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Retirement benefit and other post-retirement obligations
 12 Months Ended
Dec. 31, 2021
Text block [abstract]  
Retirement benefit and other post-retirement obligations
25. Retirement benefit and other post-retirement obligations
Background
The Group operates a number of defined benefit and defined contribution retirement plans throughout the world.
The largest plan is the Pearson Pension Plan (UK Group plan) in the UK, which is sectionalised to provide both defined benefit and defined contribution pension benefits. The defined benefit section was largely closed to new members from 1 November 2006. The defined contribution section, opened in 2003, is open to new and existing employees. Finally, there is a separate section within the UK Group plan set up for auto-enrolment.
The defined benefit section of the UK Group plan is a final salary pension plan which provides benefits to members in the form of a guaranteed level of pension payable for life. The level of benefits depends on the length of service and final pensionable pay.
The defined contribution section of the UK Group plan operates a Reference Scheme Test (RST) pension underpin for its members. Where a member’s fund value is insufficient to purchase the RST pension upon retirement, the UK Group plan is liable for the shortfall to cover the member’s RST pension. In addition, in recent years, the scheme rules were amended to enable members who have sufficient funds to purchase an RST pension the ability to convert their fund value into a pension in the UK Group plan as an alternative to purchasing an annuity with an insurer. The Group recognises any assets and liabilities relating to these features of the defined contribution section as part of the overall UK Group plan obligation. From 1 January 2021, the Group also recognized the assets and liabilities for all members of the defined contribution section of the UK Group plan, accounting for the whole defined contribution section as a defined benefit scheme under IAS 19 ‘Employee Benefits’ as there is a risk the underpin will require the Group to pay further contributions to the scheme. The net impact of this on the balance sheet is £nil.
The UK Group plan is funded with benefit payments from trustee-administered funds. The UK Group plan is administered in accordance with the Trust Deed and Rules in the interests of its beneficiaries by Pearson Group Pension Trustee Limited.
At 31 December 2021, the UK Group plan had approximately 26,500 members, analysed in the following table:
 
All figures in%
   
Active
     
Deferred
     
Pensioners
     
Total
  
Defined benefit
   
 
—  
 
   
 
18
 
   
 
33
 
   
 
51
 
Defined contribution
   
 
11
 
   
 
38
 
   
 
—  
 
   
 
49
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
 
11
 
   
 
56
 
   
 
33
 
   
 
100
 
    
 
 
     
 
 
     
 
 
     
 
 
  
The other major defined benefit plans are based in the US. These are also final salary pension plans which provide benefits to members in the form of a guaranteed pension payable for life, with the level of benefits dependent on length of service and final pensionable pay. The majority of the US plans are fully funded.
Background continued
 
The Group also has several post-retirement medical benefit plans (PRMBs), principally in the US. PRMBs are unfunded but are accounted for and valued similarly to defined benefit pension plans.
The defined benefit schemes expose the Group to actuarial risks, such as life expectancy, inflation risks and investment risk including asset volatility and changes in bond yields. The Group is not exposed to any unusual, entity-specific or plan-specific risks.
Key judgements
– Whether the Group will be eligible to receive the surplus associated with the UK Group Pension Plan in recognising a pension asset.
Key areas of estimation
– The determination of the pension cost and defined benefit obligation of the Group’s defined benefit pension schemes depends on the selection of certain assumptions, which include the discount rate, inflation rate, salary growth and longevity.
Assumptions
The principal assumptions used for the UK Group plan and the US PRMB are shown below. Weighted average assumptions have been shown for the other plans, which primarily relate to US pension plans.
 
    
2021
    
2020
    
2019
  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
All figures in %
   
UK Group
plan
     
Other

plans
     
PRMB
    
UK Group
plan
    
Other

plans
    
PRMB
    
UK Group
plan
    
Other

plans
    
PRMB
  
Inflation
   
 
3.3
 
   
 
1.4
 
   
 
—  
 
     2.9       0.6       —         3.0       1.7       1.5  
Rate used to discount plan liabilities
   
 
1.9
 
   
 
2.8
 
   
 
2.6
 
     1.4       2.2       2.1       2.0       3.0       3.1  
Expected rate of increase in salaries
   
 
3.8
 
   
 
2.7
 
   
 
—  
 
     3.4       2.2       —         3.5       2.9       3.0  
Expected rate of increase for pensions in payment and deferred pensions
   
 
2.35 to 5.10
 
   
 
—  
 
   
 
—  
 
     2.05 to 5.05       —         —         1.85 to 5.05       —         —    
Initial rate of increase in healthcare rate
   
 
—  
 
   
 
—  
 
   
 
6.3
 
     —         —         6.5       —         —         6.8  
Ultimate rate of increase in healthcare rate
   
 
—  
 
   
 
—  
 
   
 
5.0
 
     —         —         5.0       —         —         5.0  
The UK discount rate is based on corporate bond yields adjusted to reflect the duration of liabilities.
The inflation rate for the UK Group plan of 3.3% (2020: 2.9%; 2019: 3.0%) reflects the RPI rate. In line with changes to legislation in 2010, certain benefits have been calculated with reference to CPI as the inflationary measure and in these instances a rate of 2.6% (2020: 2.2%; 2019: 2.0%) has been used. The CPI rate is determined as a weighted average deduction from the RPI rate, and allows for the expected change to the formula for calculating RPI to be in line with CPIH from 2030 onwards.
The expected rate of increase in salaries has been set at 3.8% for 2021 (2020: 3.4%; 2019: 3.5%).
Assumptions continued
 
For the UK Group plan, the mortality base table assumptions have been updated and are derived from the SAPS S3 for males and females, adjusted to reflect the observed experience of the plan, with CMI model improvement factors. A 1.5% long-term rate improvement on the CMI 2020 model is applied for both males and females. The analysis of experience, and standard tables, do not reflect the impact of the ongoing
COVID-19
pandemic, the ultimate impact of which remains uncertain.
For the US plans, the mortality table (Pri – 2012) and 2021 improvement scale (MP – 2021) with generational projection for male and female annuitants has been adopted.
Using the above tables, the remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date for the UK Group plan and US plans is as follows:
 
    
UK
     
US
  
All figures in years
   
2021
     
2020
     
2021
     
2020
  
Male
   
 
22.6
 
      24.0     
 
20.5
 
      20.4  
Female
   
 
24.8
 
      24.3     
 
22.5
 
      22.4  
The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, for the UK and US Group plans is as follows:
 
    
UK
     
US
  
All figures in years
   
2021
     
2020
     
2021
     
2020
  
Male
   
 
24.2
 
   
 
25.6
 
   
 
22.0
 
   
 
21.9
 
Female
   
 
26.5
 
   
 
26.1
 
   
 
23.9
 
   
 
23.8
 
Although the Group anticipates that plan surpluses will be utilised during the life of the plan to address member benefits, the Group recognises its pension surplus in full in respect of the UK Group plan on the basis that it is management’s judgement that there are no substantive restrictions on the return of residual plan assets in the event of a winding up of the plan after all member obligations have been met.
Financial statement information
The amounts recognised in the income statement are as follows:
 
    
2021
  
All figures in £ millions
   
UK
Group plan
    
Defined
benefit
other
    
Sub-total
    
Defined

contribution
     
PRMB
     
Total
  
Current service cost
   
 
17
 
  
 
2
 
  
 
19
 
  
 
37
 
   
 
—  
 
   
 
56
 
Past service cost
   
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
   
 
—  
 
   
 
—  
 
Curtailments
   
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
   
 
—  
 
   
 
—  
 
Administration expenses
   
 
6
 
  
 
—  
 
  
 
6
 
  
 
—  
 
   
 
—  
 
   
 
6
 
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
Total operating expense
   
 
23
 
  
 
2
 
  
 
25
 
  
 
37
 
   
 
—  
 
   
 
62
 
Interest on plan assets
   
 
(55
) 
  
 
(2
) 
  
 
(57
) 
  
 
—  
 
   
 
—  
 
   
 
(57
) 
Interest on plan liabilities
   
 
49
 
  
 
3
 
  
 
52
 
  
 
—  
 
   
 
1
 
   
 
53
 
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
Net finance (income)/expense
   
 
(6
) 
  
 
1
 
  
 
(5
) 
  
 
—  
 
   
 
1
 
   
 
(4
) 
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
Net income statement charge
   
 
17
 
  
 
3
 
  
 
20
 
  
 
37
 
   
 
1
 
   
 
58
 
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
Financial statement information continued
 
    
2020
  
All figures in £ millions
   
UK
Group plan
    
Defined
benefit
other
    
Sub-total
    
Defined

contribution
     
PRMB
     
Total
  
Current service cost
      6       2       8       47        —          55  
Past service cost
      1       —         1       —          —          1  
Curtailments
      —         (1 )      (1 )      —          —          (1 ) 
Administration expenses
      5       —         5       —          —          5  
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
Total operating expense
      12       1       13       47        —          60  
Interest on plan assets
      (66 )      (3 )      (69 )      —          —          (69 ) 
Interest on plan liabilities
      57       5       62       —          1        63  
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
Net finance (income)/expense
      (9 )      2       (7 )      —          1        (6 ) 
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
Net income statement charge
      3       3       6       47        1        54  
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
     
 
 
  
 
    
2019
  
All figures in £ millions
   
UK
Group plan
    
Defined
benefit
other
    
Sub-total
    
Defined
contribution
     
PRMB
    
Total
  
Current service cost
   
 
6
 
  
 
3
 
  
 
9
 
  
 
57
 
   
 
—  
 
  
 
66
 
Past service cost
   
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
   
 
—  
 
  
 
—  
 
Curtailments
   
 
(2
) 
  
 
—  
 
  
 
(2
) 
  
 
—  
 
   
 
(1
) 
  
 
(3
) 
Administration expenses
   
 
6
 
  
 
—  
 
  
 
6
 
  
 
—  
 
   
 
—  
 
  
 
6
 
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Total operating expense
      10       3       13       57        (1 )      69  
Interest on plan assets
   
 
(89
) 
  
 
(5
) 
  
 
(94
) 
  
 
—  
 
   
 
—  
 
  
 
(94
) 
Interest on plan liabilities
   
 
73
 
  
 
6
 
  
 
79
 
  
 
—  
 
   
 
2
 
  
 
81
 
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Net finance (income)/expense
   
 
(16
) 
  
 
1
 
  
 
(15
) 
  
 
—  
 
   
 
2
 
  
 
(13
) 
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
Net income statement charge
      (6 )      4       (2 )      57        1       56  
  
 
 
    
 
 
    
 
 
    
 
 
     
 
 
    
 
 
  
The amounts recognised in the balance sheet are as follows:
 
   
2021
    
2020
  
All figures in £ millions
  
UK
Group

plan
    
Other
funded

plans
    
Other
unfunded
plans
    
Total
    
UK
Group
plan
    
Other
funded

plans
    
Other
unfunded
plans
    
Total
  
Fair value of plan assets
  
 
4,125
 
  
 
120
 
  
 
—  
 
  
 
4,245
 
     3,588       119       —         3,707  
Present value of defined benefit obligation
  
 
(3,588
) 
  
 
(123
) 
  
 
(20
) 
  
 
(3,731
) 
     (3,178 )      (135 )      (21 )      (3,334 ) 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net pension asset/(liability)
  
 
537
 
  
 
(3
) 
  
 
(20
) 
  
 
514
 
     410       (16 )      (21 )      373  
Other post-retirement medical benefit obligation
        
 
(34
) 
           (39 ) 
Other pension accruals
        
 
(9
) 
           (9 ) 
       
 
 
          
 
 
  
Net retirement benefit asset
        
 
471
 
           325  
       
 
 
          
 
 
  
Analysed as:
                
Retirement benefit assets
        
 
537
 
           410  
Retirement benefit obligations
        
 
(66
) 
           (85 ) 
The following gains/(losses) have been recognised in other comprehensive income:
 
All figures in £ millions
   
2021
     
2020
     
2019
  
Amounts recognised for defined benefit plans
      145        (24 )       (148 ) 
Amounts recognised for post-retirement medical benefit plans
      4        1        3  
  
 
 
     
 
 
     
 
 
  
Total recognised in year
   
 
149
 
   
 
(23
) 
   
 
(145
) 
  
 
 
     
 
 
     
 
 
  
The fair value of plan assets comprises the following:
 
    
2021
     
2020
  
  
 
 
     
 
 
  
All figures in %
   
UK Group
plan
     
Other
funded plans
     
Total
     
UK Group
plan
     
Other
funded plans
     
Total
  
Insurance
   
 
35
 
   
 
—  
 
   
 
35
 
      42        —          42  
Equities
   
 
11
 
   
 
1
 
   
 
12
 
      1        1        2  
Fixed interest securities
   
 
7
 
   
 
2
 
   
 
9
 
      5        1        6  
Property
   
 
5
 
   
 
—  
 
   
 
5
 
      5        —          5  
Pooled asset investment funds
   
 
30
 
   
 
—  
 
   
 
30
 
      34        —          34  
Other
   
 
9
 
   
 
—  
 
   
 
9
 
      11        —          11  
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group. The table below further disaggregates the plan assets into those assets which have a quoted market price in an active market and those that do not:
 
    
2021
     
2020
  
  
 
 
     
 
 
  
All figures in %
   
Quoted

market price
     
No quoted

market price
     
Quoted

market price
     
No quoted

market price
  
Insurance
   
 
35
 
   
 
—  
 
      42        —    
Equities
   
 
11
 
   
 
1
 
      —          2  
Fixed-interest securities
   
 
9
 
   
 
—  
 
      6        —    
Property
   
 
—  
 
   
 
5
 
      —          5  
Pooled asset investment funds
   
 
30
 
   
 
—  
 
      34        —    
Other
   
 
—  
 
   
 
9
 
      —          11  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
 
85
 
   
 
15
 
      82        18  
  
 
 
     
 
 
     
 
 
     
 
 
  
The liquidity profile of the UK Group plan assets is as follows:
 
All figures in %
   
2021
     
2020
  
Liquid – call <1 month
   
 
51
 
      39  
Less liquid – call 1–3 months
   
 
—  
 
      —    
Illiquid – call >3 months
   
 
49
 
      61  
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:
 
All figures in £ millions
  
2021
     
2020
  
 
UK Group
plan
    
Other

plans
    
Total
     
UK Group
plan
    
Other

plans
    
Total
  
Fair value of plan assets
             
Opening fair value of plan assets
  
 
3,588
 
  
 
119
 
  
 
3,707
 
      3,341       120       3,461  
Recognition of Money Purchase assets
  
 
513
 
  
 
—  
 
  
 
513
 
      —         —         —    
Exchange differences
  
 
—  
 
  
 
2
 
  
 
2
 
      —         (3 )      (3 ) 
Interest on plan assets
  
 
55
 
  
 
2
 
  
 
57
 
      66       3       69  
Return on plan assets excluding interest
  
 
71
 
  
 
6
 
  
 
77
 
      297       8       305  
Contributions by employer
  
 
14
 
  
 
1
 
  
 
15
 
      3       5       8  
Benefits paid
  
 
(123
) 
  
 
(10
) 
  
 
(133
) 
      (119 )      (14 )      (133 ) 
Contributions by employees
  
 
7
 
  
 
—  
 
  
 
7
 
      —         —         —    
 
 
 
    
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Closing fair value of plan assets
  
 
4,125
 
  
 
120
 
  
 
4,245
 
      3,588       119       3,707  
 
 
 
    
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Present value of defined benefit obligation
             
Opening defined benefit obligation
  
 
(3,178
) 
  
 
(156
) 
  
 
(3,334
) 
      (2,912 )      (157 )      (3,069 ) 
Recognition of Money Purchase liabilities
  
 
(513
) 
  
 
—  
 
  
 
(513
) 
      —         —         —    
Exchange differences
  
 
—  
 
  
 
(1
) 
  
 
(1
) 
      —         3       3  
Current service cost
  
 
(17
) 
  
 
(2
) 
  
 
(19
) 
      (6 )      (2 )      (8 ) 
Past service cost
  
 
—  
 
  
 
—  
 
  
 
—  
 
      (1 )      —         (1 ) 
Curtailments
  
 
—  
 
  
 
—  
 
  
 
—  
 
      —         1       1  
Administration expenses
  
 
(6
) 
  
 
—  
 
  
 
(6
) 
      (5 )      —         (5 ) 
Interest on plan liabilities
  
 
(49
) 
  
 
(3
) 
  
 
(52
) 
      (57 )      (5 )      (62 ) 
Actuarial (losses)/gains – experience
  
 
(100
) 
  
 
3
 
  
 
(97
) 
      (18 )      (2 )      (20 ) 
Actuarial (losses)/gains – demographic
  
 
(1
) 
  
 
—  
 
  
 
(1
) 
      1       1       2  
Actuarial gains/(losses) – financial
  
 
160
 
  
 
6
 
  
 
166
 
      (299 )      (11 )      (310 ) 
Contributions by employee
  
 
(7
) 
  
 
—  
 
  
 
(7
) 
      —         2       2  
Benefits paid
  
 
123
 
  
 
10
 
  
 
133
 
      119       14       133  
 
 
 
    
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Closing defined benefit obligation
  
 
(3,588
) 
  
 
(143
) 
  
 
(3,731
) 
      (3,178 )      (156 )      (3,334 ) 
 
 
 
    
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
From 1 January 2021, the Group has recognised the assets and liabilities for all members of the defined contribution section of the UK Group plan, accounting for the whole defined contribution section as a defined benefit scheme under IAS 19 ‘Employee Benefits’. The net impact on the balance sheet is £nil, however, the gross amounts of £513m can be seen in the table above. Subsequent movements to those assets and liabilities are included in the relevant lines in the table above.
The weighted average duration of the defined benefit obligation is 16 years for the UK and seven years for the US.
Changes in the value of the US PRMB are as follows:
 
All figures in £ millions
   
2021
       
2020
  
Opening defined benefit obligation
   
 
(39
) 
        (43 ) 
Exchange differences
   
 
(1
) 
        1  
Interest on plan liabilities
   
 
(1
) 
        (1 ) 
Actuarial gains – experience
   
 
2
 
        3  
Actuarial gains – demographic
   
 
—  
 
        1  
Actuarial gains/(losses) – financial
   
 
2
 
        (3 ) 
Benefits paid
   
 
3
 
        3  
    
 
 
       
 
 
  
Closing defined benefit obligation
   
 
(34
) 
        (39 ) 
    
 
 
       
 
 
  
Funding
The UK Group plan is self-administered with the plan’s assets being held independently of the Group in trust. The trustee of the UK Group plan is required to act in the best interest of the plan’s beneficiaries. The most recent triennial actuarial valuation for funding purposes was completed as at 1 January 2021 and this valuation revealed a technical provisions funding surplus of £160m. The UK Group plan expects to be able to provide benefits (in accordance with the plan rules) with a very low level of reliance on future funding from the Group.
Assets of the UK Group plan are divided into two elements: matching assets, which are assets that produce cash flows that can be expected to match the cash flows for a proportion of the membership, and include a liability-driven investment mandate (UK bonds, interest rate/inflation swaps and other derivative instruments), pensioner
buy-in
insurance policies, inflation-linked property and infrastructure, and return-seeking assets, which are assets invested with a longer-term horizon to generate the returns needed to provide the remaining expected cash flows for the beneficiaries, and include diversified growth funds, property and alternative asset classes. The UK Group plan’s long-term investment strategy allocates 95% to matching assets and 5% to return-seeking assets.
Following the purchase of
buy-in
policies with Legal & General and Aviva in 2017 and 2019, 95% of the UK Group plan’s pensioner liabilities are now matched with
buy-in
policies. These transfer significant longevity risk to Aviva and Legal & General, reducing the pension risks being underwritten by the Group and providing additional security for members.
Regular employer contributions to the UK Group plan in respect of the defined benefit sections are estimated to be £3m for 2022.
Sensitivities
The effect of a one percentage point increase and decrease in the discount rate on the defined benefit obligation and the total pension expense is as follows:
 
    
2021
  
  
 
 
  
All figures in £ millions
   
1%
increase
     
1%
decrease
  
Effect:
   
 
                
 
   
 
                
 
(Decrease)/increase in defined benefit obligation – UK Group plan
   
 
(450
) 
   
 
616
 
(Decrease)/increase in defined benefit obligation – US plan
   
 
(9
) 
   
 
11
 
                   
The effect of members living one year more or one year less on the defined benefit obligation is as follows:
 
    
2021
  
  
 
 
  
All figures in £ millions
   
One year
increase
     
One year
decrease
  
Effect:
   
 
                
 
   
 
                
 
Increase/(decrease) in defined benefit obligation – UK Group plan
   
 
107
 
   
 
(108
) 
Increase/(decrease) in defined benefit obligation – US plan
   
 
4
 
   
 
(3
) 
                   
The effect of a half percentage point increase and decrease in the inflation rate is as follows:
 
    
2021
  
  
 
 
  
All figures in £ millions
   
0.5%
increase
     
0.5%
decrease
  
Effect:
                  
Increase/(decrease) in defined benefit obligation – UK Group plan
   
 
142
 
   
 
(141
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Increase/(decrease) in defined benefit obligation – US plan
   
 
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The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant, although in practice this is unlikely to occur and changes in some assumptions may be correlated. When calculating these sensitivities, the same method has been applied to calculate the defined benefit obligation as has been applied when calculating the liability recognised in the balance sheet. This methodology is the same as prior periods.