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:


2008
£m
2007
£m
2006
£m
Defined contribution schemes 79.7 66.4 63.2
Defined benefit schemes charge to operating profit 18.6 14.3 18.5
Pension costs (note 5) 98.3 80.7 81.7
Expected return on pension scheme assets (note 6) (31.3) (28.1) (25.2)
Interest on pension scheme liabilities (note 6) 38.9 33.8 32.4
  105.9 86.4 88.9
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 2008.

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 2008 amounted to £44.2 million (2007: £47.0 million, 2006: £48.6 million). Employer contributions and benefit payments in 2009 are expected to be in the range of £63 million to £90 million depending on the performance of the assets.

(a) Assumptions

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


 
2008
% pa
2007
% pa
2006
% pa
2005
% pa
UK
Discount rate 6.0 5.8 5.1 4.7
Rate of increase in salaries 3.0 4.8 4.5 4.3
Rate of increase in pensions in payment 3.9 4.1 3.9 3.8
Inflation 2.8 3.3 3.0 2.8
Expected rate of return on equities 7.3 7.3 7.3 7.3
Expected rate of return on bonds1 4.9 5.3 5.0 4.5
Expected rate of return on insured annuities 6.0 5.8 5.1 4.7
Expected rate of return on property 6.9 5.0 7.0 7.0
Expected rate of return on cash and other 4.9 4.8 4.8 4.3
Weighted average return on assets 5.7 5.8 5.6 5.2
North America
Discount rate 6.3 6.1 5.7 5.5
Rate of increase in salaries 3.0 4.6 4.0 4.0
Inflation 2.5 2.5 2.5 2.5
Expected rate of return on equities 7.9 7.9 7.9 7.9
Expected rate of return on bonds1 5.1 5.1 4.8 4.7
Expected rate of return on cash and other 3.4 3.0 3.0 3.0
Weighted average return on assets 6.6 6.7 6.8 6.7
Continental Europe
Discount rate 5.7 5.5 4.6 4.2
Rate of increase in salaries 2.8 2.9 2.8 2.9
Rate of increase in pensions in payment 2.1 2.1 2.0 1.6
Inflation 2.1 2.2 2.1 2.0
Expected rate of return on equities 7.2 7.2 7.2 6.7
Expected rate of return on bonds1 4.5 4.5 4.4 4.3
Expected rate of return on property 6.0 5.5 6.1 6.2
Expected rate of return on cash and other 5.3 4.3 3.4 2.5
Weighted average return on assets 5.3 5.3 5.5 5.4
Asia Pacific, Latin America, Africa & Middle East
Discount rate 3.4 3.9 3.1 3.5
Rate of increase in salaries 3.9 4.0 3.7 3.6
Inflation 4.5 4.6 1.2 2.0
Expected rate of return on equities 10.0 10.0
Expected rate of return on bonds1,2 5.3 6.2 5.3 8.2
Expected rate of return on property 10.0 11.0
Expected rate of return on cash and other2 2.1 1.6 2.0 1.6
Weighted average return on assets 3.1 3.7 3.2 3.3

Notes

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 the financial statements for the years 2006 and 2005 they were classified in bonds.

There are a number of areas in the pension accounting that involve judgements made by management. These include establishing the long-term expected rates of investment return on pension assets, mortality assumptions, discount rates, inflation, rate of increase in pensions in payment and salary increases.

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.

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 2008, 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 20.0 19.0 22.3 18.4 19.3
– current pensioners – female 22.2 21.0 23.7 21.9 24.7
– future pensioners (current age 45) – male 21.3 19.8 23.5 20.7 21.4
– future pensioners (current age 45) – female 23.2 21.5 25.0 23.7 28.2

The life expectancies after age 65 at 31 December 2007 were 19.6 years and 22.2 years for male and female current pensioners respectively, and 20.5 years and 23.2 years for male and female future pensioners (current age 45) respectively.

In the determination of mortality assumptions, management use the most up-to-date mortality tables available in each country and consistently allows for expected generational improvement.

For a 0.25% increase or decrease in the discount rate at 31 December 2008, the 2009 pension expense would be broadly unchanged as the change in service cost and interest cost are similar. The effect on the year-end 2008 pension deficit would be a decrease or increase, respectively, of approximately £22.5 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:


 
2008
£m

%
2007
£m

%
2006
£m

%
Group
Equities 162.6 29.6 174.2 34.6 173.7 36.9
Bonds 245.1 44.5 203.8 40.4 198.0 42.1
Insured annuities 64.9 11.8 65.0 12.9 70.8 15.1
Property 12.6 2.3 16.6 3.3 18.7 4.0
Cash 65.2 11.8 44.4 8.8 9.2 1.9
Total fair value of assets 550.4 100.0 504.0 100.0 470.4 100.0
Present value of scheme
liabilities
(819.1) (637.6) (657.0)  
Deficit in the schemes (268.7) (133.6) (186.6)  
Irrecoverable surplus (2.4) (0.5) (1.0)  
Unrecognised past service cost (0.9) (0.9)  
Net liability1 (272.0) (135.0) (187.6)  
 
Schemes in surplus 0.4 8.4 4.7  
Schemes in deficit (272.4) (143.4) (192.3)  

Notes

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 schemes were £453.2 million, £684.6 million and £231.4 million in 2005 and £329.9 million, £595.2 million and £202.3 million in 2004, respectively.

Deficit in schemes by region


 
2008
£m
2007
£m
2006
£m
UK (24.8) (24.2) (50.0)
North America (153.4) (59.6) (82.3)
Continental Europe (80.0) (46.7) (51.2)
Asia Pacific, Latin America,
Africa & Middle East
(10.5) (3.1) (3.1)
Deficit in the schemes (268.7) (133.6) (186.6)

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 2008, 2007 and 2006 between funded and unfunded schemes.


 
 
 
 
 
 

 
 
 
2008
Deficit
£m
2008
Present
value of
scheme
liabil-
ities
£m

 
 
 
2007
Deficit
£m
2007
Present
value of
scheme
liabil-
ities
£m

 
 
 
2006
Deficit
£m
2006
Present
value of
scheme
liabil-
ities
£m
Funded schemes by region
UK (24.8) (269.5) (24.2) (274.2) (50.0) (295.8)
North America (71.0) (266.8) 1.6 (183.5) (15.0) (178.9)
Continental Europe (30.1) (126.5) (16.2) (77.6) (19.3) (72.5)
Asia Pacific, Latin America,
Africa & Middle East
(3.3) (16.8) (1.6) (9.1) (2.1) (9.6)
Deficit/liabilities in the
funded schemes
(129.2) (679.6) (40.4) (544.4) (86.4) (556.8)

Unfunded schemes by region
UK
North America (82.4) (82.4) (61.2) (61.2) (67.3) (67.3)
Continental Europe (49.9) (49.9) (30.5) (30.5) (31.9) (31.9)
Asia Pacific, Latin America,
Africa & Middle East
(7.2) (7.2) (1.5) (1.5) (1.0) (1.0)
Deficit/liabilities in the
unfunded schemes
(139.5) (139.5) (93.2) (93.2) (100.2) (100.2)
 
Deficit/liabilities in
the schemes

(268.7)

(819.1)

(133.6)

(637.6)

(186.6)

(657.0)

In accordance with IAS 19, schemes that are wholly or partially funded are considered funded schemes. In the financial statements for 2006, 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):


2008
£m
2007
£m
2006
£m
Group
Current service cost 16.7 16.2 18.3
Past service cost/(income) 2.5 (1.1) 0.3
Gain on settlements and curtailments (0.6) (0.8) (0.1)
Charge to operating profit 18.6 14.3 18.5
Expected return on pension scheme assets (31.3) (28.1) (25.2)
Interest on pension scheme liabilities 38.9 33.8 32.4
Charge to profit before taxation
for defined benefit schemes
26.2 20.0 25.7
 
(Loss)/gain on pension scheme assets relative to expected return (93.7) (6.0) 9.3
Experience gains arising on the scheme liabilities 4.4 0.1 3.5
Changes in assumptions underlying the
present value of the scheme liabilities
8.0 35.4 (0.5)
Change in irrecoverable surplus (0.9) 0.5 (1.0)
Actuarial (loss)/gain recognised in SORIE (82.2) 30.0 11.3

Movements in exchange rates are included in exchange adjustments on foreign currency net investments in the SORIE. In previous financial statements, they were included in the actuarial (loss)/gain.

As at 31 December 2008 the cumulative amount of net actuarial losses recognised in equity since 1 January 2001 was £173.1 million (31 December 2007: £90.9 million, 31 December 2006: £120.9 million). Of this amount, a net loss of £72 million was recognised since the 1 January 2004 adoption of IAS 19.

(d) Movement in scheme obligations

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


 
2008
£m
2007
£m
2006
£m
Change in benefit obligation
Benefit obligation at beginning of year 637.6 657.0 684.6
Service cost 16.7 16.2 18.3
Interest cost 38.9 33.8 32.4
Plan participants’ contributions 0.6 0.5 0.5
Actuarial gain (12.4) (35.5) (3.0)
Benefits paid (40.7) (40.2) (40.1)
Loss/(gain) due to exchange rate movements 133.8 7.2 (37.8)
Plan amendments 2.8 (2.0) 0.3
Acquisitions 44.3 0.3
Reclassification 3.6 1.1 5.8
Settlements and curtailments (6.1) (0.8) (4.0)
Benefit obligation at end of year 819.1 637.6 657.0

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:


 
2008
£m
2007
£m
2006
£m
Change in plan assets
Fair value of plan assets at beginning of year 504.0 470.4 453.2
Expected return on plan assets 31.3 28.1 25.2
Actuarial (loss)/gain on plan assets (93.7) (6.0) 9.3
Employer contributions 44.2 47.0 48.6
Plan participants’ contributions 0.6 0.5 0.5
Benefits paid (40.7) (40.2) (40.1)
Gain/(loss) due to exchange rate movements 79.0 4.2 (23.1)
Acquisitions 29.4
Reclassification 1.8 0.7
Settlements (5.5) (3.9)
Fair value of plan assets at end of year 550.4 504.0 470.4

Actual return on plan assets
(62.4) 22.1 34.5
(f) History of experience gains and losses

 
2008
£m
2007
£m
2006
£m
(Loss)/gain on pension scheme assets
relative to expected return:
Amount (93.7) (6.0) 9.3
Percentage of scheme assets 17.0% 1.2% 2.0%

Experience gains arising on the scheme liabilities:
Amount 4.4 0.1 3.5
Percentage of the present value of the scheme liabilities 0.5% 0.0% 0.5%

Total (loss)/gain recognised in SORIE:
Amount (82.2) 30.0 11.3
Percentage of the present value of the scheme liabilities (10.0%) 4.7% 1.7%

The experience gains on pension scheme assets and scheme liabilities were £22.4 million and £3.6 million in 2005 and £13.5 million and £1.2 million in 2004 respectively.

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