Defined contribution schemes
The Group operates defined contribution retirement benefit schemes for employees in the United Kingdom, France, Belgium, Canada and the United States of America. The assets of the schemes are held separately from those of the Group in funds under the control of trustees. Where there are employees who leave the schemes prior to vesting fully in the contributions, the contributions payable by the Group are reduced by the amount of forfeited contributions.
The Group's employees in Denmark, Finland, Sweden, Italy and the Netherlands are members of state-managed retirement benefit schemes operated by the governments of each country. The relevant subsidiaries are required to contribute a specified percentage of payroll costs to the retirement benefit schemes to fund the benefits. The only obligation of the Group with respect to these retirement benefit schemes is to make the specified contributions.
The total cost charged to income of £6.7m (2016: £6.2m) represents contributions payable to these schemes by the Group at rates specified in the rules of the plans. As at 31 December 2017 contributions of £0.2m (2016: £0.2m) due in respect of the current reporting period had not been paid over to the schemes.
Defined benefit schemes
The Group operated a number of pension schemes and provided leaving service benefits to certain employees during the year. The defined benefit obligation less fair value of assets at the end of the year and total expense recognised in the income statement are summarised below as follows:
| 2017
£m | 2016
£m |
|---|
| UK Scheme | (2.4) | 3.6 |
| Non-UK Schemes | 17.6 | 17.9 |
| 15.2 | 21.5 |
Total expense recognised in income statement
| 2017
£m | 2016
£m |
| UK Scheme | 1.1 | 0.8 |
| Non-UK Schemes | 0.4 | 0.1 |
| 1.5 | 0.9 |
UK Scheme
The Group sponsors the Bodycote UK Pension Scheme ('the Scheme') which is a funded defined benefit arrangement for certain UK employees, and pays out pensions at retirement based on service, final pensionable pay and price inflation. The Scheme is funded by the Group and current employee members. The Scheme exposes the Company to actuarial risks such as longevity risk, interest rate risk and market (investment) risk.
The Scheme operates under UK trust law and the trust is a separate legal entity from the Group. The Scheme is governed by a board of trustees, composed of two member representatives, two employer representatives and one independent trustee. The trustees are required by law to act in the best interests of scheme members and are responsible for setting certain policies (e.g. investment, funding) together with the Group.
Funding of the Scheme is based on a separate actuarial valuation for funding purposes for which the assumptions may differ from the assumptions above. Funding requirements are formally set out in the Statement of Funding Principles, Schedule of Contributions and Recovery Plan agreed between the Trustees and the Group. The actuarial valuation of the Scheme as at 6 April 2017 was completed by a qualified independent actuary and the results of this have been updated on an approximate basis to 31 December 2017.
The contributions made by the employer over the financial year have been £0.7m, comprising £0.3m in respect of benefit accrual and £0.4m in respect of deficit recovery and ongoing expenses.
It is the policy of the Group to recognise all actuarial gains and losses in the year in which they occur outside of the profit and loss account and in Other Comprehensive Income.
As the Group does not have an unconditional right to a return of any surplus in the Scheme under the wording of the Scheme Rules, the additional reporting requirements of IFRIC14 apply. As the Scheme is in surplus as at 31 December 2017 a restriction must be applied to the balance sheet. The surplus recognised on the balance sheet has been restricted to £2.4m. No further liabilities need to be recognised at 31 December 2017 as the Group is not committed to paying any further deficit reduction contributions under the current Schedule of Contributions.
Reconciliation of opening and closing balances of the present value of the defined benefit obligation
| 2017
£m | 2016
£m |
| Defined benefit obligation at start of year | 126.6 | 99.9 |
| Current service cost | 0.6 | 0.6 |
| Interest expense | 2.9 | 3.4 |
| Contributions by plan participants | 0.1 | 0.2 |
| Actuarial gains arising from changes in demographic assumptions | (2.4) | – |
| Actuarial losses arising from changes in financial assumptions | 0.6 | 27.0 |
| Experience (gains)/losses on liabilities | (5.4) | 1.3 |
| Benefits paid, death in service insurance premiums and expenses | (13.1) | (5.8) |
| Defined benefit obligation at end of year | 109.9 | 126.6 |
Reconciliation of opening and closing balances of the fair value of the assets
| 2017
£m | 2016
£m |
| Fair value of assets at start of year | 123.0 | 101.4 |
| Interest income | 2.8 | 3.5 |
| Return on scheme assets excluding interest income | 4.4 | 19.8 |
| Scheme administration expenses | (0.4) | (0.3) |
| Contributions by employer | 0.7 | 4.2 |
| Contributions by plan participants | 0.1 | 0.2 |
| Benefits paid, death in service insurance premiums and expenses (incl. age related rebate) | (13.1) | (5.8) |
| Fair value of assets at end of year | 117.5 | 123.0 |
Total expense recognised in the income statement
| 2017
£m | 2016
£m |
| Current service cost | 0.6 | 0.6 |
| Net interest on the defined benefit (asset) liability | 0.1 | (0.1) |
| Scheme administration expenses | 0.4 | 0.3 |
| Total expenses | 1.1 | 0.8 |
Assets
| 2017
Quoted
£m | 2017
Unquoted
£m | 2016
Quoted
£m | 2016
Unquoted
£m |
| Equities | 14.4 | – | 18.5 | – |
| Bonds | 60.9 | 15.4 | 59.1 | 15.7 |
| Cash | 5.1 | – | 1.4 | – |
| Diversified growth funds | 7.9 | – | 28.3 | – |
| Diversified credit funds | 13.8 | – | – | – |
| 102.1 | 15.4 | 107.3 | 15.7 |
None of the fair value of the assets shown above includes any of the Group's own financial instruments or any property occupied by, or other assets used by, the Group.
The Scheme's present strategic target is to allocate 65% of the investment portfolio to 'return seeking' asset classes including equities, diversified growth funds, absolute return bonds and direct lending, and 35% to 'liability-matching' asset classes, namely Liability Driven Investment ('LDI'). The LDI portion of assets has been put in place to reduce interest rate and inflation risk.
Assumptions
| 2017
% per
annum | 2016
% per
annum |
| RPI inflation | 3.25 | 3.30 |
| CPI inflation | 2.45 | 2.50 |
| Salary increases | 3.00 | 3.00 |
| Rate of discount | 2.25 | 2.30 |
| Allowance for pension in payment increases of RPI or 3% p.a. if less | 2.41 | 2.41 |
| Allowance for revaluation of deferred pensions | 2.45 | 2.50 |
Mortality – current pensioners:
| Actuarial tables used | 2017
S2PxA YoB CMI 2013 1.5% long term trend | 2016
S2PxA YoB CMI 2013 1.5% long term trend |
| Life expectancy for members currently aged 65 | 22.6 | 22.8 |
Mortality – future pensioners:
| Actuarial tables used | 2017
S2PxA YoB CMI 2013 1.5% long term trend | 2016
S2PxA YoB CMI 2013 1.5% long term trend |
| Life expectancy at age 65 for members currently aged 40 | 24.3 | 25.0 |
| Cash commutation | 2017
All members commute
75% of maximum permitted | 2016
All members commute
75% of maximum permitted |
| The weighted average duration of the defined benefit obligation as at 31 December 2017 is approximately 19 years (31 December 2016: 18 years) |
Present value of defined benefit obligations, fair value of assets and deficit
| 2017
£m | 2016
£m |
| Present value of defined benefit obligation | 109.9 | 126.6 |
| Fair value of plan assets | (117.5) | (123.0) |
| Deficit/(surplus) in the Scheme | (7.6) | 3.6 |
| Adjustment relating to asset ceilings and minimum funding requirements | 5.2 | – |
| Net defined benefit (asset)/liability before deferred tax | (2.4) | 3.6 |
Reconciliation of asset ceiling
| 2017
£m | 2016
£m |
| Restriction due to asset ceiling at beginning of period | – | 4.2 |
| Interest on asset restriction | – | 0.1 |
| Other changes in asset restriction | 5.2 | (4.3) |
| Restriction due to asset ceiling at end of period | 5.2 | – |
The best estimate of contributions to be paid into the plan for the year ending 31 December 2017 is £0.8m.
Amounts recognised in Other Comprehensive Income
| 2017
£m | 2016
£m |
| Gain/(loss) on experience on plan liabilities | 5.4 | (1.3) |
| Return on scheme assets excluding interest income | 4.4 | 19.8 |
| Effects of changes in financial assumptions underlying the present value of the liabilities | (0.6) | (27.0) |
| Effects of changes in demographic assumptions underlying the present value of the liabilities | 2.4 | – |
| (Loss)/gain due to change in asset restriction | (5.2) | 4.3 |
| Total gain/(loss) recognised in Other Comprehensive Income | 6.4 | (4.2) |
Impact of changes to assumptions
| 2017 | 2016 |
| Increase
£m | Decrease
£m | Increase
£m | Decrease
£m |
| 0.25% change in discount rate | (4.9) | 4.9 | (6.3) | 6.3 |
| 0.25% change in price inflation (and associated assumptions) | 1.8 | (1.8) | 2.9 | (2.9) |
| 1 year change in life expectancy at age 65 | 4.4 | (4.4) | 4.5 | (4.5) |
Combined non-UK disclosures
The Group operates schemes in the USA and continental Europe.
During the year the two schemes in the USA were merged. This has been recognised as a settlement of the assets and liabilities in the Metallurgical scheme with an offsetting past service credit and cost in the non-Meterallurgical scheme. Overall there is no net impact on the total expense recognised in the income statement in the year due to the merger of the US schemes.
In Europe the Group operates defined benefit pension, post retirement and long-service arrangements for certain employees in France, Germany, Italy, Turkey, Switzerland and Liechtenstein.
Reconciliation of opening and closing balances of the present value of the defined benefit obligation
| 2017
£m | 2016
£m |
| Defined benefit obligation at start of year | 29.0 | 25.6 |
| Current service cost | 0.7 | 0.7 |
| Interest expense | 0.5 | 0.6 |
| Actuarial losses arising from changes in financial assumptions | 0.2 | 1.5 |
| Experience gains on liabilities | (0.3) | (0.4) |
| Benefits paid, death in service insurance premiums and expenses | (2.1) | (2.3) |
| Employee contributions | 0.1 | 0.1 |
| Curtailments | – | (0.2) |
| Settlements | (2.7) | – |
| Past service cost/(credit) | 2.1 | (0.8) |
| Exchange rate (gain)/loss | (0.2) | 4.2 |
| Defined benefit obligation at end of year | 27.3 | 29.0 |
Reconciliation of opening and closing balances of the fair value of plan assets
| 2017
£m | 2016
£m |
| Fair value of assets at start of year | 11.1 | 10.4 |
| Interest income | 0.2 | 0.2 |
| Return on scheme assets excluding interest income | 0.2 | 0.3 |
| Contributions by employer | 0.2 | 0.2 |
| Contributions by employees | 0.1 | 0.1 |
| Benefits paid, death in service insurance premiums and expenses | (1.4) | (1.9) |
| Settlements | (1.9) | – |
| Past service credit | 1.9 | – |
| Exchange rate (loss)/gain | (0.7) | 1.8 |
| Fair value of assets at end of year | 9.7 | 11.1 |
Total expense recognised in the income statement
| 2017
£m | 2016
£m |
| Current service cost | 0.7 | 0.7 |
| Net interest on the defined benefit liability | 0.3 | 0.4 |
| Curtailments | – | (0.2) |
| Settlements | (0.8) | – |
| Past service cost | 0.2 | (0.8) |
| Total expense | 0.4 | 0.1 |
Assets
| 2017 | 2016 |
| Quoted
£m | Unquoted
£m | Quoted
£m | Unquoted
£m |
| Equities | 3.8 | – | 1.9 | – |
| Bonds | – | – | – | – |
| Cash and cash equivalents | – | 0.2 | 1.9 | 0.1 |
| Insurance contracts | – | 5.7 | – | 7.2 |
| Total | 3.8 | 5.9 | 3.8 | 7.3 |
None of the fair values of the assets shown above include any of the Group's own financial instruments or any property occupied by, or other assets used by the Group.
Assumptions for 2017
| Salary
increases
% per annum | Rate of
discount
% per annum | Inflation
% per annum | Pension
increases
% per annum |
| USA – metallurgical | n/a | 3.5 | n/a | n/a |
| USA – non-metallurgical | n/a | 3.5 | n/a | n/a |
| France | 2.5 | 1.2 | 1.5 | 1.0 |
| Germany | 2.5 | 2.0 | n/a | 1.8 |
| Italy | 2.5 | 1.4 | 1.5 | n/a |
| Turkey | 6.0 | 10.5 | n/a | n/a |
| Liechtenstein | 2.5 | 0.8 | n/a | n/a |
| Switzerland | n/a | 0.8 | n/a | n/a |
Duration
The weighted average durations of the defined benefit obligations of the overseas schemes at 31 December 2017 range from 13 years to 19 years. The durations ranged from 10 years to 20 years as at 31 December 2016.
Present value of defined benefit obligations, fair value of assets and deficit
| 2017
£m | 2016
£m |
| Present value of defined benefit obligation | 27.3 | 29.0 |
| Fair value of plan assets | (9.7) | (11.1) |
| Deficit in the schemes | 17.6 | 17.9 |
As all actuarial gains and losses are recognised, the deficit shown above at 31 December 2017 is that recognised in the balance sheet.
Amounts recognised in Other Comprehensive Income
| 2017
£m | 2016
£m |
| Gain from experience on plan liabilities | 0.3 | 0.4 |
| Return on scheme assets excluding interest income | 0.2 | 0.3 |
| Effects of changes in financial assumptions underlying the present value of the liabilities | (0.2) | (1.5) |
| Total gain/(loss) recognised in Other Comprehensive Income | 0.3 | (0.8) |
The only funded plans are those operated in USA, France, Switzerland and Liechtenstein. The best estimate of contributions to be paid into the plans for the year ending 31 December 2017 is £0.2m.
Sensitivities (changes to total defined benefit obligations)
| 2017 | 2016 |
| Increase
£m | Decrease
£m | Increase
£m | Decrease
£m |
| 0.25% change in discount rate | (1.0) | 1.0 | (1.1) | 1.1 |
| 0.25% change in price inflation (and associated assumptions) | 0.5 | (0.5) | 0.5 | (0.5) |