UK pensions discussions

Rolls-Royce Group plc is pleased to confirm that it has reached an understanding with employee representatives and is making substantial progress with Trustees over future UK pension arrangements.

Commenting on the outcome of these discussions Sir John Rose, Chief Executive, said:
“We are very pleased to have reached an understanding on these arrangements. The objective of these changes is to reduce substantially the volatility of the cost to the Group of meeting the pension obligations whilst providing employees with competitive pensions”.

As part of these discussions it has been agreed that a total of £500m will be injected into the UK pension funds by the Group, the majority of which is subject to agreement with the Trustees on changes in investment strategy. The new arrangements include the following elements:

With effect from 1 April 2007 all UK defined benefit pension schemes have been closed to new employees. For these employees the Group has introduced a competitive defined contribution arrangement.
To reflect changes in HM Revenue & Customs practice, the Group has agreed to increase the size of the lump sum payment retirees are able to receive by commuting part of their pension. Like many other employers we have increased the amount of the lump sum paid for pension commuted. Updating our commutation arrangements to reflect these factors will utilize approximately £110m of the £500m contribution mentioned above, and is a one-off effect.
The Group has also agreed a 2% discretionary increase applicable to pensions that do not benefit from any guaranteed increase. This increase is effective from 1 April 2007 and will absorb a further one-off contribution of approximately £30m of the £500m.
The cost of providing for the changes in commutation and the discretionary increase should be funded by 30 June 2007.
The Trustees of the Rolls-Royce Group Pension Scheme, our second largest pension scheme, have already implemented a substantial switch into assets that are better correlated with the liabilities and continue to work with the Group. The Trustees of the other two major schemes are in discussion with the Group over similar proposals. The Group intends to make a further contribution of approximately £360m, the remaining element of the £500m, when final risk reduction strategies are agreed with Trustees.

The aggregate of the commutation benefit change and pensions in payment increase, amounting to around £140m, will be recorded in the income statement as a one-off item in 2007 and will be excluded from the underlying trading results.

At 31 December 2006 the combined UK pensions scheme deficit was £665m, before tax. Whilst the movement in share prices and interest rates since the end of 2006 has reduced the deficit somewhat, an update of the total IAS19 deficit across the UK schemes has not been performed at this time. The IAS19 deficit will be reviewed at the half year and it is expected that a full update of the IAS19 deficit across the UK schemes will be carried out at the end of the year. The remaining contribution of £360m will be an adjustment to the balance sheet pension liability.

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