Analysis of assets
Total assets - Valuation bases/fair value hierarchy (continued)
The total IAS 19 assets (ie excluding the non-transferable insurance policies) of the schemes are analysed as follows:
| United Kingdom £m |
Delta Lloyd £m |
Canada £m |
Ireland £m |
Total £m |
|
|---|---|---|---|---|---|
| Equities | 2,288 | - | 70 | 47 | 2,405 |
| Bonds | 3,948 | - | 96 | 149 | 4,193 |
| Property | 346 | - | - | 20 | 366 |
| Other | 415 | 6 | 10 | 166 | 597 |
| Total fair value of assets | 6,997 | 6 | 176 | 382 | 7,561 |
Risk management and asset allocation strategy
The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these objectives, each scheme's assets are invested in a diversified portfolio, consisting primarily of equity and debt securities. These reflect the current long-term asset allocation ranges chosen, having regard to the structure of liabilities within the schemes.
Main UK scheme
Both the group and the trustees regularly review the asset/liability management of the main UK scheme. It is fully understood that, whilst the current asset mix is designed to produce appropriate long-term returns, this introduces a material risk of volatility in the scheme's surplus or deficit of assets compared with its liabilities. The principal asset risks to which the scheme is exposed are:
- Equity market risk - the effect of equity market falls on the value of plan assets;
- Inflation risk - the effect of inflation rising faster than expected on the value of the plan liabilities; and
- Interest rate risk - falling interest rates leading to an increase in liabilities significantly exceeding the increase in the value of assets.
The trustees have taken measures to partially mitigate inflation and interest rate risks, including entering into inflation and interest rate swaps.
There is also an exposure to currency risk where assets are not denominated in the same currency as the liabilities. The majority of this exposure has been removed by the use of hedging instruments.
During 2008, there was a reduction in the proportion of assets invested in equities, thereby mitigating the equity risk
Other schemes
The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme.
Available funds
To ensure access to liquidity as and when needed, the group maintains over £2 billion of undrawn committed central borrowing facilities with various highly rated banks. £1 billion of this is allocated to support the credit rating of Aviva plc's £2 billion commercial paper programme. The expiry profile of the undrawn committed central borrowing facilities is as follows:
| £m | |
|---|---|
| Expiring in one year | 815 |
| Expiring beyond one year | 1,285 |
| 2,100 |
Guarantees
As a normal part of their operating activities, various group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products.
For the UK Life with-profit business, provisions in respect of these guarantees and options are calculated on a market consistent basis, in which stochastic models are used to evaluate the level of risk (and additional cost) under a number of economic scenarios, which allow for the impact of volatility in both interest rates and equity prices. For UK Life non-profit business, provisions do not materially differ from those determined on a market consistent basis.
In all other Businesses, provisions for guarantees and options are calculated on a local basis with sensitivity analysis undertaken where appropriate to assess the impact on provisioning levels of a movement in interest rates and equity levels (typically a 1% increase in interest rates and 10% decline in equity markets).
