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Retirement benefit and other post-retirement obligations
 12 Months Ended
Dec. 31, 2023
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. The Group also recognises 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 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 Pension Trustee Limited.
At 31 December 2023, the UK Group plan had approximately 26,300 members, analysed in the following table:
 
         
All figures in %      Active        Deferred       Pensioners        Total  
Defined benefit   
 
–
 
   
 
15
 
   
 
33
 
   
 
48
 
Defined contribution   
 
10
 
   
 
42
 
   
 
–
 
   
 
52
 
         
Total
   
 
10
 
   
 
57
 
   
 
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.
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.
 
   
     LOGO Key judgements     
 
—  Whether the Group will be eligible to receive the surplus associated with the UK Group Pension Plan in recognising a pension asset.
  
  LOGO 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.
 
                     
               
2023
                       2022                   2021  
All figures in %  
UK
Group
plan
    
Other
plans
    
PRMB
         
UK Group
plan
    
Other
plans
     PRMB    
UK Group
plan
    
Other
plans
     PRMB  
Inflation  
 
3.0
 
  
 
2.0
 
  
 
–
 
       3.4       2.0       –       3.3       1.4       –  
Rate used to discount plan liabilities  
 
4.6
 
  
 
4.9
 
  
 
5.0
 
       4.9       5.3       5.3       1.9       2.8       2.6  
Expected rate of increase in salaries  
 
3.5
 
  
 
2.5
 
  
 
–
 
       3.9       2.9       –       3.8       2.7       –  
Expected rate of increase for pensions in payment and deferred pensions  
 
1.75 to
5.10
 
 
  
 
–
 
  
 
–
 
      
1.95 to
5.20
  
 
     –       –      
2.35 to
5.10
  
 
     –       –  
Initial rate of increase in healthcare rate  
 
–
 
  
 
–
 
  
 
6.5
 
       –       –       6.5       –       –       6.3  
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 3.0% (2022: 3.4%) 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 2.3% (2022: 2.7%) 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.
For the UK Group plan, the mortality base table assumptions 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 2022 model is applied for both males and females, with a weighting to 2022 mortality experience in the CMI model of 40% to reflect current trends in life expectancy. Life expectancy remains uncertain following the
COVID-19
pandemic which had wide-ranging direct and indirect impacts.
For the US plans, a 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   
   2023
         2022         2021    
 
   
   2023
         2022         2021  
Male   
 
21.8
 
      22.5        22.6       
 
20.7
 
      20.6        20.5  
Female   
 
24.1
 
      24.7        24.8    
 
   
 
22.6
 
      22.6        22.5  
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   
   2023
         2022         2021    
 
   
   2023
         2022         2021  
Male   
 
23.4
 
      24.1        24.2       
 
22.2
 
      22.1        22.0  
Female   
 
25.8
 
      26.4        26.5    
 
   
 
24.1
 
      24.0        23.9  
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:
 
All figures in £ millions  
UK Group
plan
    
Defined
benefit
other
    
Sub-total
    
Defined
contribution
    
PRMB
    
2023
 
 
Total
  
Current service cost  
 
16
 
  
 
2
 
  
 
18
 
  
 
45
 
  
 
–
 
  
 
63
 
Past service cost  
 
–
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
–
 
Settlements  
 
–
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
–
 
  
 
–
 
Administration expenses  
 
8
 
  
 
–
 
  
 
8
 
  
 
–
 
  
 
–
 
  
 
8
 
Total operating expense
  
 
24
 
  
 
2
 
  
 
26
 
  
 
45
 
  
 
–
 
  
 
71
 
Interest on plan assets  
 
(148
) 
  
 
(5
) 
  
 
(153
) 
  
 
–
 
  
 
–
 
  
 
(153
) 
Interest on plan liabilities  
 
121
 
  
 
6
 
  
 
127
 
  
 
–
 
  
 
–
 
  
 
127
 
Net finance (income)/expense
  
 
(27
) 
  
 
1
 
  
 
(26
) 
  
 
–
 
  
 
–
 
  
 
(26
) 
Net income statement charge
  
 
(3
) 
  
 
3
 
  
 
–
 
  
 
45
 
  
 
–
 
  
 
45
 
 
                                       
 
2022
  
All figures in £ millions   UK Group
plan		      Defined
benefit
other		    
 Sub-total
     Defined
 contribution		      PRMB      Total  
Current service cost     17       2       19       46       –       65  
Past service cost     3       –       3       –       –       3  
Settlements     –       –       –       –       –       –  
Administration expenses     7       –       7       –       –       7  
Total operating expense
     27       2       29       46       –       75  
Interest on plan assets     (77 )      (3 )      (80 )      –       –       (80 ) 
Interest on plan liabilities     67       3       70       –       1       71  
Net finance (income)/expense
     (10 )      –       (10 )      –       1       (9 ) 
Net income statement charge
     17       2       19       46       1       66  
                                       
 
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     –       –       –       –       –       –  
Settlements     –       –       –       –       –       –  
           
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  
The amounts recognised in the balance sheet are as follows:
 
                         
 
2023
                              
 
2022
  
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  
 
3,060
 
  
 
107
 
  
 
–
 
  
 
3,167
 
  
 
     3,088       104       –       3,192  
Present value of defined benefit obligation  
 
(2,569
) 
  
 
(99
) 
  
 
(15
) 
  
 
(2,683
) 
  
 
     (2,514 )      (106 )      (17 )      (2,637 ) 
Net pension asset/(liability)
  
 
491
 
  
 
8
 
  
 
(15
) 
  
 
484
 
       574       (2 )      (17 )      555  
Other post-retirement medical benefit obligation        
 
(21
) 
             (25 ) 
Other pension accruals  
 
 
 
  
 
 
 
  
 
 
 
  
 
(8
) 
  
 
  
 
 
 
  
 
 
 
  
 
 
 
     (10 ) 
Net retirement benefit asset
  
 
 
 
  
 
 
 
  
 
 
 
  
 
455
 
  
 
  
 
 
 
  
 
 
 
  
 
 
 
     520  
Analysed as:
                  
Retirement benefit assets        
 
499
 
             581  
Retirement benefit obligations  
 
 
 
  
 
 
 
  
 
 
 
  
 
(44
) 
  
 
  
 
 
 
  
 
 
 
  
 
 
 
     (61 ) 
 
 
Financial statement information continued
The following gains/(losses) have been recognised in other comprehensive income:
 
 
All figures in £ millions
   
 
   2023
    
 
   2022
     
 
   2021
  
Amounts recognised for defined benefit plans   
 
(86
) 
     44        145  
Amounts recognised for post-retirement medical benefit plans   
 
1
 
     10        4  
Total recognised in year
   
 
(85
) 
     54        149  
The fair value of plan assets comprises the following:
 
                     
 
2023
     
 
                   
 
   2022
  
All figures in %   
UK Group
plan
     
Other
funded plans
     
Total
            UK Group
plan		      Other
funded plans		      Total  
Insurance   
 
33
 
   
 
–
 
   
 
33
 
         33        –        33  
Equities   
 
15
 
   
 
1
 
   
 
16
 
         14        1        15  
Fixed interest securities   
 
6
 
   
 
2
 
   
 
8
 
         5        2        7  
Property   
 
5
 
   
 
–
 
   
 
5
 
         6        –        6  
Pooled asset investment funds (including LDI)   
 
24
 
   
 
–
 
   
 
24
 
         23        –        23  
Infrastructure   
 
11
 
   
 
–
 
   
 
11
 
         11        –        11  
Cash and cash equivalents   
 
1
 
   
 
–
 
   
 
1
 
         3        –        3  
Other   
 
2
 
   
 
–
 
   
 
2
 
   
 
      2        –        2  
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:
 
             
 
2023
                   
 
2022
  
All figures in %   
Quoted
market price
     
No quoted
market price
            Quoted
market price		      No quoted
market price		  
Insurance   
 
–
 
   
 
33
 
         –        33  
Equities   
 
16
 
   
 
–
 
         15        –  
Fixed-interest securities   
 
8
 
   
 
–
 
         7        –  
Property   
 
–
 
   
 
5
 
         –        6  
Pooled asset investment funds (including LDI)   
 
24
 
   
 
–
 
         23        –  
Infrastructure   
 
–
 
   
 
11
 
         –        11  
Cash and cash equivalents   
 
–
 
   
 
1
 
         –        3  
Other   
 
–
 
   
 
2
 
   
 
      –        2  
Total
   
 
48
 
   
 
52
 
   
 
      45        55  
The liquidity profile of the UK Group plan assets is as follows:
 
 
All figures in %
   
 
   2023
     
 
    2022
  
Liquid – call <1 month   
 
48
 
      47  
Less liquid – call 1–3 months   
 
2
 
      2  
Illiquid – call >3 months   
 
50
 
      51  
 
 
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:
 
                   
 
2023
                  
 
2022
  
All figures in £ millions   
UK Group
plan
    
Other
plans
    
Total
     UK Group
plan		     Other
plans		     Total  
Fair value of plan assets
             
Opening fair value of plan assets   
 
3,088
 
  
 
104
 
  
 
3,192
 
     4,125       120       4,245  
Recognition of Money Purchase assets   
 
–
 
  
 
–
 
  
 
–
 
     –       –       –  
Exchange differences   
 
–
 
  
 
(6
) 
  
 
(6
) 
     –       12       12  
Interest on plan assets   
 
148
 
  
 
5
 
  
 
153
 
     77       3       80  
Return on plan assets excluding interest   
 
(48
) 
  
 
5
 
  
 
(43
) 
     (1,000 )      (18 )      (1,018 ) 
Contributions by employer   
 
–
 
  
 
15
 
  
 
15
 
     15       2       17  
Contributions by employees   
 
7
 
  
 
–
 
  
 
7
 
     7       –       7  
Benefits paid   
 
(135
) 
  
 
(14
) 
  
 
(149
) 
     (136 )      (15 )      (151 ) 
Settlements   
 
–
 
  
 
(2
) 
  
 
(2
) 
     –       –       –  
Closing fair value of plan assets
   
 
3,060
 
  
 
107
 
  
 
3,167
 
     3,088       104       3,192  
Present value of defined benefit obligation
             
Opening defined benefit obligation   
 
(2,514
) 
  
 
(123
) 
  
 
(2,637
) 
     (3,588 )      (143 )      (3,731 ) 
Recognition of Money Purchase liabilities   
 
–
 
  
 
–
 
  
 
–
 
     –       –       –  
Exchange differences   
 
–
 
  
 
6
 
  
 
6
 
     –       (14 )      (14 ) 
Disposals   
 
–
 
  
 
–
 
  
 
–
 
     –       1       1  
Current service cost   
 
(16
) 
  
 
(2
) 
  
 
(18
) 
     (17 )      (2 )      (19 ) 
Past service cost   
 
–
 
  
 
–
 
  
 
–
 
     (3 )      –       (3 ) 
Administration expenses   
 
(8
) 
  
 
–
 
  
 
(8
) 
     (7 )      –       (7 ) 
Interest on plan liabilities   
 
(121
) 
  
 
(6
) 
  
 
(127
) 
     (67 )      (3 )      (70 ) 
Actuarial losses – experience   
 
(61
) 
  
 
(2
) 
  
 
(63
) 
     (25 )      (2 )      (27 ) 
Actuarial gains – demographic   
 
52
 
  
 
–
 
  
 
52
 
     14       –       14  
Actuarial (losses)/gains – financial   
 
(29
) 
  
 
(3
) 
  
 
(32
) 
     1,050       25       1,075  
Contributions by employees   
 
(7
) 
  
 
–
 
  
 
(7
) 
     (7 )      –       (7 ) 
Benefits paid   
 
135
 
  
 
14
 
  
 
149
 
     136       15       151  
Settlements   
 
–
 
  
 
2
 
  
 
2
 
     –       –       –  
Closing defined benefit obligation
   
 
(2,569
) 
  
 
(114
) 
  
 
(2,683
) 
     (2,514 )      (123 )      (2,637 ) 
The weighted average duration of the defined benefit obligation is 12 years for the UK and six years for the US.
Changes in the value of the US PRMB are as follows:
 
All figures in £ millions   
 
   2023
    
 
   2022
  
Opening defined benefit obligation   
 
(25
) 
     (34 ) 
Exchange differences   
 
1
 
     (3 ) 
Interest on plan liabilities   
 
–
 
     (1 ) 
Actuarial gains – experience   
 
2
 
     5  
Actuarial (losses)/gains – financial   
 
(1
) 
     5  
Benefits paid   
 
2
 
     3  
Closing defined benefit obligation
   
 
(21
) 
     (25 ) 
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 provision 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 final salary section of the UK Group plan are divided into two main elements: liability matching assets and return seeking assets. The UK Group plan’s investment strategy for the final salary section allocates approximately 95% to matching assets and 5% to return-seeking assets.
Liability matching assets 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 (LDI) for which a Qualifying Investor Alternative Investment Fund (QIAIF) was established, managed by a subsidiary of Legal & General Investment Management. The QIAIF invests in UK bonds, interest rate/inflation swaps and other derivative instruments in order to reduce interest rate and inflation risks using accurate cash flow matching and risk control. Other liability matching assets include pensioner
buy-in
insurance policies, bonds and inflation-linked property and infrastructure.
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 were 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.
Return-seeking assets 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.
 
 
Recent economic and geopolitical uncertainty has increased volatility in the valuation of certain assets, in particular the LDI and insurance contracts. However, these movements are offset by equivalent movements in the defined benefit obligation. The UK Group plan divides its assets between a number of investment managers and across different types of assets, as such there is no significant concentration of risk.
Regular employer contributions to the UK Group plan in respect of the defined benefit sections are estimated to be £nil for 2024.
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:
 
                        
                        
            
 
2023
  
All figures in £ millions
   
1% increase
    
1% decrease
  
Effect:
     
 
(Decrease)/increase in defined benefit obligation – UK Group plan
   
 
(203
) 
  
 
251
 
 
(Decrease)/increase in defined benefit obligation – US plan
   
 
(5
) 
  
 
5
 
The effect of members living one year more or one year less on the defined benefit obligation is as follows:
 
                        
                        
             
 
2023
  
All figures in £ millions
   
One year
increase
     
One year
decrease
  
Effect:
      
 
Increase/(decrease) in defined benefit obligation – UK Group plan
   
 
58
 
   
 
(58
) 
 
Increase/(decrease) in defined benefit obligation – US plan
   
 
2
 
   
 
(2
) 
The effect of a half percentage point increase and decrease in the inflation rate is as follows:
 
                                                 
             
 
2023
  
All figures in £ millions
   
0.5% increase
     
0.5% decrease
  
Effect:
      
 
Increase/(decrease) in defined benefit obligation – UK Group plan
   
 
61
 
   
 
(58
) 
 
Increase/(decrease) in defined benefit obligation – US plan
   
 
–
 
   
 
–
 
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.