset recognised (148) (172) (320)   312 8 320
Tax effect of APS surplus recognised         126   126
Cumulative actuarial (losses)/gains not recognised (209) 9 (200)   798 (2) 796
  (357) (163) (520)   1,236 6 1,242

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.

c  Amounts recognised in the income statement

  2009
  Employee benefit obligations   Employee benefit assets
£ million NAPS Other schemes Total   APS Other schemes Total
Current service cost 129 7 136   14   14
Past service cost 3   3   1   1
Recognised in arriving at operating loss 132 7 139   15 15
Expected return on scheme assets (502) (19) (521)   (338) (3) (341)
Interest costs on scheme liabilities 502 26 528   367 1 368
Amortisation of APS surplus (net of tax)         (17)   (17)
Other finance cost 7 7   12 (2) 10
 
2008
Restated
  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         19   19
Interest costs on scheme liabilities 425 23 448   318 1 319
Other finance cost (70) 5 (65)   (4) (1) (5)

d  Unrecognised cumulative actuarial gains and losses

  Employee benefit obligations   Employee benefit assets
£ million NAPS Other schemes Total   APS Other schemes Total
Amount of unrecognised actuarial losses at April 1, 2007 (Restated) (593) 7 (586)        
Actual return on scheme assets 6 (8) (2)   523 3 526
Less: Expected return on scheme assets (495) (18) (513)   (341) (2) (343)
  (489) (26) (515)   182 1 183
Other actuarial gains/(losses) 873 28 901   616 (3) 613
Cumulative unrecognised actuarial (losses)/gains at March 31, 2008 (209) 9 (200)   798 (2) 796
Actual return on scheme assets (1,462) (6) (1,468)   (385) (6) (391)
Less: Expected return on scheme assets (502) (19) (521)   (338) (3) (341)
  (1,964) (25) (1,989)   (723) (9) (732)
Other actuarial gains/(losses) 980 (98) 882   372 1 373
Amortisation of APS surplus (gross of tax)         (26)   (26)
Cumulative unrecognised actuarial (losses)/gains at March 31, 2009 (1,193) (114) (1,307)   421 (10) 411

The actuarial assumptions made for the expected rates of return on assets were derived by considering best estimates for the expected long-term real rates of return from the main asset classes and combining these in proportions for each scheme. These assumed rates of return are net of investment expenses.

e  Actuarial assumptions

At March 31

  2009   2008
Per cent per annum NAPS APS* Other schemes   NAPS APS* Other schemes
Inflation 3.0 2.7 2.5-3.0   3.5 3.5 3.0-5.0
Rate of increase in salaries 3.0 2.7 2.8-8.5   3.5 4.0 1.5-5.5
Rate of increase of pensions in payment 2.9 2.7 1.5-10.0   3.4 3.5 1.5-11.0
Discount rate 6.9 7.1 1.9-7.6   6.6 7.0 2.0-6.6
Expected rate of return on scheme assets 7.1 4.7 5.5-8.5   6.9 5.2 4.0-7.6

* Rate of increase in salaries is assumed to be in line with inflation (2008: 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).

Rate of increase in healthcare costs are based on medical trend rates of 10 per cent grading down to 5 per cent over five years (2008: 11 per cent grading down 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 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 £110 million in APS and approximately £140 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 £50 million in APS and £120 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 (3) 2
Effect on defined benefit obligation (26) 21

f  Present value of scheme liabilities

  Employee benefit obligations   Employee benefit assets
£ million NAPS Other schemes Total   APS Other schemes Total
As at April 1, 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
Current service cost 129 7 136   14   14
Past service cost 3   3   1   1
Interest cost 502 26 528   367 1 368
Benefits paid (221) (18) (239)   (385) (1) (386)
Employee contributions 78   78   8   8
Actuarial (gains)/losses (980) 98 (882)   (372) (1) (373)
At March 31, 2009 7,216 497 7,713   5,065 28 5,093

The defined benefit obligation comprises £169 million (2008: £134 million) arising from unfunded plans and £7,544 million (2008: £7,955 million) from plans that are wholly or partly funded.

g  Fair value of scheme assets

  Employee benefit obligations   Employee benefit assets
£ million NAPS Other schemes Total   APS Other schemes Total
As at April 1, 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
Expected return on plan assets 502 19 521   338 3 341
Employer contributions 306 6 312   19   19
Contributions by employees 78   78   8   8
Benefits paid (221) (18) (239)   (385) (1) (386)
Actuarial losses (1,964) (25) (1,989)   (723) (9) (732)
At March 31, 2009 6,049 203 6,252   5,925 28 5,953

h  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, 2009              
Fair value of scheme assets 6,049 203 6,252   5,925 28 5,953
Present value of defined benefit obligation (7,216) (497) (7,713)   (5,065) (28) (5,093)
(Deficit)/surplus in the scheme (1,167) (294) (1,461)   860   860
Experience adjustments arising on plan liabilities (980) 98 (882)   (372) (1) (373)
Experience adjustments arising on plan assets (1,964) (25) (1,989)   (723) (9) (732)
As at March 31, 2008 (Restated)              
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)
(Deficit)/surplus in the scheme (357) (163) (520)   1,236 6 1,242
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.

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