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