RBS 2012 Annual Report Download - page 383

RBS GROUP 2012
381
Interim valuations of the Group’s schemes under IAS 19 ‘Employee Benefits’ were prepared to 31 December with the support of independent actuaries,
using the following assumptions:
Main scheme All schemes
Principal actuarial assumptions at 31 December (weighted average) 2012
%
2011
%
2010
%
2012
%
2011
%
2010
%
Discount rate 4.5 5.0 5.5 4.4 5.2 5.4
Expected return on plan assets 5.3 5.7 6.7 5.3 5.6 6.3
Rate of increase in salaries 1.8 1.8 1.8 1.7 2.0 2.0
Rate of increase in pensions in payment 2.8 3.0 3.3 2.6 2.9 3.0
Inflation assumption 2.9 3.0 3.3 2.8 3.0 3.2
Discount rate
The Group discounts its defined benefit pension obligations at discount
rates determined by reference to the yield on ‘high quality’ corporate
bonds.
The sterling yield curve (applied to 91% of the Group’s defined benefit
obligations) is constructed by reference to yields on ‘AA’ corporate bonds
from which a single discount rate is derived based on a cash flow profile
similar in structure and duration to the pension obligations. Significant
judgement is required when setting the criteria for bonds to be included in
the population from which the yield curve is derived. The criteria include
issuance size, quality of pricing and the exclusion of outliers. Judgement
is also required in determining the shape of the yield curve at long
durations: a constant credit spread relative to gilts is assumed. In
previous years, the discount rate was determined by reference to the
upper quartile yield on the iBoxx over 15 year sterling corporate bond
index, less a margin determined by reference to the shape of the yield
curve and the spread of yields among the index’s constituents.
Discount rates for other currencies are derived using a variety of
methodologies. In the case of US dollar defined pension obligations, a
matching portfolio of high-quality ‘AA’ corporate bonds is used for the first
30 years’ cash flows; cash flows beyond 30 years are discounted using a
yield curve determined in a similar way to the UK. For euro defined
pension obligations, a similar approach to the UK has been used at 31
December 2012. However, at longer durations, rates are derived by
extrapolating yields on ‘A’ and ‘AAA’ corporate bonds to derive equivalent
‘AA’ yields. Prior to 2012, extrapolation was not used at longer durations
and different criteria were used to determine the reference pool of ‘AA’
bonds.
Main scheme All schemes
Major classes of plan assets as a percentage of total plan assets 2012
%
2011
%
2010
% 2012
%
2011
%
2010
%
Quoted equities 23.4 20.9 25.9 25.0 23.3 28.2
Private equity 5.4 5.8 5.4 4.7 4.9 4.5
Index-linked bonds 30.7 26.1 27.0 28.7 24.3 24.1
Government fixed interest bonds 1.9 0.9 — 2.9 2.8 1.9
Corporate and other bonds 21.1 23.9 26.2 21.0 22.2 24.8
Hedge funds 2.2 2.5 3.2 2.5 2.4 3.5
Property 4.3 3.5 3.4 4.2 3.6 3.6
Derivatives 2.2 2.4 0.9 2.0 2.1 1.2
Cash and other assets 8.7 13.8 7.8 9.0 13.7 8.1
Equity exposure of equity futures 9.0 17.7 25.6 8.4 15.7 21.4
Cash exposure of equity futures (8.9) (17.5) (25.4) (8.4) (15.0)(21.3)
100.0 100.0 100.0 100.0 100.0 100.0
The Main scheme, which represents 85% of plan assets at 31 December 2012 (2011 and 2010 - 84%), is invested in a diversified portfolio of quoted
and private equity, government and corporate fixed-interest and index-linked bonds, and other assets including property and hedge funds.
The Main scheme also employs derivative instruments, where appropriate, to achieve a desired asset class exposure or to match assets more closely to
liabilities. The value of assets shown reflects the actual physical assets held by the scheme, with any derivative holdings valued on a mark-to-market
basis. The return on assets on the total scheme has been based on the asset exposure created allowing for the net impact of the derivatives on the risk
and return profile of the holdings.