Notes to the consolidated financial statements

« 36 Other liabilities
37 Retirement benefit obligations
38 Deferred tax »

37 Retirement benefit obligations

	2008 £m	2007 £m
Charge to the income statement
Defined benefit pension schemes	157	158
Other post-retirement benefit schemes	7	17
Total defined benefit schemes	164	175
Defined contribution pension schemes	71	63
	235	238
	2008 £m	2007 £m
Amounts recognised in the balance sheet
Defined benefit pension schemes	1,657	2,033
Other post-retirement benefit schemes	114	111
	1,771	2,144

Pension schemes

Defined benefit schemes

The Group has established a number of defined benefit pension schemes in the UK and overseas. The majority of the Group's employees are members of the defined benefit sections of the Lloyds TSB Group Pension Schemes No's 1 and 2. These schemes provide retirement benefits calculated as a percentage of final salary depending upon the length of service; the minimum retirement age under the rules of the schemes is 50.

The latest full valuations of the two main schemes are being carried out as at 30 June 2008. The provisional results have been updated to 31 December 2008 by qualified independent actuaries. The last full valuations of other Group schemes were carried out on a number of different dates; these have been updated to 31 December 2008 by qualified independent actuaries or, in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows.

The Group's obligations in respect of its defined benefit schemes are funded. The Group currently expects to pay contributions of at least £525 million to its defined benefit schemes in 2009.

	2008 £m	2007 £m
Amount included in the balance sheet
Present value of funded obligations	15,617	16,795
Fair value of scheme assets	(13,693)	(16,112)
	1,924	683
Unrecognised actuarial (losses) gains	(267)	1,350
Liability in the balance sheet	1,657	2,033
	2008 £m	2007 £m
Movements in the defined benefit obligation
At 1 January	16,795	17,378
Current service cost	258	302
Interest cost	957	866
Actuarial gains	(1,928)	(971)
Benefits paid	(597)	(555)
Past service cost	21	25
Curtailments	6	–
Disposal of businesses	–	(262)
Exchange and other adjustments	105	12
At 31 December	15,617	16,795
	2008 £m	2007 £m
Changes in the fair value of scheme assets
At 1 January	16,112	15,279
Expected return	1,085	1,035
Employer contributions	541	446
Actuarial (losses) gains	(3,520)	139
Benefits paid	(597)	(555)
Disposal of businesses	–	(244)
Exchange and other adjustments	72	12
At 31 December	13,693	16,112
Actual return on scheme assets	(2,435)	1,174

Assumptions

The principal actuarial and financial assumptions used in valuations of the defined benefit pension schemes were as follows:

	2008 %	2007 %
Discount rate	6.30	5.80
Rate of inflation	3.00	3.30
Rate of salary increases	3.75	4.00
Rate of increase for pensions in payment	2.80	3.10
	Years	Years
Life expectancy for member aged 60, on the valuation date:
Men	26.4	25.9
Women	27.2	27.9
Life expectancy for member aged 60, 15 years after the valuation date:
Men	27.3	27.1
Women	28.1	29.0

The mortality assumptions used in the scheme valuations are based on standard tables published by the Institute and Faculty of Actuaries which were adjusted in line with the actual experience of the relevant schemes. The table shows that a member retiring at age 60 as at 31 December 2008 is assumed to live for, on average, 26.4 years for a male and 27.2 years for a female. In practice there will be much variation between individual members but these assumptions are expected to be appropriate across all members. It is assumed that younger members will live longer in retirement than those retiring now. This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of improvement assumed the table also shows the life expectancy for members aged 45 now, when they retire in 15 years time at age 60.

An analysis of the impact of a reasonable change in these assumptions is provided in note 3.

The expected return on scheme assets has been calculated using the following assumptions:

	2008 %	2007 %
Equities	8.2	8.0
Fixed interest gilts	4.5	4.6
Index linked gilts	4.4	4.2
Non-Government bonds	6.0	5.1
Property	6.7	6.5
Money market instruments and cash	4.8	3.9

The expected return on scheme assets in 2009 will be calculated using the following assumptions:

		2009 %
Equities and alternative assets		8.4
Fixed interest gilts		3.7
Index linked gilts		4.0
Non-Government bonds		6.7
Property		6.4
Money market instruments and cash		3.8

Composition of scheme assets:

	2008 £m	2007 £m
Equities	7,040	8,537
Fixed interest gilts	1,452	2,041
Index linked gilts	1,326	1,433
Non-Government bonds	1,721	1,990
Property	1,485	1,666
Money market instruments, cash and other assets and liabilities	669	445
At 31 December	13,693	16,112

The assets of all the funded plans are held independently of the Group's assets in separate trustee administered funds.

The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields at the balance sheet date at a term and credit rating broadly appropriate for the bonds held. Expected returns on equity and property investment are long-term rates based on the views of the plan's independent investment consultants. The expected return on equities allows for the different expected returns from the private equity, infrastructure and hedge fund investments held by some of the funded plans. Some of the funded plans also invest in certain money market instruments and the expected return on these investments has been assumed to be the same as cash.

Experience adjustments history (since the date of adoption of IAS 19):

	2008 £m	2007 £m	2006 £m	2005 £m	2004 £m
Present value of defined benefit obligation	15,617	16,795	17,378	17,320	14,866
Fair value of scheme assets	(13,693)	(16,112)	(15,279)	(14,026)	(11,648)
	1,924	683	2,099	3,294	3,218
Experience losses on scheme liabilities	(39)	(185)	(50)	(69)	(126)
Experience (losses) gains on scheme assets	(3,520)	139	314	1,538	361

The expense recognised in the income statement for the year ended 31 December comprises:

	2008 £m	2007 £m
Current service cost	258	302
Interest cost	957	866
Expected return on scheme assets	(1,085)	(1,035)
Curtailments	6	–
Past service cost	21	25
Total defined benefit pension expense	157	158

Defined contribution schemes

The Group operates a number of defined contribution pension schemes in the UK and overseas, principally the defined contribution sections of the Lloyds TSB Group Pension Schemes No's 1 and 2.

During the year ended 31 December 2008 the charge to the income statement in respect of these schemes was £71 million (2007: £63 million), representing the contributions payable by the employer in accordance with each scheme's rules.

	2008 £m	2007 £m
Present value of unfunded obligations	118	123
Unrecognised actuarial losses	(4)	(12)
Liability in the balance sheet	114	111

	2008 £m	2007 £m
At 1 January	123	110
Exchange and other adjustments	2	–
Actuarial (gain) loss	(8)	2
Insurance premiums paid	(6)	(6)
Charge for the year	7	17
At 31 December	118	123

ANNUAL REPORT AND ACCOUNTS 2008