Man Group plc - Annual Report 2007

The US scheme was terminated during the year.

Actuarial valuations are conducted every three years. The latest actuarial valuation of the largest scheme, the Man Group plc Pension Fund (formerly known as the ED & F Man Limited Group Pension Fund), a UK defined benefit pension plan, was made at 31 December 2005, using the Projected Unit Cost method. This is a closed scheme and the current service cost is expected to increase as the members approach retirement. For the UK scheme, the Group has agreed to contribute 34.2% of pensionable salaries each year until 2008. The Group made an additional $19 million contribution in August 2006.

The following paragraphs discuss the key assumptions applied and sensitivities in the valuation of the Group’s largest scheme, the UK scheme.

The discount rate is based on yields on high quality corporate bonds of appropriate duration. The annualised yield on the index constructed by iBoxx of AA rated stocks of duration of 15 years or more was 5.4% at 31 March 2007 (4.94% at 31 March 2006). The mean term of the 15-year index falls short of the mean term of the liabilities of the Fund of around 20 years, but in the absence of suitable data, the iBoxx yields are thought to be an appropriate guide.

The expected return on plan assets is based on the market expectation at the beginning of the period for returns over the entire life of the benefit obligation. Investment market conditions suggest an expected return on equities of around 8.0%, expected bond returns of around 5.2%, and expected return on other plan assets (hedge funds, cash) of around 7.6%.

The pension increase entitlement for the majority of members in the Fund is RPI subject to a minimum of 3.0% per annum and a maximum of 5.0% per annum. Pension increases have been assumed to be at a rate of 3.5% per annum reflecting the possibility that future increases are likely to be higher than price inflation.

In light of recent experience, which suggests that there has been lower mortality than previously assumed, it is thought appropriate to update the mortality tables to allow for the general improvements being experienced. As a result, the table of mortality rates PA92C05 (with no age rating) is now being used.
In addition, allowance is made for future improvements in mortality by reducing the discount rate by 0.25% per annum, which increases the balance sheet liabilities. In practical terms, the table below sets out the expectations of life for male and female members currently aged 60 and for those who will be 60 years old in 20 years’ time.

The US defined benefit pension plans were terminated effective 31 August 2006, resulting in a non-recurring cost of termination of $18 million that has been allocated to discontinued operations as an exceptional item (Note 8) and are included in the above US scheme charges.

Pension costs are included in ‘Administrative expenses’ in the income statement.

(d) Share-based payments
During the year, $43 million was charged to the income statement for equity settled, share-based payment transactions (2006: $33 million) in respect of continuing operations. Share-based payment charges for discontinued operations totalled $22 million (2006: $19 million) giving a total for the Group of $65 million (2006: $52 million).

This expense was based on the fair value of the share-based payment transactions when contracted. All of the expense arose under employee share awards made within the Group’s share-based remuneration schemes. Details of these schemes may be found on the Remuneration Report page.

The Group has no legal or constructive obligation to repurchase or settle the options in cash.

The fair value of share options and awards are calculated using a ‘binomial lattice’ model that takes into account the effect of both financial and demographic assumptions. Financial assumptions include the future share price volatility, dividend yield, risk-free interest rate, and the best estimate outcome of non-market based performance conditions. Demographic assumptions include forfeiture and early vesting behaviours that are based upon historic observable data.

The fair values per option and award granted during the year to employees of both continuing and discontinued operations, and the assumptions used in the calculations, are as follows:

The expected share price volatility is based on historical volatility over the last 10 years. The expected option life is the average expected period to exercise. The risk-free rate of return is the yield on zero-coupon US and UK (where appropriate) government bonds of a term consistent with the assumed option life.

It is assumed that the performance conditions applicable to the executive share option scheme and performance share plan will be met in full. For the executive share option scheme, it is assumed that 5% of options per year are subject to early exercise, and in addition, provided there is a gain of 50% on the exercise price, it is assumed that 50% of remaining option holders will exercise per year.