Annual report and accounts 2023 - Flipbook - Page 194
A.G. BARR p.l.c. Annual Report and Accounts 2023
Notes to the Accounts continued
27. Retirement benefit obligations continued
Risks to which the 2008 Scheme exposes the Company
The nature of the 2008 Scheme exposes the Company to the risk of paying unanticipated additional contributions to the 2008 Scheme in times of adverse experience.
The most financially significant risks are likely to be:
– Asset volatility
The 2008 Scheme’s liabilities are calculated using a discount rate set with reference to corporate bond yields in line with the requirements of IAS 19R. If the 2008 Scheme
assets underperform this yield, this will create a deficit. The plan holds investments in a diversified portfolio, primarily equity and bonds, which are expected to outperform
corporate bonds in the long term but provide volatility and risk in the short term.
The board of pension trustees have made a number of steps to control the level of investment risk within the 2008 Scheme. The Trustee and the Company agreed to
purchase an annuity policy with Canada Life in April 2016 to cover all future pension payments to certain members of the 2008 Scheme. This policy was purchased at
a cost of £34.7m and secures the total amount of future pension payments for 100 of the 2008 Scheme’s pensioner members. A second annuity contract was purchased
with Canada Life in September 2019 at a cost of £22.7m and secures the total amount of future pension payments for 82 of the 2008 Scheme’s pensioner members.
The board of pension trustees will continue to review the risk exposures in light of the longer-term objectives of the 2008 Scheme.
– Changes in bond yields
A decrease in corporate bond yields will increase the 2008 Scheme’s liabilities. In the event of a reduction in the corporate bond yields, there will be an increase in the value
of the 2008 Scheme’s bond holdings.
– Inflation risk
The Group pension obligations are linked to inflation, and higher inflation will lead to higher liabilities. The majority of the 2008 Scheme’s assets are either unaffected by
inflation (fixed interest bonds) or loosely correlated with inflation (equities), meaning that an increase in inflation will also increase the deficit.
– Life expectancy
The 2008 Scheme’s obligation is to provide benefits for the life of the members. An increase in life expectancy will result in an increase in the 2008 Scheme’s liabilities.
Policy for recognising gains and losses
The Company recognises actuarial gains and losses immediately, through the remeasurement of the net defined benefit liability.
Asset-liability matching strategies used by the 2008 Scheme or the Company
Excluding insurance policies held within the 2008 Scheme the Trustee’s target allocation to growth assets and return seeking income focused assets is c.30%, with the
remaining c.70% in liability matching bonds including corporate bonds, with the aim of striking a balance between:
• maximising the returns on the 2008 Scheme’s assets; and
• minimising the risks associated with the lower than expected returns on the 2008 Scheme’s assets.
The Trustee has entered into a Liability Driven Investment (LDI) mandate with Legal & General Investment Management. This has resulted in interest rate and inflation hedging
levels of over 50% of liabilities (excluding insurance policies and the asset-backed funding arrangement). The LDI funds are invested in a mix of levered gilts, levered index-linked
gilts and cash, with the aim of matching, as closely as possible, the 2008 Scheme’s liability cash flows.
Description of funding arrangements and funding policy that affect future contributions
The Schedule of Contributions dated March 2018 sets out the current contributions payable by the Company to the 2008 Scheme to eliminate the Scheme deficit. This is in
addition to the rental income stream from the asset-backed funding arrangement, that is a commitment which will offset the requirement for future deficit contributions.
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