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

For the year ended 31 December 2010

23. Provision for post-employment benefits

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

  2010
£m
2009
£m
2008
£m
Defined contribution plans 101.5 95.5 79.7
Defined benefit plans charge to operating profit 19.1 20.9 18.6
Pension costs (note 5) 120.6 116.4 98.3
Expected return on pension plan assets (note 6) (30.6) (28.7) (31.3)
Interest on pension plan liabilities (note 6) 45.9 46.1 38.9
  135.9 133.8 105.9

Defined benefit plans

The pension costs are assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various pension plans were carried out at various dates in the last three years. These valuations have generally been updated by the local independent qualified actuaries to 31 December 2010.

The Group has a policy of closing defined benefit plans to new members. This has been implemented across a significant number of the pension plans.

Contributions to funded plans are determined in line with local conditions and practices. Contributions in respect of unfunded plans are paid as they fall due. The total contributions (for funded plans) and benefit payments (for unfunded plans) paid for 2010 amounted to £53.3 million (2009: £47.7 million, 2008: £44.2 million). Employer contributions and benefit payments in 2011 are expected to be in the range of £40 million to £60 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:

  2010
% pa
2009
% pa
2008
% pa
2007
% pa
UK        
Discount rate 5.4 5.7 6.0 5.8
Rate of increase in salaries 3.4 3.5 3.0 4.8
Rate of increase in pensions in payment 4.0 4.2 3.9 4.1
Inflation 3.2 3.5 2.8 3.3
Expected rate of return on equities 7.5 7.5 7.3 7.3
Expected rate of return on bonds1 4.5 4.8 4.9 5.3
Expected rate of return on insured annuities 5.4 5.7 6.0 5.8
Expected rate of return on property 6.9 6.9 6.9 5.0
Expected rate of return on cash and other 4.0 4.4 4.9 4.8
Weighted average return on assets 5.4 5.6 5.7 5.8
North America        
Discount rate 5.1 5.7 6.3 6.1
Rate of increase in salaries 3.0 3.0 3.0 4.6
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 4.3 4.7 5.1 5.1
Expected rate of return on cash and other 6.4 6.6 3.4 3.0
Weighted average return on assets 6.4 6.5 6.6 6.7
Western Continental Europe        
Discount rate 5.3 5.5 5.7 5.5
Rate of increase in salaries 2.7 2.7 2.8 2.9
Rate of increase in pensions in payment 2.0 2.0 2.1 2.1
Inflation 2.0 2.1 2.1 2.2
Expected rate of return on equities 7.1 7.8 7.2 7.2
Expected rate of return on bonds1 4.4 4.1 4.5 4.5
Expected rate of return on property 6.1 6.5 6.0 5.5
Expected rate of return on cash and other 4.6 4.6 5.3 4.3
Weighted average return on assets 5.0 5.1 5.3 5.3
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe
Discount rate 4.0 4.2 3.4 3.9
Rate of increase in salaries 4.4 4.2 3.9 4.0
Inflation 5.1 4.9 4.5 4.6
Expected rate of return on equities 10.0 10.1 10.0 10.0
Expected rate of return on bonds1 8.0 8.2 5.3 6.2
Expected rate of return on cash and other 1.0 1.1 2.1 1.6
Weighted average return on assets 3.4 3.6 3.1 3.7
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.

There are a number of areas in pension accounting that involve judgments 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 pension 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. Pension 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 plans.

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 2010, 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 20.7 19.7 22.4 20.0 19.3
– current pensioners – female 22.7 21.6 23.8 23.3 24.7
– future pensioners (current age 45) – male 22.3 21.2 23.6 22.5 19.3
– future pensioners (current age 45) – female 23.9 22.5 25.0 25.2 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 2009 were 20.5 years and 22.5 years for male and female current pensioners respectively, and 21.9 years and 23.7 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.

For a 0.25% increase or decrease in the discount rate at 31 December 2010, the effect on the year-end 2010 pension deficit would be a decrease or increase, respectively, of approximately £26 million.

(b) Assets and liabilities

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

  2010
£m
% 2009
£m
% 2008
£m
%
Equities 188.2 29.8 168.5 28.6 162.6 29.6
Bonds 245.7 38.9 256.8 43.7 245.1 44.5
Insured annuities 66.3 10.5 68.7 11.7 64.9 11.8
Property 9.6 1.5 9.8 1.7 12.6 2.3
Cash and other 121.5 19.3 84.3 14.3 65.2 11.8
Total fair value of assets 631.3 100.0 588.1 100.0 550.4 100.0
Present value of liabilities (871.2)   (836.1)   (819.1)  
Deficit in the plans (239.9)   (248.0)   (268.7)  
Irrecoverable surplus (0.9)   (3.1)   (2.4)  
Unrecognised past service cost (0.7)   (0.7)   (0.9)  
Net liability1 (241.5)   (251.8)   (272.0)  
Plans in surplus 2.8   0.7   0.4  
Plans in deficit (244.3)   (252.5)   (272.4)  
Note
1
The related deferred tax asset is discussed in note 15.

The total fair value of assets, present value of pension plan liabilities and deficit in the plans were £504.0 million, £637.6 million and £133.6 million in 2007 and £470.4 million, £657.0 million and £186.6 million in 2006, respectively.

Deficit in plans by region 2010
£m
2009
£m
2008
£m
UK (3.5) (22.0) (24.8)
North America (144.4) (140.9) (153.4)
Western Continental Europe (75.9) (73.9) (80.0)
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe (16.1) (11.2) (10.5)
Deficit in the plans (239.9) (248.0) (268.7)

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

The following table shows the split of the deficit at 31 December 2010, 2009 and 2008 between funded and unfunded pension plans.

  2010
Deficit
£m
2010
Present
value of
liabil-
ities
£m
2009
Deficit
£m
2009
Present
value of
liabil-
ities
£m
2008
Deficit
£m
2008
Present
value of
liabil-
ities
£m
Funded plans by region        
UK (3.5) (305.5) (22.0) (293.5) (24.8) (269.5)
North America (66.8) (306.5) (65.2) (274.5) (71.0) (266.8)
Western Continental Europe (29.7) (103.8) (25.0) (119.9) (30.1) (126.5)
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe (5.6) (21.1) (3.7) (16.1) (3.3) (16.8)
Deficit/liabilities in the funded plans (105.6) (736.9) (115.9) (704.0) (129.2) (679.6)
             
Unfunded plans by region          
UK
North America (77.6) (77.6) (75.7) (75.7) (82.4) (82.4)
Western Continental Europe (46.2) (46.2) (48.9) (48.9) (49.9) (49.9)
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe (10.5) (10.5) (7.5) (7.5) (7.2) (7.2)
Deficit/liabilities in the unfunded plans (134.3) (134.3) (132.1) (132.1) (139.5) (139.5)
             
Deficit/liabilities in the plans (239.9) (871.2) (248.0) (836.1) (268.7) (819.1)

In accordance with IAS 19, plans that are wholly or partially funded are considered funded plans.

(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 comprehensive income (OCI):

  2010
£m
2009
£m
2008
£m
Current service cost 23.3 22.0 16.7
Past service (income)/cost (0.6) 2.5
Gain on settlements and curtailments (3.6) (1.1) (0.6)
Charge to operating profit 19.1 20.9 18.6
Expected return on pension plan assets (30.6) (28.7) (31.3)
Interest on pension plan liabilities 45.9 46.1 38.9
Charge to profit before taxation for defined benefit plans 34.4 38.3 26.2
       
Gain/(loss) on pension plan assets relative to expected return 31.9 44.0 (93.7)
Experience gain/(loss) arising on the plan liabilities 3.4 (7.6) 4.4
Changes in assumptions underlying the present value of the plan liabilities (37.9) (42.7) 8.0
Change in irrecoverable surplus 2.2 (0.9) (0.9)
Actuarial loss recognised in OCI (0.4) (7.2) (82.2)

As at 31 December 2010 the cumulative amount of net actuarial losses recognised in equity since 1 January 2001 was £180.7 million (31 December 2009: £180.3 million, 31 December 2008: £173.1 million). Of this amount, a net loss of £79.6 million was recognised since the 1 January 2004 adoption of IAS 19.

(d) Movement in plan liabilities

The following table shows an analysis of the movement in the pension plan liabilities for each accounting period:

  2010
£m
2009
£m
2008
£m
Plan liabilities at beginning of year 836.1 819.1 637.6
Service cost 23.3 22.0 16.7
Interest cost 45.9 46.1 38.9
Actuarial loss/(gain) 34.5 50.3 (12.4)
Benefits paid (57.2) (52.9) (40.7)
Loss/(gain) due to exchange rate movements 9.7 (50.5) 133.8
Net (disposals)/acquisitions (0.9) 44.3
Settlements and curtailments (26.4) (3.3) (6.1)
Other1 5.3 6.2 7.0
Plan liabilities at end of year 871.2 836.1 819.1
Note
1
Other includes plan participants’ contributions, plan amendments and reclassifications. In the 2009 and 2008 financial statements these were presented as separate line items. 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 pension plan assets for each accounting period:

  2010
£m
2009
£m
2008
£m
Fair value of plan assets at beginning of year 588.1 550.4 504.0
Expected return on plan assets 30.6 28.7 31.3
Actuarial gain/(loss) on plan assets 31.9 44.0 (93.7)
Employer contributions 53.3 47.7 44.2
Benefits paid (57.2) (52.9) (40.7)
Gain/(loss) due to exchange rate movements 5.9 (28.3) 79.0
Net (disposals)/acquisitions (0.9) 29.4
Settlements (22.8) (2.2) (5.5)
Other1 1.5 1.6 2.4
Fair value of plan assets at end of year 631.3 588.1 550.4
Actual return on plan assets 62.5 72.7 (62.4)
Note
1
Other includes plan participants’ contributions and reclassifications. In the 2009 and 2008 financial statements these were presented as separate line items.

(f) History of experience gains and losses

  2010
£m
2009
£m
2008
£m
Gain/(loss) on pension plan assets relative to expected return:      
Amount 31.9 44.0 (93.7)
Percentage of plan assets 5.1% 7.5% (17.0%)
       
Experience gain/(loss) arising on the plan liabilities:    
Amount 3.4 (7.6) 4.4
Percentage of the present value of the plan liabilities 0.4% (0.9%) 0.5%
       
Total loss recognised in OCI:      
Amount (0.4) (7.2) (82.2)
Percentage of the present value of the plan liabilities (0.0%) (0.9%) (10.0%)

The experience (loss)/gain on pension plan assets and plan liabilities were (£6.0) million and £0.1 million in 2007 and £9.3 million and £3.5 million in 2006, respectively.