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vii  Pension costs
The following position for the main pension scheme is computed in accordance with US GAAP pension accounting rules under SFAS No. 87 and SFAS No. 88, the effect of which is shown in the above reconciliation statements.
     The pension cost determined under SFAS No. 87 was calculated by reference to an expected long-term rate of return on scheme assets of 7.27% (2004 – 7.35%, 2003 – 6.90%). The components of the pension cost for the main pension scheme comprised:

      2005
£m
    2004
£m
    2003
£m
 

 
Service cost
    507     388     453  
Interest cost
    1,745     1,657     1,707  
Expected return on scheme assets
    (1,897 )   (1,646 )   (1,813 )
Amortisation of prior service costs
    24     24     24  
Amortisation of net obligation at date of limited application of SFAS No. 87
        2     52  
Amortisation of loss (gain)
    263     378     (22 )
Additional cost of termination benefits
        1     60  

 
Pension cost for the year under US GAAP
    642     804     461  

 

The information required to be disclosed in accordance with SFAS No. 132(R) concerning the funded status of the main scheme at 31 March 2004 and 31 March 2005, based on the valuations at 1 January 2004 and 1 January 2005, respectively, is given below.


Minimum liability, intangible asset and other comprehensive income
    2005
£m
    2004
£m
 

 
Plan assets at fair value
    29,169     26,675  
Accumulated benefit obligation
    33,160     31,137  

 
Minimum liability
    3,991     4,462  
Net amount recognised at end of year
    (2,535 )   (2,275 )

 
Minimum additional liability
    1,456     2,187  
Intangible asset as at 31 March 2004:
             
Unrecognised prior service cost
    (55 )   (79 )

 
Accumulated other comprehensive income
    1,401     2,108  

 
   
Changes in benefit obligation
    2005
£m
    2004
£m
 

 
Benefit obligation at the beginning of the year
    32,448     30,277  
Service cost
    507     388  
Interest cost
    1,745     1,657  
Employees’ contributions
    50     148  
Additional cost of termination benefits
        1  
Actuarial movement
    943     1,428  
Other changes
    7     5  
Benefits paid or payable
    (1,364 )   (1,456 )

 
Benefit obligation at the end of the year
    34,336     32,448  

 
   

The benefit obligation and pension cost for the main pension scheme were determined using the following assumptions at 1 January 2003, 2004 and 2005:

      2005
per annum
%
    2004
per annum
%
    2003
per annum
%
 

 
Discount rate
    5.3     5.5     5.6  
Rate of future pay increases
    3.6     3.6     3.8  
Rate of future pension increases
    2.6     2.6     2.25  

 
Contributions expected to be paid to the plan during the next fiscal year are estimated at £459 million.

Estimated future benefit payments are as follows:

      £m  

 
Year ending 31 March 2006
    1,392  
Year ending 31 March 2007
    1,432  
Year ending 31 March 2008
    1,477  
Year ending 31 March 2009
    1,532  
Year ending 31 March 2010
    1,598  
1 April 2010 to 31 March 2015
    9,039  
         
Changes in scheme assets
    2005     2004  
      £m     £m  

 
Fair value of scheme assets at the beginning of the year
    26,675     22,757  
Actual return on scheme assets
    3,419     4,195  
Employer’s contributionsa
    382     1,026  
Employees’ contributions
    50     148  
Other changes
    7     5  
Benefits paid or payable
    (1,364 )   (1,456 )

 
Fair value of scheme assets at the end of the year
    29,169     26,675  

 
Funded status under US GAAP
    2005     2004  
      £m     £m  

 
Projected benefit obligation in excess of scheme assets
    (5,167 )   (5,773 )
Unrecognised prior service costsb
    55     79  
Other unrecognised net actuarial losses
    2,577     3,419  

 
Net amount recognised under US GAAP
    (2,535 )   (2,275 )

 
a
The employer’s contributions for the year ended 31 March 2005 includes special contributions of £6 million paid in June 2004 (2004 – £362 million paid in December 2003 and £380 million paid in March 2004).
b
Unrecognised prior service costs on scheme benefit improvements are being amortised over periods of 15 or 16 years commencing in the years of the introduction of the improvements.
 
Asset allocation
The Trustees of the main pension scheme approve the target asset allocation as well as deviation limits. The objective of the investment activities is to maximise investment return within an acceptable level of risk, taking into consideration the liabilities of the main pension scheme.
 

    Year ended 31 December 2004  
      Fair value
£bn
    %     Target
%
 

 
Equities
    20.2     69     63  
Fixed interest bonds
    4.4     15     16  
Index linked securities
    2.7     9     9  
Property
    1.9     7     12  

 
     
    29.2     100     100  

 

    Year ended 31 December 2003  
      Fair value
£bn
   
%
    Target
%
 

 
Equities
    17.1     65     65  
Fixed interest bonds
    3.9     15     15  
Index linked securities
    2.1     8     8  
Property
    3.2     12     12  

 
      26.3     100     100  

 

The assumption for the expected return in scheme assets is a weighted average based on an assumed expected return for each asset class and the proportions held of each asset class at the beginning of the year. The expected returns on bonds are based on the gross redemption yields at the start of the year. Expected returns on equities and property are based on a combination of an estimate of the risk premium above, yields on government bonds and consensus economic forecasts of future returns. The expected return of 7.27% per annum used for the calculation of pension costs for the year ending 31 March 2005 is consistent with that adopted for FRS 17.



 

 
 

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