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Notes 21-25

23. Provision for post-employment benefits

Companies within the Group operate a large number of pension schemes, the forms and benefits of which vary with conditions and practices in the countries concerned. The Group's pension costs are analysed as follows:

  2007
£m
2006
£m
2005
£m
Defined contribution schemes 66.4 63.2 59.3
Defined benefit schemes charge to operating profit 14.3 18.5 16.3
Pension costs (note 5) 80.7 81.7 75.6
Expected return on pension scheme assets (note 6) (28.1) (25.2) (24.2)
Interest on pension scheme liabilities (note 6) 33.8 32.4 32.0
  86.4 88.9 83.4

Defined benefit schemes

The pension costs are assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various schemes were carried out as at various dates in the last three years. These valuations have generally been updated by the local independent qualified actuaries to 31 December 2007.

The Group has a policy of closing defined benefit schemes to new members which has been effected in respect of a significant number of the schemes.

Contributions to funded schemes are determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes are paid as they fall due. In 2006 the Group implemented a funding strategy under which our objective is to fully eliminate the deficit for funded schemes by 31 December 2010. The total contributions (for funded schemes) and benefit payments (for unfunded schemes) paid for 2007 amounted to £47.0 million (2006: £48.6 million, 2005: £35.6 million). Employer contributions and benefit payments in 2008 are expected to be £39.4 million.

(a) Assumptions

The main weighted average assumptions used for the actuarial valuations at 31 December are shown in the following table:

  2007
% pa
2006
% pa
2005
% pa
2004
% pa
UK        
Discount rate 5.8 5.1 4.7 5.3
Rate of increase in salaries 4.8 4.5 4.3 4.3
Rate of increase in pensions in payment 4.1 3.9 3.8 3.8
Inflation 3.3 3.0 2.8 2.8
Expected rate of return on equities 7.3 7.3 7.3 7.5
Expected rate of return on bonds1 5.3 5.0 4.5 5.0
Expected rate of return on insured annuities 5.8 5.1 4.7 5.3
Expected rate of return on property 5.0 7.0 7.0 7.0
Expected rate of return on cash and other 4.8 4.8 4.3 3.0
Weighted average return on assets 5.8 5.6 5.2 5.7
North America        
Discount rate 6.1 5.7 5.5 5.7
Rate of increase in salaries 4.6 4.0 4.0 4.0
Inflation 2.5 2.5 2.5 3.0
Expected rate of return on equities 7.9 7.9 7.9 7.9
Expected rate of return on bonds1 5.1 4.8 4.7 4.8
Expected rate of return on cash and other 3.0 3.0 3.0 1.8
Weighted average return on assets 6.7 6.8 6.7 6.9
Continental Europe        
Discount rate 5.5 4.6 4.2 4.5
Rate of increase in salaries 2.9 2.8 2.9 3.1
Rate of increase in pensions in payment 2.1 2.0 1.6 1.7
Inflation 2.2 2.1 2.0 2.0
Expected rate of return on equities 7.2 7.2 6.7 7.0
Expected rate of return on bonds1 4.5 4.4 4.3 4.5
Expected rate of return on property 5.5 6.1 6.2 6.4
Expected rate of return on cash and other 4.3 3.4 2.5 2.6
Weighted average return on assets 5.3 5.5 5.4 5.5
Asia Pacific, Latin America, Africa & Middle East        
Discount rate 3.9 3.1 3.5 3.1
Rate of increase in salaries 4.0 3.7 3.6 3.1
Inflation 4.6 1.2 2.0 1.5
Expected rate of return on equities 10.0
Expected rate of return on bonds1,2 6.2 5.3 8.2 7.9
Expected rate of return on property 10.0 11.0 10.0
Expected rate of return on cash and other2 1.6 2.0 1.6 1.6
Weighted average return on assets 3.7 3.2 3.3 3.1

Note

1 Expected rate of return on bonds assumptions reflect the yield expected on actual bonds held, whereas the discount rate assumptions are based on high-quality corporate bond yields.
2 Insurance instruments are classified in cash and other. In previous financial statements they were classified in bonds.

For the Group's plans, the plans' assets are invested with the objective of being able to meet current and future benefit payment needs, while controlling balance sheet volatility and future contributions. Plan assets are invested with a number of investment managers, and assets are diversified among equities, bonds, insured annuities, property and cash or other liquid investments. The primary use of bonds as an investment class is to match the anticipated cash flows from the plans to pay pensions. Various insurance policies have also been bought historically to provide a more exact match for the cash flows, including a match for the actual mortality of specific plan members. These insurance policies effectively provide protection against both investment fluctuations and longevity risks. The strategic target allocation varies among the individual schemes.

Establishing the expected long-term rates of investment return on pension assets is a judgemental matter. Management considers the types of investment classes in which our pension plan assets are invested and the expected compound return we can reasonably expect the portfolio to earn over time, which reflects forward-looking economic assumptions.

Management reviews the expected long-term rates of return on an annual basis and revises them as appropriate.

Also, we periodically commission detailed asset and liability studies performed by third-party professional investment advisors and actuaries, which generate probability-adjusted expected future returns on those assets. These studies also project our estimated future pension payments and evaluate the efficiency of the allocation of our pension plan assets into various investment categories.

The studies performed at the time we set these assumptions supported the reasonableness of our return assumptions based on the target allocation of investment classes and the then current market conditions.

At 31 December 2007, the life expectancies underlying the value of the accrued liabilities for the main defined benefit pension plans operated by the Group were as follows:

Years life expectancy after age 65 All
plans
North
America
UK Europe Asia
Pacific
– current pensioners – male 19.6 19.0 20.5 18.3 19.3
– current pensioners – female 22.2 21.0 23.3 21.7 24.7
– future pensioners (current age 45) – male 20.5 19.0 21.9 20.6 21.4
– future pensioners (current age 45) – female 23.2 21.0 24.8 23.8 28.2

The life expectancies after age 65 at 31 December 2006 were 19.4 years and 22.1 years for male and female current pensioners respectively, and 20.3 years and 23.1 years for male and female future pensioners (current age 45) respectively.

For a 0.25% increase or decrease in the discount rate at 31 December 2007, the 2008 pension expense would be broadly unchanged as the change in service cost and interest cost are similar. The effect on the year-end 2007 pension deficit would be a decrease or increase, respectively, of approximately £20.0 million.

(b) Assets and liabilities

At 31 December, the fair value of the assets in the schemes, and the assessed present value of the liabilities in the schemes are shown in the following table:

  2007
£m
% 2006
£m
% 2005
£m
%
Group            
Equities 174.2 34.6 173.7 36.9 164.2 36.2
Bonds 203.8 40.4 198.0 42.1 191.1 42.2
Insured annuities 65.0 12.9 70.8 15.1 73.2 16.1
Property 16.6 3.3 18.7 4.0 17.5 3.9
Cash 44.4 8.8 9.2 1.9 7.2 1.6
Total fair value of assets 504.0 100.0 470.4 100.0 453.2 100.0
Present value of scheme
liabilities
(637.6)   (657.0)   (684.6)  
Deficit in the schemes (133.6)   (186.6)   (231.4)  
Irrecoverable surplus (0.5)   (1.0)    
Unrecognised past service cost (0.9)      
Net liability1 (135.0)   (187.6)   (231.4)  
             
Schemes in surplus 8.4   4.7    
Schemes in deficit (143.4)   (192.3)   (231.4)  

Note

1 The related deferred tax asset is discussed in note 15.

The total fair value of assets, present value of scheme liabilities and deficit in the scheme for 2004 were £329.9 million, £595.2 million and £202.3 million respectively.

Deficit in schemes by region        
  2007 2006 2005  
  £m £m £m  
UK (24.2) (50.0) (54.4)  
North America (59.6) (82.3) (117.6)  
Continetal Europe (46.7) (51.2) (55.1)  
Asia Pacific, Latin America,
Africa & Middle East
(3.1) (3.1) (4.3)  
Deficit in the schemes (133.6) (186.6) (231.4)  

Some of the Group's defined benefit schemes are unfunded (or largely unfunded) by common custom and practice in certain jurisdictions. In the case of these unfunded schemes, the benefit payments are made as and when they fall due. Pre-funding of these schemes would not be typical business practice.

The following table shows the split of the deficit at 31 December 2007, 2006 and 2005 between funded and unfunded schemes.

  2007
(Deficit)/
surplus
£m
2007
Present
value of
scheme
liabil-
ities
£m
2006
Deficit
£m
2006
Present
value of
scheme
liabil-
ities
£m
2005
Deficit
£m
2005
Present
value of
scheme
liabil-
ities
£m
Funded schemes by region            
UK (24.2) (274.2) (50.0) (295.8) (54.4) (290.1)
North America 1.6 (183.5) (15.0) (178.9) (44.9) (203.0)
Continental Europe (16.2) (77.6) (19.3) (72.5) (24.1) (77.1)
Asia Pacific, Latin America,
Africa & Middle East
(1.6) (9.1) (2.1) (9.6) (2.5) (8.9)
Deficit/liabilities in the
funded schemes
(40.4) (544.4) (86.4) (556.8) (125.9) (579.1)
 
Unfunded schemes by region            
UK
North America (61.2) (61.2) (67.3) (67.3) (72.7) (72.7)
Continental Europe (30.5) (30.5) (31.9) (31.9) (31.0) (31.0)
Asia Pacific, Latin America, Africa & Middle East (1.5) (1.5) (1.0) (1.0) (1.8) (1.8)
Deficit/liabilities in the unfunded schemes (93.2) (93.2) (100.2) (100.2) (105.5) (105.5)
             
Deficit/liabilities in the schemes (133.6) (637.6) (186.6) (657.0) (231.4) (684.6)

In accordance with IAS 19, schemes that are wholly or partially funded are considered funded schemes. In previous financial statements, schemes with funding levels of less than 50% were considered unfunded schemes.

(c) Pension expense

The following table shows the breakdown of the pension expense between amounts charged to operating profit, amounts charged to finance income and finance costs and amounts recognised in the statement of recognised income and expense (SORIE):

  2007
£m
2006
£m
2005
£m
Group
Current service cost 16.2 18.3 17.9
Past service (income)/cost (1.1) 0.3 (1.4)
Gain on settlements and curtailments (0.8) (0.1) (0.2)
Charge to operating profit 14.3 18.5 16.3
Expected return on pension scheme assets (28.1) (25.2) (24.2)
Interest on pension scheme liabilities 33.8 32.4 32.0
Charge to profit before taxation
for defined benefit schemes
20.0 25.7 24.1
 
(Loss)/gain on pension scheme assets relative to expected return (6.0) 9.3 22.4
Experience gains arising on the scheme liabilities 0.1 3.5 3.6
Changes in assumptions underlying the
present value of the scheme liabilities
35.4 (0.5) (31.3)
Change in irrecoverable surplus 0.5 (1.0)
Movement in exchange rates (3.0) 14.7 (10.9)
Actuarial gain/(loss) recognised in SORIE 27.0 26.0 (16.2)

As at 31 December 2007 the cumulative amount of net actuarial losses recognised in equity since 1 January 2001 was £63.5 million (31 December 2006: £90.5 million, 31 December 2005: £116.5 million). Of this amount, a net gain of £18.3 million was recognised since the 1 January 2004 adoption of IAS 19.

In accordance with IAS 19, certain other long-term employee benefits should be measured in the same manner as a defined benefit plan. In 2005, the SORIE included £0.3 million for such plans.

(d) Movement in scheme obligations

The following table shows an analysis of the movement in the scheme obligations for each accounting period:

  2007
£m
2006
£m
2005
£m
Change in benefit obligation
Benefit obligation at beginning of year 657.0 684.6 595.2
Service cost 16.2 18.3 17.9
Interest cost 33.8 32.4 32.0
Plan participants' contributions 0.5 0.5 0.6
Actuarial (gain)/loss (35.5) (3.0) 27.7
Benefits paid (40.2) (40.1) (38.4)
Loss/(gain) due to exchange rate movements 7.2 (37.8) 25.6
Plan amendments (2.0) 0.3 (1.4)
Acquisitions 0.3 14.2
Reclassification 1.1 5.8 11.4
Settlements and curtailments (0.8) (4.0) (0.2)
Benefit obligation at end of year 637.6 657.0 684.6

The reclassifications represent certain of the Group's defined benefit plans which are included in this note for the first time in the periods presented.

(e) Movement in scheme assets

The following table shows an analysis of the movement in the scheme assets for each accounting period:

  2007
£m
2006
£m
2005
£m
Change in plan assets
Fair value of plan assets at beginning of year 470.4 453.2 392.9
Expected return on plan assets 28.1 25.2 24.2
Actuarial (loss)/gain on plan assets (6.0) 9.3 22.4
Employer contributions 47.0 48.6 35.6
Plan participants' contributions 0.5 0.5 0.6
Benefits paid (40.2) (40.1) (38.4)
Loss/(gain) due to exchange rate movements 4.2 (23.1) 14.7
Acquisitions 1.2
Reclassification 0.7
Settlements (3.9)
Fair value of plan assets at end of year 504.0 470.4 453.2
 
Actual return on plan assets 22.1 34.5 46.6

(f) History of experience gains and losses

  2007
£m
2006
£m
2005
£m
(Loss)/gain on pension scheme assets
relative to expected return:
Amount (6.0) 9.3 22.4
Percentage of scheme assets 1.2% 2.0% 4.9%
Experience gains arising on the scheme liabilities:
Amount 0.1 3.5 3.6
Percentage of the present value of the scheme liabilities 0.0% 0.5% 0.5%
Total gain/(loss) recognised in SORIE:
Amount 27.0 26.0 (16.2)
Percentage of the present value of the scheme liabilities 4.2% 4.0% (2.4%)

The experience gains on pension scheme assets and scheme liabilities in 2004 were £13.5 million and £1.2 million respectively.