Notes to the financial statements

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20 Retirement benefit obligations

The Group has one defined benefit pension scheme (Dairy Crest Group Pension Fund) in the UK which was closed to future service accrual from 1 April 2010. This pension scheme is a final salary scheme that had previously been closed to new employees joining after 30 June 2006. Employees joining after this date and those members of the defined benefit pension scheme on its closure to future service accrual were invited to join the Dairy Crest Group defined contribution plan.

The Dairy Crest Group Pension Fund is administered by a corporate trustee which is legally separate from the Company. The Trustee’s directors are comprised of representatives of both the employer and employees, plus a professional trustee. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets plus the day to day administration of the benefits.

The most recent full actuarial valuation of the Dairy Crest Group Pension Fund was carried out as at 31 March 2013 by the Fund’s independent actuary using the projected unit credit method. Full actuarial valuations are carried out triennially. This valuation resulted in a deficit of £145.0 million compared to the IAS 19 deficit of £56.3 million reported at that date. The next full actuarial valuation will be carried out in 2016/17 on the 31 March 2016 position.

The Company adopted IAS19R (revised 2011) for 2013/14. As a result the interest cost and expected returns on plan assets of defined benefit plans recognised in the profit and loss have been replaced by the net interest on the defined benefit liability, calculated using the discount rate used to measure the net pension obligation. Administration expenses are now charged as operating costs in the income statement rather than as finance expenses.

The following tables summarise the components recognised in the consolidated income statement and the funded status and amounts recognised in the consolidated balance sheet for the defined benefit pension scheme. 2013 comparators have been restated to reflect IAS19R.

	Dairy Crest Group Pension Fund
Amounts recognised in consolidated income statement	2014 £m	2013 £m
Administration expenses	(1.0)	(0.9)
Other finance income/(costs) – pensions	(0.3)	(3.5)
Profit/(loss) before tax	(1.3)	(4.4)
Deferred tax	0.3	1.0
Profit/(loss) for the period	(1.0)	(3.4)

Amounts recognised in other comprehensive income
Return on plan assets (excluding amounts included in net interest)	26.8	79.7
Experience gains arising on scheme liabilities	4.3	0.8
Actuarial losses due to changes in the demographic assumptions	(18.0)	–
Actuarial losses due to changes in the financial assumptions	(63.5)	(72.8)
Net actuarial (loss)/gain	(50.4)	7.7
Recognition of liability for unrecoverable notional surplus	0.8	(10.9)
Recognised in other comprehensive income	(49.6)	(3.2)
Related tax	8.7	5.4
Net actuarial loss recognised in other comprehensive income	(40.9)	2.2
Actual returns on plan assets were £68.3 million (2013: £117.7 million).

	Dairy Crest Group Pension Fund
Defined benefit obligation	2014 £m	Restated 2013 £m
Fair value of scheme assets: – Equities	45.5	84.3
– Bonds and cash	523.6	393.4
– Equity return swaps valuation	3.3	42.9
– Property and other	92.3	62.5
– Insured retirement obligations	299.4	286.3
	964.1	869.4
Defined benefit obligation: – Uninsured retirement obligations	(714.3)	(639.4)
– Insured retirement obligations	(297.4)	(286.3)
Total defined benefit obligation	(1,011.7)	(925.7)
Recognition of liability for unrecoverable notional surplus	(10.1)	(10.9)
	(1,021.8)	(936.6)
Net liability recognised in the balance sheet	(57.7)	(67.2)
Related deferred tax asset	17.9	17.1
Net pension liability	(39.8)	(50.1)

UK legislation requires that pension schemes are funded prudently. In 2013/14 the Group paid £20.0 million into the fund in line with the agreed schedule of contributions plus an additional £40.0 million from the proceeds of the sale of St Hubert. In addition to this, the Company granted the trustee of the Group’s pension scheme to a floating charge over the maturing cheese inventories with a maximum realisable value of £60.0 million.

From October 2009, the Group has been making additional funding contributions to the scheme of £20.0 million per annum. Under the latest schedule of contributions agreed with Trustees (which was signed in March 2014), the contributions will be £13.0 million per annum for 2014/15 and 2015/16, increasing to £16.0 million per annum in 2016/17 reverting to £20.0 million per annum for 2017/18 through to 2019/20.

These annual contributions include £2.8 million per annum of rental payments for land and buildings that are subject to a sale and leaseback agreement between the Group and the Fund as part of the schedule of contributions. The land and buildings included in these arrangements are subject to long term leases and the Group will continue to benefit from substantially all of the risks and rewards of ownership. On this basis, under IFRS, these land and buildings continue to be recognised in property, plant and equipment and rental payments of £2.8 million per annum are treated as cash contributions, reflecting the substance of the arrangements.

The Group is entitled to any surplus on winding up of the Fund albeit refunds are subject to tax deductions of 35% at source. Based on the present value of committed cash contributions at 31 March 2014 and the IAS 19 valuation at that date of £47.6 million, £10.1 million would be deducted from any notional surplus returned to the Group and this has been recognised as an additional liability in accordance with IFRIC 14. However, it should be noted that cash contributions are determined by reference to the triennial actuarial valuation, not the IAS 19 valuation. The actuarial deficit is greater than that recognised under IAS 19 since liabilities are discounted by reference to gilt yields rather than high quality corporate bond yields.

In December 2008, certain obligations relating to retired members were hedged by the purchase of an insurance contract. A further insurance contract for retired members was purchased in June 2009 resulting in coverage for all members who retired up to August 2008. These contracts are included within scheme assets and their value will always be equal to the obligation as calculated under IAS 19 for those members covered.

The purchase of the second insurance contract in June 2009 was funded by the sale of equities. Subsequently, in order to re-establish an appropriate equity weighting of scheme assets, the Fund purchased equity total return swaps (synthetic equity). These instruments comprise an asset leg and a liability leg. The asset leg generates a return based on UK and overseas equity indices and the liability leg incurs a cost based on LIBOR plus margin. Credit risk is minimised since collateral is provided by the counterparties to the benefit of the Fund when the instruments are in the money. At 31 March 2014, the valuation of the above comprises a positive equity exposure of £155.7 million and a negative LIBOR exposure of £152.4 million (2013: equity exposure of £276.8 million and LIBOR exposure of £233.9 million).

The 2013/14 results have been produced under IAS 19R (revised 2011).

Administration expenses are now recognised in the income statement rather than as part of the actuarial gains and losses.

The effects of the adoption of IAS19R on previously reported results are summarised as follows:

Consolidated Income Statement	Originally Reported 31 Mar 13 £m	Amended IAS 19R 31 Mar 13 £m	Movement 31 Mar 13 £m
Operating costs	(1,368.2)	(1,369.1)	(0.9)
Other finance income/(costs) – pensions	5.9	(3.5)	(9.4)
Profit before tax	(0.4)	(10.7)	(10.3)
Tax	0.4	2.8	2.4
Profit for the period	54.5	46.6	(7.9)

Consolidated Statement of Comprehensive Income
Profit for the period	54.5	46.6	(7.9)
Actuarial gains/(losses)	(13.5)	(3.2)	10.3
Tax	7.6	5.2	(2.4)

Consolidated Balance Sheet
Deferred tax liability	–	–	–
Shareholders’ funds	–	–	–

Decrease in reported earnings per share:
Basic earnings per share on profit for the year (pence)	40.5	34.6	(5.9)
Diluted earnings per share on profit for the year (pence)	39.9	34.6	(5.3)
Basic earnings/(loss) per share from continuing operations (pence)	–	(5.9)	(5.9)
Diluted earnings/(loss) per share from continuing operations (pence)	–	(5.9)	(5.9)
Adjusted basic earnings per share from continuing operations (pence)	29.9	29.4	(0.5)
Adjusted diluted earnings per share from continuing operations (pence)	29.5	29.4	(0.1)
Basic earnings per share from discontinued operations (pence)	40.5	40.5	–
Diluted earnings per share from discontinued operations (pence)	39.9	40.5	0.6

The average duration of Fund liabilities is approximately 17 years (2013: 18 years). Discount rate assumptions for each reporting period are based upon quoted AA-rated corporate bond indices with maturities matching the Fund’s expected benefit payments. The Fund duration is an indicator of the weighted-average time until benefit payments are made. For the Fund as a whole, the duration is around 18 years reflecting the approximate split of the defined benefit obligation (including insured pensioners) between deferred members (duration of 24 years), current non-insured pensioners (duration of 15 years) and insured pensioners (duration of 11 years).

The following table provides an analysis of the defined benefit obligation by membership category:

	2014 £m	2013 £m
Deferred members	498.6	442.5
Non-insured pensioner members	215.7	196.9
Insured pensioner members	297.4	286.3
Total defined benefit obligation	1,011.7	925.7

The RPI inflation assumptions are determined by adopting a yield curve approach, based on the break-even rate of inflation implied by fixed interest gilt yields and index-linked yields. Applying this approach to the Fund’s projected benefit payments gives an average break-even inflation assumption of 3.6% (2013: 3.5%). The CPI inflation assumption is determined by reference to adjusted RPI rather than by reference to CPI-linked investments where the market is small and illiquid. The principal differences between RPI and CPI are (i) the formula effect due to RPI using arithmetic means and CPI geometric means, and (ii) the bundles of goods considered – CPI excludes mortgage payments and other housing costs. The assumption used at 31 March 2014 is that CPI inflation will track 1.0% points below RPI inflation in the long term (2013: 1.0%) and is therefore set at 2.6% (2013: 2.5%). Pension increase assumptions are based on RPI with an adjustment to reflect caps within the Fund rules.

The annuity contracts purchased in 2008 and 2009 provide increases on post-88 GMP in line with RPI inflation up to 3% per annum. However, since 2011 the post-88 GMP paid to members only need to increase with CPI inflation up to 3% per annum which is expected to be less than RPI. It is therefore expected that the annuity contracts are expected to pay out slightly more than will be paid out to members so the asset valuation for the annuity contracts are £2.0 million higher than the corresponding liabilities.

Mortality assumptions were updated in the year ended 31 March 2014 based on analysis of the membership data performed as part of the March 2013 full actuarial valuation. The result was an increase in life expectancy assumptions of approximately 0.9 years. Details of the changes to mortality assumptions are detailed later in this note.

The key assumptions used for IAS 19 are discount rate, inflation and mortality. If different assumptions were used, this could have a material effect on the results disclosed. The sensitivity of the results to these assumptions is as follows:

		Expected Expense for 14/15
	Service Cost	Net Interest	Total P&L Charge	March 2014 Deficit
Current Figures	1.0	1.8	2.8	(47.6)
Effect of a 0.1% decrease in the discount rate	–	0.6	0.6	(15.4)
Recalculated value	1.0	2.4	3.4	(63.0)

Effect of a 0.1% increase in the inflation assumption	–	0.4	0.4	(10.0)
Recalculated value	1.0	2.2	3.2	(57.6)

Effect of a 1 year increase in life expectancy	–	1.1	1.1	(25.4)
Recalculated value	1.0	2.9	3.9	(73.0)

The above sensitivities assume that the Fund’s assets remain unchanged but in practice changes in interest and inflation rates will also affect the value of the Fund’s assets. The Company and Trustee have agreed a long-term strategy for reducing investment risk as and when appropriate. This includes an asset/liability matching policy which aims to reduce the volatility of the funding level of the Fund by investing in assets which perform in line with the liabilities of the Fund. In December 2008 and June 2009, certain obligations relating to retired members were fully hedged by the purchase of annuity contracts. The Fund’s other investments include matching assets which protect against changes in bond yields and against inflation risk: the respective interest rate and inflation hedge ratios for these assets as at 31 March 2014 were 25.8% and 23.3% of those obligations not covered by annuity contracts.

The liabilities are calculated using a discount rate set with reference to corporate bond yields; if assets underperform this yield, this will create an increased deficit. The Fund holds a significant proportion in a range of return-seeking assets which, though expected to outperform corporate bonds in the long-term, create volatility and risk in the short-term. The allocation to return-seeking assets is monitored to ensure it remains appropriate given the Fund’s long term objectives.

A decrease in corporate bond yields will increase the value placed on the Fund’s liabilities for accounting purposes, although this will be partially offset by an expected increase in the value of the Fund’s bond holdings.

A significant proportion of the Fund’s benefit obligations are linked to inflation, and higher expected future inflation will lead to higher liabilities (although, in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation). The majority of the assets are either unaffected by or only loosely correlated with inflation, meaning that an increase in expected future inflation will also increase the deficit.

The majority of the Fund’s obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the liabilities.

A contingent liability exists in relation to the equalisation of Guaranteed Minimum Pension (‘GMP’). The UK Government intends to implement legislation which could result in higher benefits for some members. This would increase the defined benefit obligation of the Fund. At this stage, it is not possible to quantify the impact of this change.

	Dairy Crest Group Pension Fund
Movement in the present value of the defined benefit obligations are as follows:	2014 £m	2013 £m
Opening defined benefit obligation	(925.7)	(845.9)
Interest cost	(41.8)	(41.5)
Actuarial losses	(77.2)	(72.0)
Benefits paid	33.0	33.7
Closing defined benefit obligation	(1,011.7)	(925.7)

Movement in the fair value of plan assets are as follows:
Opening fair value of scheme assets	869.4	766.1
Interest income on fund assets	41.5	38.0
Remeasurement gains on fund assets	26.8	79.7
Contributions by employer	60.4	20.2
Administration costs incurred	(1.0)	(0.9)
Benefits paid out	(33.0)	(33.7)
Closing fair value of plan assets	964.1	869.4

The principal assumptions used in determining retirement benefit obligations for the Dairy Crest Group Pension Fund are shown below:

	2014 %	2013 %	2012 %
Key assumptions:
Price inflation (RPI)	3.6	3.5	3.4
Price inflation (CPI)	2.6	2.5	2.4
Pension increases (Pre 1993 – RPI to 7%/annum)	3.6	3.5	3.4
Pension increases (1993 to 2006 – RPI to 5%/annum)	3.4	3.3	3.2
Pension increases (Post 2006 – RPI to 4% pa)	3.1	3.0	3.0
Life expectancy at 65 for a male currently aged 50 (years)	23.8	22.6	22.5
Average expected remaining life of a 65 year old retired male (years)	22.3	21.7	21.6
Life expectancy at 65 for a female currently aged 50 (years)	26.7	25.3	25.2
Average expected remaining life of a 65 year old retired female (years)	24.5	24.1	24.0
Discount rate	4.3	4.6	5.0

The financial assumptions reflect the nature and term of the Fund’s liabilities.

The mortality assumptions are based on analysis of the Fund members, and allow for expected future improvements in mortality rates.

It has been assumed that members exchange 25% of their pension for a cash lump sum at retirement.

The results of the latest funding valuation at 31 March 2013 have been adjusted to the balance sheet date taking account of experience over the period since 31 March 2013, changes in market conditions and differences in the financial and demographic assumptions. The present value of the defined obligation and the related current service cost were measured using the Projected Unit Credit Method.

The Fund’s assets are invested in the following asset classes (all assets have a quoted market value in an active market with the exception of property, annuity policy and cash).

Assets	2014 £m	2013 £m	2012 £m

Equities:
United Kingdom	50.6	137.3	115.9
North America	62.8	89.3	69.0
Europe (ex UK)	29.1	35.8	27.7
Japan	15.8	34.4	29.8
Asia (ex Japan)	8.2	16.0	12.6
Emerging Markets	21.0	37.8	34.4
Global Small Cap	13.7	12.2	9.7
Cash/LIBOR Synthetic Equity	(152.4)	(235.5)	(164.8)

Emerging Market Debti	61.2	38.4	33.8
High Yield Bonds	–	22.7	20.0
Multi Asset Creditii	60.0	–	–
Insurance Linked Securitiesiii	24.7	–	–
Absolute Return Bondsiv	30.4	–	–

Bonds:
Government Index Linked Gilts	–	111.4	59.4
Network Rail Index Linked Gilts	–	60.5	55.0
Corporate Bonds	98.0	131.8	117.1

Liability Driven Investmentsv	170.0	–	–
Annuity Policy	299.4	286.3	279.6
Property	67.6	62.5	58.8
Cash	104.0	28.5	8.1
Total	964.1	869.4	766.1

31/3/2014 equities are a combination of physical equities of £45.5 million, a positive synthetic equity exposure of £155.7 million and a negative LIBOR exposure of £152.4 million. The Group does not use any of the pension fund assets.

i This is debt issued by emerging market countries denominated in the emerging market’s domestic currency. The debt is almost entirely issued by governments and not by corporations. Investors benefit from higher yields on the bonds due to the additional risks of investing in emerging market countries, compared to developed countries and it is also expected that the emerging market currencies will appreciate over time relative to developed countries.

ii Multi Asset Credit strategies invest globally in a wide range of credit-based asset classes which include bank loans, high yield bonds, securitised debt, emerging market debt and distressed debt of non-investment grade. The investment strategies will also allocate amounts in investment grade credit, sovereign bonds and cash for defensive reasons. The strategies are opportunistic and allocate dynamically to the best opportunities within the credit market from an asset allocation and individual security selection perspective.

iii Insurance linked securities are event-linked investments which allow investors outside the insurance industry to access insurance premiums for assuming various forms and degrees of insurance risk. The underlying risk premium is a type of invent risk where the event is linked to natural or man-made catastrophes. The premium paid to the investor represents compensation for the “expected loss” due to the uncertainty around the size and timing of the insured event.

iv Absolute Return Bond strategies are designed to deliver a positive return in all market environments and will take advantage of numerous alpha opportunities within the fixed income universe. The objective of the strategy is to capture returns from active management in a number of areas within fixed income including interest rates, currencies, asset allocation and security selection. The strategy will have long and short positions and employ a degree of leverage. The strategies tend to have low sensitivity to the direction of interest rates and credit.

v Insight have been appointed to manage the Liability Driven Investment (‘LDI’) portfolio for the Fund. The objective is to hedge a proportion of the Fund’s liabilities against changes in interest rates and inflation expectations by investing in assets that are similarly sensitive to changes in interest rates and inflation expectations. The current hedging target for the LDI portfolio is to hedge approximately 36% of the fixed and inflation linked liabilities of the Fund. Currently the LDI portfolio hedges c20.7% and c23.3% of the fixed and inflation linked liabilities respectively. Insight will seek to add interest and inflation exposure to the LDI portfolio over time in line with parameters that have been set by the Trustee. Insight are permitted to use a range of swaps and gilt based derivative instruments as well as physical bonds to structure the liability hedge for the Fund. In addition, Insight are responsible for monitoring market yields against a number of pre-set yield triggers and will increase the level of hedging as and when the triggers are met.

History of experience gains and losses:	2010 £m	2011 £m	2012 £m	2013 £m	2014 £m
Fair value of Fund assets	680.1	718.6	766.1	869.4	964.1
Present value of defined benefit obligation	(822.5)	(778.7)	(845.9)	(936.6)	(1,021.8)
Net deficit	(142.4)	(60.1)	(79.8)	(67.2)	(57.7)

Experience adjustments arising on Fund liabilities*	7.4	16.4	(6.5)	0.8	4.3
Adjustments arising from changes in underlying assumptions	(258.9)	21.7	(61.6)	(72.8)	(81.5)
Experience adjustments arising on Fund assets	143.1	31.5	32.9	79.7	26.8
Recognition of liability for unrecoverable notional surplus	–	–	–	(10.9)	0.8
Net actuarial (loss)/gain	(108.4)	69.6	(35.2)	(3.2)	(49.6)

* This item consists of gains/(losses) in respect of liability experience only and excludes any change in liabilities in respect of changes to the actuarial assumptions used.

These figures have been restated as if the accounts had been prepared under IAS 19R.

The Company recognises no liabilities on its balance sheet, or charges or credits in its income statement or statement of recognised income and expense in relation to the Group pension plans. The legal sponsor of the Dairy Crest Group Pension Fund is Dairy Crest Limited.

The Group has charged £7.0 million in respect of the Dairy Crest Group defined contribution scheme in the year ended 31 March 2014 (2013: £7.1 million). The Company has made no charge in respect of the Dairy Crest Group defined contribution scheme in the year ended 31 March 2014 (2013: nil).