D4 Pension fund assets

D4 – Pension fund assets

In addition to the assets recognised directly on the group’s balance sheet outlined in the disclosures above, the group is also exposed to the ‘’Plan assets’’ that are shown net of the present value of scheme liabilities within the IAS 19 net pension deficit. The net pension deficit is recognised within provisions on the group’s consolidated statement of financial position.

Plan assets include investments in group-managed funds of £101 million in the UK scheme, and insurance policies of £157 million and £1,351 million in the UK and Dutch schemes respectively. Where the investment and insurance policies are in segregated funds with specific asset allocations, they are included in the appropriate lines in the table below, otherwise they appear in “Other”. The Dutch insurance policies are considered non-transferable under the terms of IAS 19 and so have been excluded as assets of the relevant scheme in this table.

					2009						2008
	United Kingdom £m	Delta Lloyd £m	Canada £m	Ireland £m	Total £m		United Kingdom £m	Delta Lloyd £m	Canada £m	Ireland £m	Total £m
Equities	2,285	—	78	28	2,391		3,002	—	93	182	3,277
Bonds	4,619	—	110	231	4,960		3,395	—	86	172	3,653
Property	403	—	—	18	421		405	—	—	26	431
Other	835	7	10	130	982		485	7	3	80	575
Total	8,142	7	198	407	8,754		7,287	7	182	460	7,936

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.

– Interest rate risk – falling interest rates leading to an increase in liabilities significantly exceeding the increase in the value of assets.

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.

In addition, the trustees have taken measures to partially mitigate inflation and interest rate risks, including entering into inflation and interest rate swaps to hedge approximately one third of the scheme’s exposure to these risks.

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.