Defined contribution schemes

The Group operates defined contribution retirement benefit schemes for employees in the United Kingdom, France, Belgium, Canada and the United States of America. The assets of the schemes are held separately from those of the Group in funds under the control of trustees. Where there are employees who leave the schemes prior to vesting fully in the contributions, the contributions payable by the Group are reduced by the amount of forfeited contributions.

The Group's employees in Denmark, Finland, Sweden, Italy and the Netherlands are members of state-managed retirement benefit schemes operated by the governments of each country. The relevant subsidiaries are required to contribute a specified percentage of payroll costs to the retirement benefit schemes to fund the benefits. The only obligation of the Group with respect to these retirement benefit schemes is to make the specified contributions.

The total cost charged to income of £5.6m (2013: £5.8m) represents contributions payable to these schemes by the Group at rates specified in the rules of the plans. As at 31 December 2014 contributions of £0.2m (2013: £0.2m) due in respect of the current reporting period had not been paid over to the schemes.

Defined benefit schemes

The Group operated a number of pension schemes and provided leaving service benefits to certain employees during the year. The defined benefit obligation less fair value of assets at the end of the year and total expense recognised in the income statement are summarised below as follows:

2014
£m
2013
£m
UK scheme1.04.8
Non-UK schemes16.013.7
17.018.5

Total expense recognised in income statement

2014
£m
2013
£m
UK scheme1.21.2
Non-UK schemes1.01.0
2.22.2

Further details of the Group's defined benefit arrangements are given in the Finance Director's report.

UK scheme

The Group sponsors the Bodycote UK Pension Scheme ("the Scheme") which is a funded defined benefit arrangement for certain UK employees, and pays out pensions at retirement based on service, final pensionable pay and price inflation. The Scheme is funded by the Group and current employee members. The Scheme exposes the Company to actuarial risks such as longevity risk, interest rate risk and market (investment) risk.

The Scheme operates under UK trust law and the trust is a separate legal entity from the Group. The Scheme is governed by a board of trustees, composed of two member representatives, one employer representative and one independent trustee. The trustees are required by law to act in the best interests of scheme members and are responsible for setting certain policies (e.g. investment, funding) together with the Company.

Funding of the Scheme is based on a separate actuarial valuation for funding purposes for which the assumptions may differ from the assumptions above. Funding requirements are formally set out in the Statement of Funding Principles, Schedule of Contributions and Recovery Plan agreed between the Trustees and the Group. The actuarial valuation of the Scheme as at 6 April 2014 is being carried out by a qualified independent actuary and the preliminary results of this have been updated on an approximate basis to 31 December 2014.

The contributions made by the employer over the financial year have been £1.5m, comprising £0.4m in respect of benefit accrual and £1.1m in respect of deficit recovery and ongoing expenses.

It is the policy of the Group to recognise all actuarial gains and losses in the year in which they occur outside of the profit and loss account and in Other Comprehensive Income.

Reconciliation of opening and closing balances of the present value of the defined benefit obligation

2014
£m
2013
£m
Defined benefit obligation at start of year85.785.6
Current service cost0.60.6
Interest expense3.83.8
Contributions by plan participants0.20.2
Actuarial gains arising from changes in demographic assumptions(1.2)
Actuarial losses arising from changes in financial assumptions19.60.2
Experience gains on liabilities(2.0)
Benefits paid, death in service insurance premiums and expenses(3.4)(4.7)
Defined benefit obligation at end of year103.385.7

Reconciliation of opening and closing balances of the fair value of the assets

2014
£m
2013
£m
Fair value of assets at start of year80.981.4
Interest income3.63.6
Return on scheme assets excluding interest income19.9(0.7)
Scheme administration expenses(0.4)(0.4)
Contributions by employer1.51.5
Contributions by plan participants0.20.2
Benefits paid, death in service insurance premiums and expenses (incl. age related rebate)(3.4)(4.7)
Fair value of assets at end of year102.380.9

Total expense recognised in the income statement

2014
£m
2013
£m
Current service cost0.60.6
Net interest on the defined benefit liability0.20.2
Scheme administration expenses0.40.4
Total expenses1.21.2

Assets

2014
Quoted
£m
2014
Unquoted
£m
2013
Quoted
£m
2013
Unquoted
£m
Equities17.612.1
Bonds60.44.043.4
Cash0.30.7
Diversified growth funds20.024.50.2
98.34.037.343.6

None of the fair value of the assets shown above include any of the Group's own financial instruments or any property occupied by, or other assets used by the Group.

The scheme's present strategic target is to allocate 65% of the investment portfolio to 'contractual' asset classes including equities, diversified growth funds, absolute return bonds and direct lending, and 35% to 'non-contractual' asset classes, namely Liability Driven Investment (LDI). The LDI portion of assets has been put in place to reduce interest rate and inflation risk.

Assumptions

2014
% per
annum
2013
% per
annum
RPI inflation3.103.40
CPI inflation2.302.60
Salary increases3.003.00
Rate of discount3.304.50
Allowance for pension in payment increases of RPI or 3% p.a. if less2.362.50
Allowance for revaluation of deferred pensions2.302.60

Mortality – current pensioners:

Actuarial tables used2014
S2PxA YoB
CMI 2013
1.5% long
term trend
2013
S1PxA YoB
CMI 2010
1.5% long
term trend
Life expectancy for members currently aged 6522.622.7

Mortality – future pensioners:

Actuarial tables used2014
S2PxA YoB
CMI 2013
1.5% long
term trend
2013
S1PxA YoB
CMI 2010
1.5% long
term trend
Life expectancy at age 65 for members currently aged 4024.825.5
Cash commutation2014
Members
commute
75% of
maximum
permitted
2013
Members
commute
75% of
maximum
permitted
The weighted average duration of the defined benefit obligation at 31 December 2014 is approximately 18 years (19 years as at 31 December 2013).

Present value of defined benefit obligations, fair value of assets and deficit

2014
£m
2013
£m
Present value of defined benefit obligation103.385.7
Fair value of plan assets(102.3)(80.9)
Deficit in the scheme1.04.8

As all actuarial gains and losses are recognised, the deficit shown above at 31 December 2014 is that recognised in the balance sheet.

The best estimate of contributions to be paid into the plan for the year ending 31 December 2015 is £1.6m.

Amounts recognised in Other Comprehensive Income

2014
£m
2013
£m
Gain from experience on plan liabilities2.0
Return on scheme assets excluding interest income19.9(0.7)
Effects of changes in financial assumptions underlying the present value of the liabilities(19.6)(0.2)
Effects of changes in demographic assumptions underlying the present value of the liabilities1.2
Total gain/(loss) recognised in Other Comprehensive Income3.5(0.9)

Impact of changes to assumptions

20142013
Increase
£m
Decrease
£m
Increase
£m
Decrease
£m
0.25% change in discount rate(4.8)4.8(4.0)4.0
0.25% change in price inflation (and associated assumptions)2.1(2.1)1.2(1.1)
1 year change in life expectancy at age 653.7(3.7)2.0(2.0)

Combined non-UK disclosures

The Group operates schemes in the USA and continental Europe.

In Europe, the Group operates defined benefit pension, post retirement and long-service arrangements for certain employees in Belgium, France, Germany, Italy, Turkey, Switzerland and Liechtenstein.

Reconciliation of opening and closing balances of the present value of the defined benefit obligation

2014
£m
2013
£m
Defined benefit obligation at start of year23.023.8
Current service cost0.60.7
Interest expense0.70.6
Actuarial losses arising from changes in demographic assumptions0.1
Actuarial losses/(gains) arising from changes in financial assumptions3.2(0.7)
Experience losses on liabilities0.3
Benefits paid, death in service insurance premiums and expenses(0.4)(2.1)
Employee contributions0.10.1
Settlements(0.1)
Exchange rate (gain)/loss(1.1)0.4
Defined benefit obligation at end of year26.223.0

Reconciliation of opening and closing balances of the fair value of plan assets

2014
£m
2013
£m
Fair value of assets at start of year9.39.0
Interest income0.30.2
Return on scheme assets excluding interest income0.30.2
Contributions by employer0.30.2
Contributions by employees0.10.1
Benefits paid, death in service insurance premiums and expenses0.1(0.4)
Exchange rate loss(0.2)
Fair value of assets at end of year10.29.3

Total expense recognised in the income statement

2014
£m
2013
£m
Current service cost0.60.7
Net interest on the defined benefit liability0.40.4
Settlements(0.1)
Total expenses1.01.0

Assets

2014
Quoted
£m
2014
Unquoted
£m
2013
Quoted
£m
2013
Unquoted
£m
Equities1.81.7
Bonds0.10.2
Cash1.50.11.3
Insurance contracts6.76.1
3.46.83.26.1

None of the fair values of the assets shown above include any of the Group's own financial instruments or any property occupied by, or other assets used by the Group.

Assumptions for 2014

Salary
increases
% per annum
Rate of
discount
% per annum
Inflation
% per annum
Pension
increases
% per annum
USA - metallurgicaln/a4.1n/an/a
USA - non-metallurgicaln/a4.3n/an/a
France2.82.01.81.5
Germany2.51.9n/a1.8
Italy3.01.21.0n/a
Turkeyn/a9.35.0n/a
Liechtenstein2.51.5n/an/a
Switzerland3.01.5n/an/a

Duration

The weighted average durations of the defined benefit obligations of the overseas schemes at 31 December 2014 range from 11 years to 16 years. The durations ranged from 9 years to 16 years as at 31 December 2013.

Present value of defined benefit obligations, fair value of assets and deficit

2014
£m
2013
£m
Present value of defined benefit obligation26.223.0
Fair value of plan assets(10.2)(9.3)
Deficit in the schemes16.013.7

As all actuarial gains and losses are recognised, the deficit shown above at 31 December 2014 is that recognised in the balance sheet.

Amounts recognised in Other Comprehensive Income

2014
£m
2013
£m
Loss on experience on plan liabilities(0.3)
Return on scheme assets excluding interest income0.30.2
Effects of changes in financial assumptions underlying the present value of the liabilities(3.2)0.7
Effects of changes in demographic assumptions underlying the present value of the liabilities(0.1)
Total (loss)/gain recognised in Other Comprehensive Income(3.0)0.6

The only funded plans are those operated in the USA, Switzerland and Liechtenstein. The best estimate of contributions to be paid into the plans for the year ending 31 December 2015 is £0.2m.

Sensitivities (changes to total defined benefit obligations)

20142013
Increase
£m
Decrease
£m
Increase
£m
Decrease
£m
0.25% change in discount rate(1.0)1.0(0.8)0.9
0.25% change in price inflation (and associated assumptions)0.5(0.5)0.4(0.4)

The scheme sensitivities are designed to give a broad indication of the effect of changes to the assumptions, and are applied to adjust the defined benefit obligation at the end of the reporting period.