Annual report and financial statements 2009

Notes to the Group financial statements

20 Pensions

a) Defined benefit pension scheme

The Group operates two pension schemes, the ‘Morrison’ and ‘Safeway’ schemes, providing benefits based on pensionable pay of the final years of membership. The assets of the schemes are held in separate trustee administered funds; no part of the schemes is wholly unfunded. The latest full actuarial valuations, which were carried out at 6 April 2007 and 1 April 2007 for the Morrison and Safeway schemes respectively, were updated for IAS 19 purposes for the periods to 1 February 2009, 3 February 2008, 4 February 2007 and 29 January 2006 by a qualified independent actuary.

The Deed and Rules of the Morrison Pension Scheme gives the trustees power to set the level of contributions. In the Safeway Scheme this power is given to the Group, subject to regulatory override.

The current best estimate of employer contributions to be paid for the year commencing 2 February 2009 is £44m (2008: £138m, including a special contribution of £100m).

b) Assumptions

The major assumptions used in this valuation to determine the present value of the schemes’ defined benefit obligation were as follows:

i) Financial

ii) Longevity

The average life expectancy in years of a member who reaches normal retirement age of 65 and is currently aged 45 is as follows:

The average life expectancy in years of a member retiring at the age of 65 at balance sheet date is as follows:

Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with published statistics. The longevity assumption considers how long a member will live when they reach the age of retirement. Amongst the UK population there is a continuing trend for a generation to live longer than the preceding generation, and this has been reflected in the longevity assumption. This means that a 45 year old today is assumed to live on average longer than a 65 year old today. This particular adjustment, described in the mortality tables below, is known as ‘Long Cohort’ and is in line with the latest advice from the Pension Regulator.

In calculating the present value of the liabilities the actuary selects the appropriate mortality table that reflects the longevity assumption. The most up to date tables are used in each period. The current mortality table used is PNX00 YOB LC (2008: PNX00 YOB LC and 2007: PA92 C2020). As disclosed in the critical accounting assumptions in the Group accounting policies, the results of the experience study conducted for the Safeway Scheme have been used to adjust the longevity assumption for both schemes.

iii) Expected return on assets

The major assumptions used to determine the expected future return on the schemes’ assets, were as follows:

The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. The expected return on plan assets is based on market expectation at the beginning of the period for returns over the entire life of the benefit obligation.

c) Valuations

Assets of the schemes are held in order to generate cash to be used to satisfy the schemes’ obligations, and are not necessarily intended to be realised in the short term. The allocation of assets between category is governed by the Investment Principles of each scheme and is the responsibility of the trustees of each respective scheme. The trustees should take due consideration of the Group’s views and a representative of the Group attends Trustee Investment Committee meetings. The fair value of the schemes’ assets, which may be subject to significant change before they are realised, and the present value of the schemes’ liabilities which are derived from cash flow projections over long periods and are inherently uncertain, are as follows:

The movement in the fair value of the schemes’ assets over the year was as follows:

The above pension scheme assets do not include any investments in the Company’s own shares or property occupied by any member of the Group.

The movement in the present value of the defined benefit obligation during the period was as follows:

The cost of buying out pension benefits with an insurer was estimated in the recent actuarial valuations to be £2,300m at April 2007, versus assets of £1,939m at February 2008. This is a deficit of £361m or solvency funding ratio of 84%.

The cost of providing pensions equivalent to the level of compensation paid by the Pension Protection Fund was estimated to be £1,633m at April 2007, compared with assets of £1,939m at February 2008. This is a Pension Protection Fund surplus of £306m or a funding ratio of 119%.

d) Sensitivities

Below is listed the impact on the liabilities at 1 February 2009 of changing key assumptions whilst holding other assumptions constant:

e) Income statement

The following amounts have been charged in employee benefits as set out in note 3 in arriving at operating profit:

The amounts for current and past service cost have been charged to the following income statement lines:

The following amounts have been included in finance income:

f) Actuarial gains and losses recognised in the Statement of recognised income and expense (SoRIE)

The amounts included in the SoRIE were:

The actual return on schemes’ assets can therefore be summarised as follows:

The expected return on schemes’ assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity and property investments reflect long term real rates of return experienced in the respective markets.

g) History of experience gains and losses

h) Defined contribution pension scheme

Employees joining the Company after September 2000 are no longer eligible to gain automatic entry into the final salary pension scheme. In June 2001 the Company established a stakeholder pension scheme, open to all employees, to which the Company makes matching contributions of a maximum of 5% of eligible earnings. Pension costs for the defined contribution scheme are as follows:

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