Section image

Cherries
oil on canvas
22 x 20 in
1981

Penny Machines
oil on canvas
23¾ x 29¾ in
1961

Stack of Books
oil on canvas
30 x 24 in
n.d.

Seven Suckers
oil on canvas
19 x 23 in
1970

Twin Jackpots
oil on canvas
30 x 46 in
1962

Ties
oil on canvas
20 x 26 in
1980

Cake Slices
oil on canvas
20 x 16 in
n.d.

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:
  2009
£m
2008
£m
2007
£m
Defined contribution schemes 95.5 79.7 66.4
Defined benefit schemes charge to operating profit 20.9 18.6 14.3
Pension costs (note 5) 116.4 98.3 80.7
Expected return on pension scheme assets (note 6) (28.7) (31.3) (28.1)
Interest on pension scheme liabilities (note 6) 46.1 38.9 33.8
  133.8 105.9 86.4

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 2009.

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. Contributions in respect of unfunded schemes are paid as they fall due. The total contributions (for funded schemes) and benefit payments (for unfunded schemes) paid for 2009 amounted to £47.7 million (2008: £44.2 million, 2007: £47.0 million). Employer contributions and benefit payments in 2010 are expected to be in the range of £50 million to £70 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:
  2009
% pa
2008
% pa
2007
% pa
2006
% pa
UK        
Discount rate 5.7 6.0 5.8 5.1
Rate of increase in salaries 3.5 3.0 4.8 4.5
Rate of increase in pensions in payment 4.2 3.9 4.1 3.9
Inflation 3.5 2.8 3.3 3.0
Expected rate of return on equities 7.5 7.3 7.3 7.3
Expected rate of return on bonds1 4.8 4.9 5.3 5.0
Expected rate of return on insured annuities 5.7 6.0 5.8 5.1
Expected rate of return on property 6.9 6.9 5.0 7.0
Expected rate of return on cash and other 4.4 4.9 4.8 4.8
Weighted average return on assets 5.6 5.7 5.8 5.6
North America        
Discount rate 5.7 6.3 6.1 5.7
Rate of increase in salaries 3.0 3.0 4.6 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 4.7 5.1 5.1 4.8
Expected rate of return on cash and other 6.6 3.4 3.0 3.0
Weighted average return on assets 6.5 6.6 6.7 6.8
Western Continental Europe        
Discount rate 5.5 5.7 5.5 4.6
Rate of increase in salaries 2.7 2.8 2.9 2.8
Rate of increase in pensions in payment 2.0 2.1 2.1 2.0
Inflation 2.1 2.1 2.2 2.1
Expected rate of return on equities 7.8 7.2 7.2 7.2
Expected rate of return on bonds1 4.1 4.5 4.5 4.4
Expected rate of return on property 6.5 6.0 5.5 6.1
Expected rate of return on cash and other 4.6 5.3 4.3 3.4
Weighted average return on assets 5.1 5.3 5.3 5.5
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe        
Discount rate 4.2 3.4 3.9 3.1
Rate of increase in salaries 4.2 3.9 4.0 3.7
Inflation 4.9 4.5 4.6 1.2
Expected rate of return on equities 10.1 10.0 10.0
Expected rate of return on bonds1,2 8.2 5.3 6.2 5.3
Expected rate of return on property 10.0
Expected rate of return on cash and other2 1.1 2.1 1.6 2.0
Weighted average return on assets 3.6 3.1 3.7 3.2
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 year 2006 they were classified in bonds.

There are a number of areas in 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 the pension plan assets are invested and the expected compound return that can reasonably be expected for 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, management 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 the estimated future pension payments and evaluate the efficiency of the allocation of the pension plan assets into various investment categories. The studies performed at the time these assumptions were set support the reasonableness of the return assumptions based on the target allocation of investment classes and the then current market conditions.

At 31 December 2009, 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 Western
Conti-
nental
Europe
Asia
Pacific1
– current pensioners – male 20.5 19.6 22.3 18.5 19.3
– current pensioners – female 22.5 21.6 23.7 21.9 24.7
– future pensioners (current age 45) – male 21.9 21.1 23.5 20.4 19.3
– future pensioners (current age 45) – female 23.7 22.5 25.0 23.4 24.9
Note
1
Includes Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe.

The life expectancies after age 65 at 31 December 2008 were 20.0 years and 22.2 years for male and female current pensioners respectively, and 21.3 years and 23.2 years for male and female future pensioners (current age 45), respectively.

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

For a 0.25% increase or decrease in the discount rate at 31 December 2009, the 2010 pension expense would be broadly unchanged as the change in service cost and interest cost are offsetting. The effect on the year-end 2009 pension deficit would be a decrease or increase, respectively, of approximately £24.5 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:
  2009
£m
% 2008
£m
% 2007
£m
%
Group            
Equities 168.5 28.6 162.6 29.6 174.2 34.6
Bonds 256.8 43.7 245.1 44.5 203.8 40.4
Insured annuities 68.7 11.7 64.9 11.8 65.0 12.9
Property 9.8 1.7 12.6 2.3 16.6 3.3
Cash and other 84.3 14.3 65.2 11.8 44.4 8.8
Total fair value of assets 588.1 100.0 550.4 100.0 504.0 100.0
Present value of scheme liabilities (836.1)   (819.1)   (637.6)  
Deficit in the schemes (248.0)   (268.7)   (133.6)  
Irrecoverable surplus (3.1)   (2.4)   (0.5)  
Unrecognised past service cost (0.7)   (0.9)   (0.9)  
Net liability1 (251.8)   (272.0)   (135.0)  
Schemes in surplus 0.7   0.4   8.4  
Schemes in deficit (252.5)   (272.4)   (143.4)  
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 schemes were £470.4 million, £657.0 million and £186.6 million in 2006 and £453.2 million, £684.6 million and £231.4 million in 2005, respectively.

Deficit in schemes by region 2009
£m
2008
£m
2007
£m
UK (22.0) (24.8) (24.2)
North America (140.9) (153.4) (59.6)
Western Continental Europe (73.9) (80.0) (46.7)
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe (11.2) (10.5) (3.1)
Deficit in the schemes (248.0) (268.7) (133.6)

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 2009, 2008 and 2007 between funded and unfunded schemes.
  2009
Deficit
£m
2009
Present
value of
scheme
liabil-
ities
£m
2008
Deficit
£m
2008
Present
value of
scheme
liabil-
ities
£m
2007
Deficit
£m
2007
Present
value of
scheme
liabil-
ities
£m
Funded schemes by region            
UK (22.0) (293.5) (24.8) (269.5) (24.2) (274.2)
North America (65.2) (274.5) (71.0) (266.8) 1.6 (183.5)
Western Continental Europe (25.0) (119.9) (30.1) (126.5) (16.2) (77.6)
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe (3.7) (16.1) (3.3) (16.8) (1.6) (9.1)
Deficit/liabilities in the funded schemes (115.9) (704.0) (129.2) (679.6) (40.4) (544.4)
             
Unfunded schemes by region            
UK
North America (75.7) (75.7) (82.4) (82.4) (61.2) (61.2)
Western Continental Europe (48.9) (48.9) (49.9) (49.9) (30.5) (30.5)
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe (7.5) (7.5) (7.2) (7.2) (1.5) (1.5)
Deficit/liabilities in the unfunded schemes (132.1) (132.1) (139.5) (139.5) (93.2) (93.2)
             
Deficit/liabilities in the schemes (248.0) (836.1) (268.7) (819.1) (133.6) (637.6)

In accordance with IAS 19, schemes that are wholly or partially funded are considered funded 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 consolidated statement of comprehensive income (OCI):
  2009
£m
2008
£m
2007
£m
Group      
Current service cost 22.0 16.7 16.2
Past service cost/(income) 2.5 (1.1)
Gain on settlements and curtailments (1.1) (0.6) (0.8)
Charge to operating profit 20.9 18.6 14.3
Expected return on pension scheme assets (28.7) (31.3) (28.1)
Interest on pension scheme liabilities 46.1 38.9 33.8
Charge to profit before taxation for defined benefit schemes 38.3 26.2 20.0
       
Gain/(loss) on pension scheme assets relative to expected return 44.0 (93.7) (6.0)
Experience (loss)/gain arising on the scheme liabilities (7.6) 4.4 0.1
Changes in assumptions underlying the present value of the scheme liabilities (42.7) 8.0 35.4
Change in irrecoverable surplus (0.9) (0.9) 0.5
Actuarial (loss)/gain recognised in OCI (7.2) (82.2) 30.0

Movements in exchange rates are included in exchange adjustments on foreign currency net investments in the OCI. In the 2007 financial statements, they were included in the actuarial gain.

As at 31 December 2009 the cumulative amount of net actuarial losses recognised in equity since 1 January 2001 was £180.3 million (31 December 2008: £173.1 million, 31 December 2007: £90.9 million). Of this amount, a net loss of £79.2 million was recognised since the 1 January 2004 adoption of IAS 19.

(d) Movement in benefit obligation
The following table shows an analysis of the movement in the benefit obligation for each accounting period:
  2009
£m
2008
£m
2007
£m
Change in benefit obligation      
Benefit obligation at beginning of year 819.1 637.6 657.0
Service cost 22.0 16.7 16.2
Interest cost 46.1 38.9 33.8
Plan participants’ contributions 0.7 0.6 0.5
Actuarial loss/(gain) 50.3 (12.4) (35.5)
Benefits paid (52.9) (40.7) (40.2)
(Gain)/loss due to exchange rate movements (50.5) 133.8 7.2
Plan amendments 2.8 (2.0)
Net (disposals)/acquisitions (0.9) 44.3 0.3
Reclassifications 5.5 3.6 1.1
Settlements and curtailments (3.3) (6.1) (0.8)
Benefit obligation at end of year 836.1 819.1 637.6

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 plan assets
The following table shows an analysis of the movement in the plan assets for each accounting period:
  2009
£m
2008
£m
2007
£m
Change in plan assets      
Fair value of plan assets at beginning of year 550.4 504.0 470.4
Expected return on plan assets 28.7 31.3 28.1
Actuarial gain/(loss) on plan assets 44.0 (93.7) (6.0)
Employer contributions 47.7 44.2 47.0
Plan participants’ contributions 0.7 0.6 0.5
Benefits paid (52.9) (40.7) (40.2)
(Loss)/gain due to exchange rate movements (28.3) 79.0 4.2
Net (disposals)/acquisitions (0.9) 29.4
Reclassifications 0.9 1.8
Settlements (2.2) (5.5)
Fair value of plan assets at end of year 588.1 550.4 504.0
       
Actual return on plan assets 72.7 (62.4) 22.1
(f) History of experience gains and losses
  2009
£m
2008
£m
2007
£m
Gain/(loss) on pension scheme assets relative to expected return:      
Amount 44.0 (93.7) (6.0)
Percentage of scheme assets 7.5% 17.0% 1.2%
       
Experience (loss)/gain arising on the scheme liabilities:      
Amount (7.6) 4.4 0.1
Percentage of the present value of the scheme liabilities 0.9% 0.5% 0.0%
       
Total (loss)/gain recognised in OCI:      
Amount (7.2) (82.2) 30.0
Percentage of the present value of the scheme liabilities 0.9% (10.0%) 4.7%

The experience gains on pension scheme assets and scheme liabilities were £9.3 million and £3.5 million in 2006 and £22.4 million and £3.6 million in 2005, respectively.

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