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Note 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 31 March 1984 and NAPS closed to new members on 31 March 2003. From 1 April 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. 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. Additionally, APS has access to an additional £230 million of collateral in the event of insolvency.

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 £2.2 million (2009: £2.1 million). Due to US funding requirements, the Group is forecast to make contributions to the US pensions scheme for £12 million in 2010/11.

Pension contributions for APS and NAPS were determined by actuarial valuations made as at 31 March 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. The contribution rate will be reviewed again following the finalisation of the 2009 actuarial valuation, on which it is proposed to make further changes to the NAPS benefit structure.

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 31 March 2010 were £22 million (2009: £25 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 £330 million.

a  Employee benefit schemes recognised on the balance sheet

  Employee benefit obligations   Employee benefit assets
£ million 2010 2009   2010 2009
Arising under defined benefit pension plans and post-retirement benefits 66 57 483 340
Arising under post-retirement medical benefit plans 132 123      
Total arising under post-retirement benefits 198 180 483 340
Other employee benefit obligations 10 11      
At 31 March 208 191   483 340

At 31 March 2010, 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 £8 million (2009: £9 million) relating to British Airways Holidays Limited; with the remainder relating to the Company.

b  Scheme assets and liabilities

  2010
  Employee benefit obligations   Employee benefit assets
£ million NAPS Other schemes Total   APS Other schemes Total
Scheme assets at fair value
Equities 5,245 174 5,419 1,082 19 1,101
Bonds 1,831 74 1,905 4,774 17 4,791
Others 948 5 953   587   587
Fair value of scheme assets 8,024 253 8,277 6,443 36 6,479
Present value of scheme liabilities 9,969 579 10,548   6,247 31 6,278
Net pension (liability)/asset (1,945) (326) (2,271)   196 5 201
Net pension (liability)/asset represented by:
Net pension asset/(liability) recognised 158 (198) (40) 317 8 325
Restriction on APS surplus due to the asset ceiling 50 50
Cumulative actuarial losses not recognised (2,103) (128) (2,231)   (171) (3) (174)
  (1,945) (326) (2,271)   196 5 201
  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 (liability)/asset represented by:
Net pension asset/(liability) recognised 26 (180) (154) 304 10 314
Restriction on APS surplus due to the asset ceiling 135 135
Cumulative actuarial (losses)/gains not recognised (1,193) (114) (1,307)   421 (10) 411
  (1,167) (294) (1,461)   860 860

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

  2010
  Employee benefit obligations   Employee benefit assets
£ million NAPS Other schemes Total   APS Other schemes Total
Current service cost 105 6 111 10 1 11
Past service cost 1   1        
Recognised in arriving at operating profit 106 6 112   10 1 11
Expected return on scheme assets (418) (14) (432) (269) (1) (270)
Interest costs on scheme liabilities 489 30 519 345 2 347
Amortisation of actuarial losses in excess of the corridor 31 6 37 
Effect of the APS asset ceiling          (85)   (85)
Other finance cost 102 22 124   (9) 1 (8)
  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 profit 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

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 1 April 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 31 March 2009 (1,193) (114) (1,307) 421 (10) 411
Actual return on scheme assets 1,970 61 2,031 930 11 941
Less: Expected return on scheme assets (418) (14) (432)   (269) (1) (270)
1,552 47 1,599 661 10 671
Other actuarial losses (2,493) (67) (2,560) (1,253) (3) (1,256)
Amortisation of actuarial losses in excess of the corridor 31 6 37        
Cumulative unrecognised actuarial losses at 31 March 2010 (2,103) (128) (2,231)   (171) (3) (174)

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 31 March

  2010   2009
Per cent per annum NAPS APS Other schemes   NAPS APS Other schemes
Inflation 3.7 3.6 2.3-5.3 3.0 2.7 2.5-3.0
Rate of increase in pensionable pay* 3.7 3.6 2.0-8.5 3.0 2.7 2.8-8.5
Rate of increase of pensions in payment 3.5 3.6 1.5-9.0 2.9 2.7 1.5-10.0
Discount rate 5.6 5.5 2.0-9.0 6.9 7.1 1.9-7.6
Expected rate of return on scheme assets 7.3 5.2 4.0-9.0   7.1 4.7 5.5-8.5

*Rate of increase in pensionable pay is assumed to be in line with inflation. The first increase in pensionable pay is assumed to be February 2011 for NAPS and February 2013 for APS.

Rate of increase in healthcare costs are based on medical trend rates of 9 per cent grading down to 5 per cent over eight years (2009: 10 per cent grading down to 5 per cent over five years).

In the UK, mortality rates are calculated using the standard SAPS mortality tables produced by the CMI for APS and NAPS. 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 PPA10 mortality 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 £220 million in APS and approximately £250 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 £80 million in APS and £210 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 (37) 29

f  Present value of scheme liabilities

  Employee benefit obligations   Employee benefit assets
£ million NAPS Other schemes Total   APS Other schemes Total
As at 1 April 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)
As at 31 March 2009 7,216 497 7,713 5,065 28 5,093
Current service cost 105 6 111 10 1 11
Past service cost 1
Interest cost 489 30 519 345 2 347
Benefits paid (390) (22) (412) (429) (3) (432)
Employee contributions 55 1 56 3 3
Actuarial losses 2,493 67 2,560   1,253 3 1,256
At 31 March 2010 9,969 579 10,548   6,247 31 6,278

The defined benefit obligation comprises £220 million (2009: £169 million) arising from unfunded plans and £10,328 million (2009: £7,544 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 1 April 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
Employee contributions 78 78 8 8
Benefits paid (221) (18) (239) (385) (1) (386)
Actuarial losses (1,964) (25) (1,989)   (723) (9) (732)
As at 31 March 2009 6,049 203 6,252 5,925 28 5,953
Expected return on plan assets 418 14 432 269 1 270
Employer contributions 340 10 350 14 14
Employee contributions 55 1 56 3 3
Benefits paid (390) (22) (412) (429) (3) (432)
Actuarial gains 1,552 47 1,599   661 10 671
At 31 March 2010 8,024 253 8,277   6,443 36 6,479

h  History of experience gains and losses

  Employee benefit obligations   Employee benefit assets
£ million NAPS Other schemes Total   APS Other schemes Total
As at 31 March 2010
Fair value of scheme assets 8,024 253 8,277 6,443 36 6,479
Present value of defined benefit obligation (9,969) (579) (10,548)   (6,247) (31) (6,278)
(Deficit)/surplus in the scheme (1,945) (326) (2,271) 196 5 201
Experience adjustments arising on plan liabilities 2,493 67 2,560 1,253 3 1,256
Experience adjustments arising on plan assets 1,552 47 1,599   661 10 671
As at 31 March 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 31 March 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 31 March 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 31 March 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

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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