abrdn reports on defined benefit and contribution pension provisions

abrdn PLC has disclosed its full-year results for 2024, highlighting the status of its pension and post-retirement benefit provisions. The Group operates both defined benefit and defined contribution plans, with the former providing set pension payments upon retirement, and the latter involving contributions to individual pension plans without further obligations.

The UK and Ireland defined benefit plans are funded through trustee-administered funds, while some smaller plans remain unfunded. The financial statement reflects either a net asset or liability for each plan, based on actuarial valuations.

For the principal defined benefit plan, the Group believes it has an unconditional right to a refund of any surplus, which is recognized net of an authorized surplus payments charge. Net interest income or expense is recognized in the income statement, along with service costs representing the present value of pension entitlements.

Remeasurements, which include actuarial gains and losses, are recognized in other comprehensive income but are not reclassified to profit or loss in subsequent periods. Defined contribution plans involve Group contributions to external pension plans, recognized as staff costs in the income statement when due.

The Group’s UK plans are governed by trustee boards and adhere to statutory funding objectives, requiring funding to at least the level of their technical provisions. The trustees set investment strategies and prepare statements of funding and investment principles, with schedules of contributions to restore funding levels if necessary.

For the abrdn UK Group plan, accrual ceased in April 2016, and adjustments have been made to address inequalities in guaranteed minimum pensions (GMPs). The funding valuation as of 31 December 2022 showed a surplus and a funding level of 144%, negating the need for a recovery plan.

The Group has reached an agreement to use part of the surplus to fund defined contribution benefits for current employees, with an expected annual benefit to net capital generation from July 2025. This agreement allows the Group to maintain the surplus while retaining flexibility for future options.

Other UK plans include the Edinburgh Fund Managers Group Scheme and the Murray Johnstone Limited Retirement Benefits Plan, with the former being in deficit and the latter in surplus. Details of a buy-in undertaken on the MJ Plan in 2023 are provided.

The Group also operates smaller funded and unfunded defined benefit plans in other countries. The ROI plan in Ireland was in deficit at the last funding valuation, and funding plans have been agreed upon with the plan’s trustees.

The consolidated income statement recognizes contributions made to defined contribution and defined benefit plans, with contributions expected to be £4m in 2025, not materially changing in subsequent years.

The consolidated statement of financial position reflects the present value of funded and unfunded obligations, with a net asset or liability before considering the limit on plan surplus. UK recoverable surpluses are reduced to reflect an authorized surplus payments charge that would arise on a refund.

Movements in the net defined benefit asset include total expenses recognized in the consolidated income statement and remeasurement gains or losses recognized in other comprehensive income. Exchange differences, employer contributions, and benefit payments are also accounted for.

Investment strategies for the principal plan involve a diversified multi-asset absolute return strategy and hedging techniques to protect against interest rate and inflation movements. The fair value hierarchy is used to determine and measure the fair value of plan assets.

The key economic assumptions for the principal plan include discount rates and rates of inflation, with changes reflecting market conditions and the future reform of RPI effective from 2030. The determination of the present value of the funded obligation includes a methodology change for post-retirement pension increases.

Longevity assumptions are significant for the principal plan, with cautious allowances for observed slowdowns in longevity improvements. The weighted average duration of the principal plan’s obligations provides an illustration of the expected benefit payments.

Risks to the consolidated statement of financial position include asset volatility, yield/discount rate fluctuations, inflation, and life expectancy. The principal plan uses bonds and derivatives to hedge yield and inflation risks, with exposure to movements in the gap between RPI and CPI. Climate-related risks are assessed as minimal due to the low-risk investment strategy and strong funding level.

Sensitivity analyses are provided for the principal plan’s obligation and assets, considering changes in yield/discount rates, rates of inflation, and life expectancy.

Other financial liabilities include accruals, amounts due to counterparties and customers for unsettled trades, lease liabilities, cash collateral held in respect of derivative contracts, contingent consideration liabilities, deferred income, and other liabilities.

Provisions and other liabilities include separation costs, process execution, tax-related provisions, and other provisions such as dilapidations on leased properties and restructuring provisions. Movements in provisions during the year are detailed, including charges or credits to the consolidated income statement and amounts used during the year.

Financial instruments risk management involves managing market, credit, and liquidity risks. The Group’s exposure to financial instrument risk is derived from the financial instruments it holds directly, the assets and liabilities of unit-linked funds, and the Group’s defined benefit pension plans. The Group reviews and manages climate-related risks and opportunities, acknowledging its relationship with financial and regulatory and legal risks. The Group’s day-to-day business is predominantly exposed to transition risk as markets and policies align to a lower carbon world.

Market risk exposures include equity risk, interest rate risk, and foreign currency risk. The Group’s exposure to equity markets primarily relates to investments in Phoenix, seed capital investments, and equity securities held by the abrdn Financial Fairness Trust. Pooled investment funds where the underlying instruments are exposed to interest rate risk also contribute to market risk exposures.

Foreign currency risk arises from adverse movements in currency exchange rates impacting the value of revenues and assets held in non-UK Sterling currencies. The Group may use derivative contracts to reduce or eliminate currency risk arising from individual transactions or seed capital and co-investment activity.

Sensitivity analysis is performed to assess the impact of variations in equity security prices, interest rates, and foreign exchange rates on the Group’s profit after tax and equity. The Group’s profit after tax and equity are sensitive to these variations, and a sensitivity analysis illustrates the impact of reasonably possible changes in a single sensitivity factor.

Credit risk is managed by setting exposure limits for different types of financial instruments and counterparties. Expected credit losses (ECL) are calculated on financial assets measured at amortised cost, with the Group assuming significant increases in credit risk for contractual payments more than 30 days past due. The Group applies a simplified approach to calculate the ECL allowance for trade receivables and contract assets, using a provision matrix approach based on historic observed default rates.

Credit exposure is analyzed by credit quality of shareholder financial assets and the maximum exposure to credit risk. Collateral is accepted and pledged in respect of bilateral over-the-counter derivative financial instruments and bilateral repurchase agreements to mitigate counterparty risk. The Group’s bilateral OTC derivatives are subject to an International Swaps and Derivative Association (ISDA) master agreement, which provides a right of set off that is enforceable only in the event of default, insolvency, or bankruptcy.

Liquidity risk is the risk of financial loss due to the inability to settle financial obligations when they fall due. The Group has a liquidity risk framework and processes in place for monitoring, assessing, and managing liquidity risk, including stress testing and contingency funding plans. A maturity analysis presents the undiscounted cash flows payable under contractual maturity for all financial liabilities.

Structured entities are entities structured in such a way that voting or similar rights are not the dominant factor in deciding who controls the entity. The Group has interests in structured entities through investments in various investment vehicles, including pooled investment funds, debt securitisation vehicles, and asset management fees received from these entities. The Group consolidates structured entities it controls and discloses interests in unconsolidated structured entities. The Group’s exposure to loss in respect of unconsolidated structured entities is limited to the carrying value of the Group’s investment in these entities and the loss of future asset management and other fees received by the Group for the management of these entities.

Employee share-based payments and deferred fund awards involve awards of options, conditional awards, or restricted shares in abrdn plc (equity-settled share-based payments) and cash awards based on the share price of abrdn plc (cash-settled share-based payments). The Group also incentivizes certain employees through the award of units in Group managed funds (deferred fund awards). All incentive plans have conditions attached before the employee becomes entitled to the award, which can be performance and/or service conditions or the requirement to save in the save-as-you-earn scheme.

For equity-settled share-based payment transactions, the fair value of services received is measured by reference to the fair value of the equity instruments at the grant date, and the fair value of the number of instruments expected to vest is charged to the consolidated income statement over the vesting period. For cash-settled share-based payment and deferred fund awards transactions, services received are measured at the fair value of the liability, which is remeasured at each reporting date, and any changes in fair value are recognized in the consolidated income statement.

The Group operates several share incentive plans, including the abrdn plc Deferred Share Plan, Discretionary Share Plan, Executive LTIP Plan, Sharesave, and Share Incentive Plan, with varying vesting periods and conditions for vesting. The fair value of awards granted under the Group’s incentive schemes is determined using relevant valuation techniques, such as the Black Scholes option pricing model, and recharged to employing entities over the life of the awards. The amounts recognized as an expense for equity-settled share-based payment transactions and deferred fund awards include share options and share awards granted under deferred and discretionary share plans, Sharesave options, matching shares granted under share incentive plans, cash-settled deferred fund awards, and cash-settled share-based payments.

Related party transactions include transactions and balances with related parties, compensation of key management personnel, and transactions with key management personnel and their close family members. The Group enters into transactions with related parties related to investment management and insurance businesses, including management fees recognized from the Group’s defined benefit pension plans and investments in investment vehicles managed by the Group. Key management personnel includes Directors of abrdn plc and the members of the Executive Leadership Team, with compensation including salaries, benefits, share-based payments, and termination benefits. Certain members of key management personnel hold investments in investment products managed by the Group, with all transactions on terms equivalent to those available to all employees of the Group.

Capital management involves determining and maintaining the quantity and quality of capital appropriate for the Group and ensuring capital is deployed in a manner consistent with the expectations of stakeholders. The Group manages capital with two primary objectives: ensuring financial stability and creating equity holder value. The treasury and capital management policy is subject to annual review and operates alongside the strategic investment policy and Group risk policies. Capital requirements are forecasted periodically, and rates of return achieved on capital invested are assessed against hurdle rates. Capital plans are approved by the Board, with stress testing informing the appropriate level of regulatory capital and liquidity to be held.

The Group is supervised under the Investment Firms Prudential (LON:PRU) Regime (IFPR), with regulatory own funds determined by consolidating eligible capital and reserves, subject to deductions. The Group is required to hold own funds to cover the higher of the Own Funds Requirement and the Own Funds Threshold Requirement. Stress testing, the Internal Capital Adequacy and Risk Assessment (ICARA), and the Supervisory Review and Evaluation Process (SREP) inform the Group’s regulatory capital position. The Group has complied with all externally imposed capital requirements during the year.

There have been no material events occurring between the balance sheet date and the date of signing this report that would impact the disclosed pension and post-retirement benefit provisions.

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