Docusign Envelope ID: 7C50003C-051D-4E0C-907A-F452AD5C4EA2
UNITED TECHNOLOGIES CORPORATION (UK) PENSION SCHEME YEAR ENDED 31 DECEMBER 2023
NOTES TO THE FINANCIAL STATEMENTS
of the arrangements in 2036. The valuation of the ABF/SPV arrangements is dependent upon the probability of the Trigger-off mechanism being activated over the period to June 2036.
In the previous year, Barnett Waddingham LLP (BW) were engaged to assess the probability of the Trigger- off mechanism being activated. The modelling approach adopted was to project the progression of the Scheme’s expected funding levels over time. This was undertaken using a sto chastic model, i.e., simulating the Scheme’s funding levels under a large range of random scenarios. There are a significant number of assumptions and economic variables which feed into the model. For example, the actuarial approach has been adopted, which assumes that the Scheme’s assets achieve a return consistent with the best estimate. The Scheme’s investment strategy as at 31 December 2022 and the agreed de -risking framework from 1 January 2025 have been applied. The volatility of the Scheme’s investme nt assets and interest rates will also affect how likely it is that the funding level triggers will be met. Different volatility and return assumptions are used for the different asset classes held within the investment portfolio; these assumptions are based on a combination of historical data and forward-looking data. The estimated liability values are also projected into the future. To do this, the model assumes actual future experience is in line with the assumptions made for the most recent Scheme Funding Valuation. The mean projected coupon and bullet payments are then calculated under the model, alongside the implied probability of payment. The implied probability is calculated as the mean payment received divided by maximum theoretical payment. The mean payment figures will reflect the potential for payments being switched off or missed payments being received upon coupons switching back on. Cardano Advisory Limited were then engaged to calculate the discounted cash flows for the ABF/SPV arrangements, adjusted for the probability of the Trigger-off mechanism referred to above, using an appropriate discount rate to determine the present value of the arrangements. This was then applied to the data provided by BW; then an average was calculated to establish the expected/mean position for the arrangements. The cash flows are discounted using an appropriate discount rate to determine the present value of the arrangements. The discount rate term structure takes into account the shape of the relevant risk-free curve (i.e., gilts) and the timing of each individual cash flow. Each payment is then matched to an appropriate discount rate based on the timing of the specific payment. Each discount rate (which in aggregate ranged across the period from 5.76% to 5.91%) is composed of (a) a risk-free reference rate at which future cashflows from the arrangements are discounted, based on fixed interest gilt yields (in a range of 3.49% to 3.87% over the period), (b) a credit risk premium which has been derived using market pricing for GBP-denominated corporate bonds issued by counterparties of a similar credit quality to RTC (in a range of 1.47% to 1.84% over the period), and (c) an additional liquidity premium of 0.56%. The data reflects market conditions as at 31 December 2022. The fair value of the ABF/SPV arrangements as at 31 December 2023 amounted to £220.0m (2022 - £212.6m). As instructed by the Trustee, Cardano have used the stochastic analysis performed in the prior year in their calculations alongside updated discount rates in the ranges 5.09% to 6.10% (aggregate), 3.25% to 4.33% (risk-free reference rate), 0.99% to 1.39% (credit risk premium) and 0.56% (additional liquidity premium). Set out below is the sensitivity of changes to the aggregate discount rate, calculated as a parallel movement along entire term period. The revised fair value at 31 December 2023 is after applying such a change in discount.
-1.0% pa: £239.6m -0.5% pa: £229.5m +0.5% pa: £211.0m +1.0% pa: £202.6m
Having taken appropriate advice, the Trustee is of the opinion that the investment does not constitute an employer related investment; however, it is considered to be a related party transaction. At 31 December 2023, the investment accounted for 13.9% of the net asset of the Scheme (2022 – 13.6%).
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