Annual Report 2016

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26. Retirement benefit obligations

30 March 2016
€’000
25 March 2015
€’000
27 March 2014
€’000
Total market value of pension scheme assets320,388321,974284,006
Total present value of defined benefit obligations(350,066)(389,341)(323,623)
Excess of scheme obligations over assets(29,678)(67,367)(39,617)
Members share of surplus on RWESS scheme(4,540)-(3,390)

The defined benefit scheme of €34.2 million (2015: €67.3 million) comprises defined benefit pension schemes in an asset position of €4.5m (2015: Nil) and defined benefit schemes in a deficit of €38.7 million (2015: €67.3 million). The pension asset and liability are shown separately in the Group balance sheet.

(a) Description of the Bord na Móna pension schemes

The Group operates three contributory defined benefit pension schemes covering the majority of employees, each of which is funded by contributions from the Group and the members. Contributions are based on the advice of a professional qualified actuary obtained at regular intervals at average rates of pensionable emoluments.

The two principal schemes in operation are the General Employees Superannuation Scheme (GESS) which covers management, professional and clerical employees and the Regular Works Employees Superannuation Scheme (RWESS) which covers remaining categories of employees. A third scheme BnM Fuels Pension scheme covers employees who became Group employees on the acquisition of the Coal Distributors Group, Stafford North East, Sutton Group and Sheehan and Sullivan.

On retirement from one of the defined benefit schemes a member is entitled to a pension for each year of pensionable service divided by eighty multiplied by net (adjusted for old aged pension) retiring salary and a gratuity equal to 3/80th of retiring salary for each year of pensionable service.

Bord na Móna plc had awarded unfunded pension benefits to certain retired employees including former managing directors and their dependants.The future cost of funding these pensions is recognised in the balance sheet at €4.3 million based on an actuarial valuation at 30 March 2016 (March 2015: €4.8 million).

Actuarial valuations and funding position of schemes

The actuarial method used (aggregate method) determines a contributory rate which should, if continued until the last of the present members retires, provide a fund which is sufficient to provide their benefits. The assumptions which have the most significant effect on the results of the actuarial valuation are those relating to the return on investments and the rate of increase in remuneration.

The most recent funding valuation for the GESS and RWESS schemes are dated 31 March 2014 and the BnM Fuels scheme valuation dated 1 April 2015. In the actuarial valuations it was assumed that the schemes’ investments will earn a real rate of investment return of 2.75% above the rate of wage inflation. In the latest actuarial valuations the market value of the schemes’ investments was €285.5 million.

The most recent actuarial valuations of these three schemes showed the following:

(i) A deficit of €40.8 million on the GESS scheme

(ii) A deficit of €4.8 million on the RWESS scheme

(iii) A deficit of €1.4 million on the BnM Fuels scheme

At March 2014 after allowing for expected future increases in earnings and pensions in payment, the valuations indicated that the actuarial value of total scheme assets was sufficient to cover 71%, 97% and 88% of the benefits that had accrued to the members of the GESS, RWESS and BnM Fuels schemes respectively at the valuation dates.

Liabilities are computed using the projected unit credit method. In common with many other defined benefit pension schemes, two of the defined benefit plans are in net deficits but one of the schemes is currently in surplus, when the total value of the respective scheme assets is compared to the actuarial value of the accrued benefits of the members.

A funding proposal to address the RWESS scheme benefits is in place since 2010, with the Group and active members paying an additional annual sum of €0.5 million of their pensionable salary.

The increased benefits provided to those active members, effective from 1 January 2010, accrue over future service from 1 January 2010 until the sixtieth birthday of each member. The present value of the estimated cost at 30 March 2016 was €6.5 million and the Group will meet the capital cost by way of fixed annual capital payments of €1.0 million by 30 June over a period of no more than twelve years. No additional liability has been recognised over and above the IAS 19 liability in accordance with the accounting requirements of IAS 19 and IFRIC 14.

A GESS funding proposal to address the scheme deficit was approved by the Board, shareholders, active members and the Pension Board in May 2015. The revised funding arrangement requires a number of changes to the scheme, namely:

(i) Three year pensionable salary freeze from April 2013 until April 2016.

(ii) Pensionable salary cap until November 2023 restricted to CPI or a maximum rate increase of 2% whichever is the lower.

(iii) A Section 50 cut to the order of 10% to deferred members’ benefits.

(iv) A Section 50 adjustment to pensions-in-payments in line with 2013 priority order legislation.

(v) The scheme remains open to future accrual.

In addition to the scheme changes, the Group will make payments of €36.0 million over an eight year period, with a payment of €10.2 million made in May 2015 and a payment of €5.1 million made in May 2016. The impact of the above changes on scheme benefits was a past service credit of €10.7 million shown in the income statement during the year. No additional liability has been recognised for the funding commitments over and above the IAS 19 liability in accordance with the accounting requirements of IAS 19 and IFRIC 14.

The BnM Fuels pension scheme is closed to future accrual with effect from June 2013. An approved funding proposal for Group contributions of €2.3 million was agreed with all parties with annual payments until December 2023. Included in other accruals (Note 16) is an additional liability of €0.4 million which has been recognised over and above the IAS 19 liability in accordance with the accounting requirements of IAS 19 and IFRIC 14.

The Group expects to pay €9.5 million in contributions to its defined benefit plans in the year ended 31 March 2017.

Movement in net defined benefit liability

Defined benefit
liability
Fair Value of
Plan assets
Net Defined
benefit obligation
30 March 201625 March 201530 March 201625 March 201530 March 201625 March 2015
€’000€’000€’000€’000€’000€’000
Balance at the beginning of the financial year(389,341)(327,013)321,974284,006(67,367)(43,007)
Included in income statement
Current service costs(3,071)(2,308)--(3,071)(2,308)
Interest cost(4,865)(9,680)--(4,865)(9,680)
Interest Income-4,0598,4444,0598,444
Past service credit10,700---10,700-
Remeasurements Actuarial Gain/(loss) arising from:
Financial assumptions22,021(67,661)--22,021(67,661)
Experience adjustment4,1553,763--4,1553,763
Return on plan assets excluding interest income--(10,198)35,043(10,198)35,043
Impact of members’ share of surplus(4,540)3,390--(4,540)3,390
Other
Contributions paid by members(2,861)(3,027)2,8613,027-4,649
Contributions paid by the employer--14,8884,64914,888-
Benefits paid by the schemes13,19513,195(13,195)(13,195)--
10,33410,1684,554(5,519)14,8884,649

(b) Plan assets

30 March 2016
€’000
25 March 2015
€’000
27 March 2014
€’000
Equity securities105,607100,778115,024
Bonds141,411141,025134,337
Property20,93517,38714,485
Cash49,26759,56518,177
Alternatives3,1693,2191,988

All equity securities and bonds have quoted prices in active markets. All government bonds are issued by European governments and are rated AAA or AA. Property assets are based in Ireland. The investments in the RWESS, GESS and BnM Fuels scheme include an increased allocation to bonds which match the profile of some benefit obligations. The investment strategy is to divest from equities and move the funds to bonds and absolute return funds.

(c) Investment Strategy

GESS - The plan is to move to a 100% matched position over the term of the funding plan to 2023. The scheme uses passive management for both equities and bonds, with active managers being used for absolute return/diversified growth funds and alternative long term assets. Currently the holding is 25% matching assets and 75% growth assets.

RWESS – At present the asset allocation is 39% matching assets, 35% growth assets and 26% transition assets which will reallocate to matching based on market conditions.

BnM Fuels Scheme – At present the scheme holds 42% matching assets and 58% growth assets. The scheme uses passive management for both equities and bonds with active managers being used for absolute return/diversified growth funds.

(d) Defined benefit obligation

(i) Acturial assumptions

201620152014
Discount rate1.50%1.25%3.00%
Inflation rate (CPI)1.00%1.40%1.75%
Rate of increase in salaries1.50%1.90%2.25%
Rate of increase in pensions in payment - RWESS0.75%1.00%1.25%
Rate of increase in pensions in payment - GESS0.00%0.00%0.00%
RWESS
Life expectancy at age 65 for pensioners currently aged 65 years
Male20.520.520.5
Female23.423.423.4
Other Life expectancy at age 65 for pensioners currently aged 65 years
Male21.120.922.7
Female23.623.524.0
RWESS
Life expectancy at age 65 for pensioners currently aged 45 years
Male20.520.520.5
Female23.423.423.4
Other
Life expectancy at age 65 for pensioners currently aged 45 years
Male23.623.525.0
Female25.725.626.0

At 30 March 2016, the weighted average duration of the defined benefit obligation was years 14 (2015: 15 years).

(ii) Sensitivity analysis

Impact in thousands of euro on liabilities

2016%
Discount rate (0.25% increase)(16,408)-5%
Salary inflation (0.25% increase)1,5290.4%
Pension escalation (0.25% increase)4,2111.0%
2015%
Discount rate (0.25% increase)(14,127)-4%
Salary inflation (0.25% increase)3,8381%
Pension escalation (0.25% increase)10,1793%

Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumption constant, would have affected the defined benefit obligation by the amounts shown.

Although the analysis does not take account of the full distribution of cash flows expected under the plan, it does provide an approximation of the sensitivity of the assumptions shown.