Vesuvius plc Prospectus

(c) UK Plan risk mitigation strategy
The Company and the UK Plan Trustee have identified the major risks which could affect
the value of the UK Plan’s economic liabilities compared to the value of its assets and the
Trustee has taken action, as summarised below, to reduce the risk that the UK Plan’s
economic liabilities would increase materially relative to the value of its assets:
Risk and impact
Interest rate risk
Mitigation
The risk of government An interest rate swap overlay is in place designed, together
bond interest rates falling, with the bond portfolio, to mitigate approximately 75 per
leading to an increase in the cent. of the interest rate risk of the UK Plan liabilities as
value of plan liabilities.
Inflation risk
measured on an ongoing basis. Under these contracts the UK
Plan receives a fixed rate of interest and pays out a variable
rate of interest, based on LIBOR. This is beneficial when
long-term interest rates fall, significantly offsetting the
corresponding increase in the value of the UK Plan’s
economic liabilities. In December 2010, an interest rate
swaption collar was transacted, designed to mitigate the
remaining 25 per cent. of interest rate risk in the case of
extreme market movements during the following three years.
The risk of inflation rising Inflation swaps are in place designed, together with the bond
faster than expected, leading portfolio, to mitigate approximately 70 per cent. of the
to an increase in the value effective inflation risk of the UK Plan liabilities as measured
of plan liabilities.
Investment risk
on an ongoing basis. The UK Plan pays out a fixed rate of
interest and receives payments indexed with actual inflation.
This is beneficial when inflation increases faster than
expected and significantly offsets the adverse impact on the
funding ratio.
The risk of significant The UK Plan Trustee has migrated the UK Plan’s asset
financial market falls, portfolio to its current allocation, excluding risk-mitigation
leading to a fall in the value derivatives, of 58 per cent. bonds and 21 per cent. in
of plan assets.
equities. This structure, together with its liability driven
investment portfolio of financial derivative contracts,
significantly reduces the risk that the UK Plan’s assets would
fall materially relative to the value of its economic liabilities.
(d) Sensitivity analysis of the impact of changes in key IAS 19 actuarial assumptions
The following table analyses, for Vesuvius’ main UK, US and German pension plans, the
theoretical estimated impact on plan liabilities resulting from changes to key actuarial
assumptions used for IAS 19 valuation purposes, whilst holding all other assumptions
constant.
It should be noted that the investment strategy adopted by the UK Plan, details of which are
given above, was designed to mitigate a significant majority of the interest rate and inflation
risk related to the UK Plan’s economic liabilities. The stabilising impact of this strategy is
not reflected in the following table.
Assumption Change in assumption UK
Impact on plan liabilities
US Germany
Discount rate . . . Increase/decrease by 0.1% Decrease/increase by 1.7% Decrease/increase by 1.3% Decrease/increase by 1.4%
Price
inflation ....Increase/decrease by 0.1% Increase/decrease by 1.4% n/a Increase/decrease by 0.7%
Mortality ......Increase by one year Increase by 3.3% Increase by 3.5% Increase by 2.1%
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