СТАТИСТИКА 1 / Банк Англии / 2006full

Bank of England Annual Report 2006

24 FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

Following the adoption of IAS 39 at 1 March 2005, the Bank designated its euro securities in issue as financial liabilities at fair value through profit or loss, so matching the portfolio of foreign securities designated as fair value through profit or loss (note 11). These liabilities were previously recorded at amortised cost. All changes in fair values since 1 March 2005 are considered attributable to changes in prevailing interest rates.

	2006	2005
	£m	£m
Financial liabilities designated at fair value through profit or loss:
Euro Notes	4,073	–
Euro Bills	2,439	–
	6,512	–
Debt securities in issue:
Reclassified as financial liabilities designated at fair value through profit or loss (note 33)
Euro Notes	–	3,443
Euro Bills	–	2,471
	–	5,914

Comparative figures have been reclassified but not remeasured.

aEuro Notes

On 27 January 2006, €2.2 billion of the 2006 Euro Notes matured at par. The Bank created a new series of €3.3 billion of Euro Notes maturing on 27 January 2009. This was the sixth issue of three-year Bank of England Euro Notes. As with

the previous issues of Notes, these securities were sold by auction; the first tranche of €2.2 billion was sold on

24 January 2006 and a further auction of €1.1 billion was held on 28 March 2006. The Bank allots any roundings for the auction process to itself and normally retains €100 million of each tranche. In January 2006 an additional €100 million was retained in respect of the 2009 Euro Note. These roundings and amounts retained may be available for sale and repurchase transactions with market makers in the programme. Pending sale to third parties, the Notes are retained by the Bank. It is appropriate to show only the Notes sold to third parties as liabilities on the balance sheet. The position at

28 February 2006 was as follows:

Total amount issued Held by Bank of England Liabilities to third parties

	2006		2005
£m	€m	£m	€m
Fair value	Nominal	Book value	Nominal
5,348	7,700	4,549	6,600
(1,275)	(1,700)	(1,106)	(1,600)
4,073	6,000	3,443	5,000

Carrying values for comparative figures relating to financial instruments are shown under the old accounting basis.

Liabilities to third parties in sterling at 28 February 2006 include accrued interest of £10 million. At 28 February 2005 the corresponding accrued interest of £8 million was included within other liabilities.

Of the above liabilities to third parties, £1,496 million (2005 £1,377 million) falls due within one year.

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Bank of England Annual Report 2006

Notes to the Banking Department Financial Statements continued

b Euro Bills
		2006		2005
	£m	€m	£m	€m
	Fair value	Nominal	Book value	Nominal
Original maturity of Bills in issue:
3 months	1,222	1,795	1,237	1,799
6 months	1,217	1,788	1,234	1,799
Liabilities to third parties	2,439	3,583	2,471	3,598

Carrying values for comparative figures relating to financial instruments are shown under the old accounting basis.

These Bills are issued by the Bank and denominated in euro. Of the above, £1,833 million (2005 £1,856 million) are due within three months or less.

25 OTHER LIABILITIES
	2006	2005
	£m	£m
Payable to HM Treasury	47	38
Due to subsidiaries	20	20
Non-sterling debt securities interest and swap accruals	–	84
Fair values of derivatives:
currency swaps	–	4
interest rate swaps	–	32
foreign exchange swaps	–	2
Items in course of settlement	–	714
Short-term creditors, other liabilities and deferred income	287	100
	354	994

Carrying values for comparative figures relating to financial instruments are shown under the old accounting basis. Current year information relating to debt securities and derivatives is shown within notes 11, 12 and 14.

On 2 November 2005 the Liquidators of the Bank of Credit and Commerce International SA discontinued their misfeasance claim against the Bank. The proceedings were originally commenced in 1993. On 16 February 2006 the High Court issued an order regarding the costs incurred by the Bank in defending the proceedings, which directed that

the Bank’s costs of the proceedings, to be assessed if not agreed, be paid by the claimants on an indemnity basis. The order further provided that the monies paid by the claimants to the Bank on 23 and 25 November 2005 totalling £73.6 million are to be treated as interim payments on account of the Bank’s costs subject to repayment by the Bank to the claimants with interest at the Bank’s repo rate in the event of a lower overall figure being assessed or agreed. (£73.6 million is equal to the amount of the Bank’s outstanding legal costs, before interest, up to 11 November 2005 as notified to the liquidators’ solicitors on 17 November 2005.) In view of the fundamental uncertainty about what figure will eventually be assessed or agreed, in the opinion of the Bank’s Court the amount of costs that will be recovered by the Bank cannot at this stage be measured reliably. Accordingly, at 28 February 2006, these monies have been treated as deferred income in the Bank’s balance sheet. In its judgement of 12 April 2006 the High Court ruled that the Bank be entitled to be paid its cost on an indemnity basis through until the date of the hearing and explained why the Bank’s officials should be exonerated of the allegations made against them.

26 RETIREMENT BENEFITS

The Bank operates non-contributory defined benefit pension schemes providing benefits based on final pensionable pay. The assets of the schemes are held separately by the Bank in independent trustee-administered funds. The Bank also provides other post-retirement benefits, principally healthcare, for certain pensioners.

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Bank of England Annual Report 2006

Valuation for funding purposes

The main pension scheme, the Bank of England Pension Fund, is valued at intervals of not more than three years by an independent qualified actuary, with interim reviews in the intervening years. The latest valuation was as at

28 February 2005; it used the current unit method, and thus the funding target was based on each active member’s current earnings, with the effect of earnings increases on the accrued liabilities being included in normal future service contribution. The previous valuation, conducted at 28 February 2002, used the projected unit method.

	2005	2002
	£m	£m
Value of Fund assets	1,580	1,431
Actuarial value of scheme liabilities	(1,879)	(1,281)
Scheme (deficit)/surplus	(299)	150
Funding level	84%	112%
Future service contribution rate	41.3%	24.2%

For the 2005 valuation, the liabilities were valued by the actuary on an index-linked gilts yield discount rate, and no credit was taken in advance for the possibility that returns on investments held by the Fund would exceed the long-term interest rate. Allowance was made for past and prospective mortality improvements. The rate of RPI inflation used in the valuation and the pension increase assumption was 2.8% (2002 2.5%).

As a result of changes in longevity, and in the basis of valuation, the required future service contribution rate for the year to 28 February 2006 increased to 41.3% of pensionable earnings (2005 24.2%). Both contribution rates exclude the 3% cost of administration and other services set out in note 29. The Bank and the Pension Fund Trustee, with advice from the actuary, agreed that the deficit should be amortised over the period to March 2014, with four annual payments of

£52.5 million followed by six annual payments of £26.7 million. The first amortisation payment was made during 2005/06.

Summary of amounts recognised in the financial statements under IAS 19

The Bank accounts for pension costs, other post-retirement benefits and redundancy provisions in accordance with IAS 19 (Employee Benefits). Under the standard, the difference between the market values of scheme assets and the present value of scheme liabilities is reported as a surplus or deficit in the balance sheet. The Bank has adopted the option of recognising actuarial gains and losses in full through the statement of recognised income and expense.

In the preparation of their valuations under IAS 19 referred to in this note, the actuaries have used the assumptions indicated below, which Members of Court have accepted for the purposes of accounting and disclosure under the standard.

Amounts recognised as liabilities in the balance sheet
		2006	2005
		£m	£m
Pension schemes	(a)	(147)	(301)
Unfunded post-retirement benefits
Redundancy provisions	(b)	(68)	(64)
Other unfunded pension schemes	(c)	(5)	(4)
Other post-retirement benefits	(d)	(151)	(137)
		(371)	(506)

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Bank of England Annual Report 2006

Notes to the Banking Department Financial Statements continued

Amounts recognised in the income statement
		2006	2005
		£m	£m
Pension schemes	(a)	19	7
Unfunded post-retirement benefits
Redundancy provisions	(b)	5	6
Other unfunded pension schemes	(c)	1	1
Other post-retirement benefits	(d)	5	5
		30	19
Amounts recognised in the statement of recognised income and expense
		2006	2005
		£m	£m
Pension schemes	(a)	89	(229)
Unfunded post-retirement benefits
Redundancy provisions	(b)	(4)	(9)
Other unfunded pension scheme	(c)	–	(1)
Other post-retirement benefits	(d)	(12)	(50)
		73	(289)

aPension schemes

As described above, the Bank operates non-contributory defined benefit pension schemes providing benefits based on final pensionable pay. The assets of the schemes are held separately by the Bank in independent trustee-administered funds. The main pension scheme is the Bank of England Pension Fund. Members of the Executive Team participate in the Court Pension Scheme. Further details are given on page 32 of the Remuneration Report.

Summary of assumptions

Under IAS 19 measurement of scheme liabilities must be calculated under the projected unit method, which requires certain demographic and financial assumptions, including an assumption about future salary growth. The assumptions used are applied for the purposes of IAS 19 only.

The financial assumptions used by the independent actuaries to calculate scheme liabilities on an IAS 19 basis were:

	2006	2005
	%	%
Inflation rate (RPI)	2.8	2.8
Discount rate	4.6	5.1
Expected return on assets	5.8	6.7
Rate of increase in salaries	4.6	4.6
Rate of increase of pensions in payment	2.8	2.8
Rate of increase for deferred pensioners	2.8	2.8

The discount rate assumption reflects the investment return on a Grade AA corporate bond at the balance sheet date.

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Bank of England Annual Report 2006

The assets in the schemes and the expected rates of return were:

		2006			2005
	Long-term		Percentage	Long-term		Percentage
rate of return			of total	rate of return		of total
	expected	Value	value	expected	Value	value
	%	£m	%	%	£m	%
Equities	7.3	999	52.3	8.0	910	56.7
Bonds	3.9	749	39.3	4.6	562	35.0
Properties	5.8	105	5.5	6.6	88	5.5
Cash and other assets	3.8	55	2.9	3.8	44	2.8
Total market value of investments
	5.8	1,908	100.0	6.7	1,604	100.0

For the purposes of IAS 19, the asset values stated are at the balance sheet date. Market values of schemes’ assets, which are not intended to be realised in the short term, may be subject to significant change before they are realised. The long-term expected rates of return have been determined after applying due consideration to the arrangements of paragraph 106 of IAS 19. Expected rates of return are used for the purposes of calculating the annual charge to the income statement in the subsequent year, and have no impact on the deficit in the scheme as calculated on an IAS 19 basis. The assumptions used do not necessarily reflect the investment return that may be achieved.

The expected return on assets has been derived as the weighted average of expected returns from each of the main asset classes.

	2006	2005
	£m	£m
Present value of defined benefit obligations	(2,055)	(1,905)
Assets at fair value	1,908	1,604
Defined benefit liability
	(147)	(301)

The deficit in the schemes before taxation, on an IAS 19 basis, decreased by £154 million to £147 million at the year end. The decrease has arisen principally as a result of higher than expected returns on Funds’ assets and additional contributions made to the scheme (over and above regular payments), offset in part by an actuarial loss on scheme liabilities resulting from the application of a lower discount rate.

Sensitivity analysis provided by the actuaries suggests that a ±0.1% change to the discount rate would change the deficit on the main pension scheme by ±£35 million. The assumptions relating to future mortality rates were last revised in 2005 to reflect increased longevity. If mortality rates were adjusted such that individuals were assumed to live for an additional year, the main scheme liabilities at the year end would increase by approximately £50 million.

The Bank estimates that contributions of £84 million will be paid in the forthcoming year (2005 £7 million).

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Bank of England Annual Report 2006

Notes to the Banking Department Financial Statements continued

Components of pension expense in the income statement
	2006	2005
	£m	£m
Current service cost	28	24
Past service cost	1	1
Interest cost	95	85
Expected returns on assets	(105)	(103)
Total pension expense
	19	7
The increase in interest costs year on year results from the greater deficit at 28 February 2005.
Amounts recognised in the statement of recognised income and expense
	2006	2005
	£m	£m
Cumulative actuarial losses recognised at beginning of year	(229)	–
Actuarial loss on schemes’ liabilities	(106)	(291)
Actuarial gain on Funds’ assets	195	62
Cumulative actuarial losses recognised at end of year
	(140)	(229)
Reconciliation of return on assets
	2006	2005
	£m	£m
Expected return on Funds’ assets (net of expenses)	105	103
Actuarial gain on Funds’ assets	195	62
Actual return on Funds’ assets (net of expenses)
	300	165
Reconciliation of present value of defined benefit obligation
	2006	2005
	£m	£m
Present value of defined benefit obligation at 1 March	1,905	1,581
Current service cost	28	24
Past service cost	1	1
Interest cost	95	85
Actuarial loss on schemes’ liabilities	106	291
Defined benefits payments from Funds	(80)	(77)
Present value of defined benefit obligation at 28 February
	2,055	1,905

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Bank of England Annual Report 2006

Reconciliation of the fair value of assets
	2006	2005
	£m	£m
Fair value of Funds’ assets at 1 March	1,604	1,509
Actual return on Funds’ assets	300	165
Actual Bank contributions	84	7
Actual benefits paid from Funds	(80)	(77)
Fair value of Funds’ assets at 28 February
	1,908	1,604
Experience gains and losses
	2006	2005
	£m	£m
Experience gain on defined benefit obligation	20	30
Experience gain on Funds’ assets	195	62

bRedundancy provisions

As part of redundancy arrangements with staff, the Bank may give enhanced pension entitlement in the form of added years’ service or early pension rights. The costs of such benefits cannot be charged to the Pension Fund. The costs are therefore borne in the Bank’s accounts, and represent the future cost of decisions that have already been taken. Provision is made for the costs of these benefits at the time the redundancy offer is announced based on actuarial advice.

The valuation of these provisions has been performed using the relevant assumptions applied for the IAS 19 valuation of pension schemes (see (a)).

	2006	2005
	£m	£m
Unfunded defined benefit liability	(68)	(64)

The Bank estimates that contributions of £5 million will be paid in the forthcoming year (2005 £5 million).

Components of pension expense in the income statement
	2006		2005
		£m	£m
Past service cost	2		3
Interest cost	3		3
Total pension expense
	5		6

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Bank of England Annual Report 2006

Notes to the Banking Department Financial Statements continued

Amounts recognised in the statement of recognised income and expense
	2006	2005
	£m	£m
Cumulative actuarial losses recognised at beginning of year	(9)	–
Actuarial loss on liabilities	(4)	(9)
Cumulative actuarial losses recognised at end of year	(13)	(9)
Reconciliation of present value of defined benefit obligation
	2006	2005
	£m	£m
Present value of defined benefit obligation at 1 March	64	54
Past service cost	2	3
Interest cost	3	3
Actuarial loss on liabilities	4	9
Defined benefits payments	(5)	(5)
Present value of defined benefit obligation at 28 February
	68	64
Experience gains and losses
	2006	2005
	£m	£m
Experience loss on defined benefit obligation	(1)	(1)

cOther unfunded pension scheme

As explained in the Remuneration section of the Annual Report on page 32, for Governors subject to the pensions earnings cap introduced in the Finance Act 1989, the Bank offers additional unfunded pensions so that their total pensions broadly match what would have been provided by the Court scheme in the absence of a cap. Provision is made for these in the Bank’s accounts. In addition, certain former Governors and Directors and the widows of some former Governors and Directors were granted ex-gratia pensions. Provision for these was made in the Bank’s accounts when the grants were made. These provisions are revalued annually by the Court scheme actuary.

The valuation of this scheme has been performed using the relevant assumptions applied for the IAS 19 valuation of pension schemes (see (a)).

2006 2005

£m £m

Unfunded defined benefit liability	(5)	(4)

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Bank of England Annual Report 2006

Components of pension expense in the income statement
	2006	2005
	£m	£m
Service and interest cost	1	1
Total pension expense
	1	1
Amounts recognised in the statement of recognised income and expense
	2006	2005
	£m	£m
Cumulative actuarial losses recognised at beginning of year	(1)	–
Actuarial loss on scheme liabilities	–	(1)
Cumulative actuarial losses recognised at end of year
	(1)	(1)
Reconciliation of present value of defined benefit obligation
	2006	2005
	£m	£m
Present value of defined benefit obligation at 1 March	4	3
Service and interest cost	1	1
Actuarial loss on scheme liabilities	–	1
Benefit payments	–	(1)
Present value of defined benefit obligation at 28 February
	5	4

Experience gains and losses

For the year ended 28 February 2006, experience losses on the defined benefit obligation were less than £1 million (2005 less than £1 million).

dOther post-retirement benefits

Some staff are entitled to receive healthcare benefits in retirement. Separate provision is made for these in the Bank’s accounts as these cannot be paid out of the Pension Fund.

Summary of assumptions

The inflation and discount rates used for the purpose of measuring post-retirement benefit liabilities are the same as those used in the IAS 19 valuation of pension schemes liabilities (see (a)). Additionally, for accounting purposes the following assumptions have been in respect of medical expense inflation:

	2006	2005
	%	%
Initial medical trend	11.0	12.0
Ultimate medical trend	5.0	5.0
Years to ultimate	6.0	7.0

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Bank of England Annual Report 2006

Notes to the Banking Department Financial Statements continued

2006 2005

£m £m

Unfunded defined benefit liability	(151)	(137)

Sensitivity analysis provided by the actuaries suggests that a ±0.1% change to the discount rate would change the deficit on the other post-retirement benefits by ±£3 million.

The Bank estimates that contributions of £2 million will be paid in the forthcoming year (2005 £3 million).

Components of pension expense in the income statement
	2006	2005
	£m	£m
Service cost	2	1
Interest cost	3	4
Total pension expense
	5	5
Amounts recognised in the statement of recognised income and expense
	2006	2005
	£m	£m
Cumulative actuarial losses recognised at beginning of year	(50)	–
Actuarial loss on scheme liabilities	(12)	(50)
Cumulative actuarial losses recognised at end of year
	(62)	(50)
Reconciliation of present value of defined benefit obligation
	2006	2005
	£m	£m
Present value of defined benefit obligation at 1 March	137	85
Service cost	2	1
Interest cost	3	4
Actuarial loss on scheme liabilities	12	50
Defined benefits payments from Plan	(3)	(3)
Present value of defined benefit obligation at 28 February
	151	137
Experience gains and losses
Experience loss on defined benefit obligation	–	(2)

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