Notes to the Consolidated Financial Statements
Notes 21-25
- 21. Transactions with equity shareholders
- 22. Movements in accumulated other recognised income and expense
- 23. Movements in retained losses
- 24. Borrowings
- 25. Post employment benefits
25. Post employment benefits
Background
At 31 March 2008, the Group operated a number of pension plans for the benefit of its employees throughout the world, which vary depending on the conditions and practices in the countries concerned. The Group’s pension plans are provided through both defined benefit and defined contribution arrangements. Defined benefit schemes provide benefits based on the employees’ length of pensionable service and their final pensionable salary or other criteria. Defined contribution schemes offer employees individual funds that are converted into benefits at the time of retirement.
The principal defined benefit pension scheme of the Group is in the United Kingdom. This tax approved final salary scheme was closed to new entrants from 1 January 2006. The assets of the scheme are held in an external trustee administered fund. In addition, the Group operates defined benefit schemes in Germany, Greece, India, Ireland, Italy, Turkey and the United States. Defined contribution pension schemes are currently provided in Australia, Egypt, Greece, Hungary, Ireland, Italy, Kenya, Malta, the Netherlands, New Zealand, Portugal, South Africa, Spain and the United Kingdom.
Income statement expense
| 2008 £m |
2007 £m |
2006 £m |
|
|---|---|---|---|
| Defined contribution schemes | 63 | 32 | 28 |
| Defined benefit schemes | 28 | 62 | 52 |
| Total amount charged to the income statement (note 35) | 91 | 94 | 80 |
Defined benefit schemes
The principal actuarial assumptions used for estimating the Group’s benefit obligations are set out below:
| 2008(1) | 2007(1) | 2006(1) | |
|---|---|---|---|
| Weighted average actuarial assumptions used at 31 March: | |||
| Rate of inflation | 3.1% | 2.7% | 2.5% |
| Rate of increase in salaries | 4.3% | 4.4% | 4.2% |
| Rate of increase in pensions in payment and deferred pensions | 3.1% | 2.7% | 2.5% |
| Discount rate | 6.1% | 5.1% | 4.8% |
| Expected rates of return: | |||
| Equities | 8.0% | 7.8% | 7.3% |
| Bonds(2) | 4.4% | 4.8% | 4.2% |
| Other assets | 1.3% | 5.3% | 3.4% |
| Notes: | |
|---|---|
| (1) | Figures shown represent a weighted average assumption of the individual schemes. |
| (2) | For the year ended 31 March 2008 the expected rate of return for bonds consisted of a 4.7% rate of return for corporate bonds (2007: 5.1%) and a 3.5% rate of return for government bonds (2007: 4.0%). |
The expected return on assets assumptions are derived by considering the expected long term rates of return on plan investments. The overall rate of return is a weighted average of the expected returns of the individual investments made in the group plans. The long term rates of return on equities and property are derived from considering current risk free rates of return with the addition of an appropriate future risk premium from an analysis of historic returns in various countries. The long term rates of return on bonds and cash investments are set in line with market yields currently available at the balance sheet date.
Mortality assumptions used are consistent with those recommended by the individual scheme actuaries and reflect the latest available tables, adjusted for the experience of the Group where appropriate. The largest scheme in the Group is the UK scheme and the tables used for this scheme indicate a further life expectancy for a male/female pensioner currently aged 65 of 22.0/24.8 years (2007: 19.4/22.4 years, 2006: 17.8/20.7 years) and a further life expectancy for a male/female non-pensioner member currently aged 40 of 23.2/26.0 years (2007: 22.1/25.1 years, 2006: 20.3/23.3 years) from age 65.
Measurement of the Group’s defined benefit retirement obligations are particularly sensitive to changes in certain key assumptions, including the discount rate. An increase or decrease in the discount rate of 0.5% would result in a £135 million decrease or a £145 million increase in the defined benefit obligation, respectively.
Charges made to the Consolidated Income Statement and Consolidated Statement of Recognised Income and Expense (“SORIE”) on the basis of the assumptions stated above are:
| 2008 £m |
2007 £m |
2006 £m |
|
|---|---|---|---|
| Current service cost | 53 | 74 | 57 |
| Interest cost | 69 | 61 | 52 |
| Expected return on pension assets | (89) | (73) | (57) |
| Curtailment | (5) | – | – |
| Total included within staff costs | 28 | 62 | 52 |
| Actuarial losses /(gains) recognised in the consolidated SORIE | 47 | (65) | 43 |
| Cumulative actuarial losses recognised in the consolidated SORIE | 127 | 80 | 145 |
Fair value of the assets and present value of the liabilities of the schemes
The amount included in the balance sheet arising from the Group’s obligations in respect of its defined benefit schemes is as follows:
| 2008 £m |
2007 £m |
2006 £m |
|
|---|---|---|---|
| Movement in pension assets: | |||
| 1 April | 1,251 | 1,123 | 874 |
| Reclassification as held for sale | – | – | (3) |
| Expected return on pension assets | 89 | 73 | 57 |
| Actual (losses)/gains | (176) | 26 | 121 |
| Employer cash contributions | 86 | 55 | 85 |
| Member cash contributions | 13 | 13 | 11 |
| Benefits paid | (42) | (32) | (27) |
| Exchange rate movements | 50 | (7) | 5 |
| 31 March | 1,271 | 1,251 | 1,123 |
| Movement in pension liabilities: | |||
| 1 April | 1,292 | 1,224 | 998 |
| Reclassification as held for sale | – | – | (31) |
| Current service cost | 53 | 74 | 57 |
| Interest cost | 69 | 61 | 52 |
| Member cash contributions | 13 | 13 | 11 |
| Actuarial (gains)/losses | (129) | (39) | 164 |
| Benefits paid | (42) | (32) | (27) |
| Other movements | (6) | 4 | (8) |
| Exchange rate movements | 60 | (13) | 8 |
| 31 March | 1,310 | 1,292 | 1,224 |
An analysis of net assets/(deficits) is provided below for the Group’s principal defined benefit pension scheme in the UK and for the Group as a whole.
| UK | Group | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2008 £m |
2007 £m |
2006 £m |
2005 £m |
2008 £m |
2007 £m |
2006 £m |
2005 £m |
||
| Analysis of net assets/(deficits): | |||||||||
| Total fair value of scheme assets | 934 | 954 | 835 | 628 | 1,271 | 1,251 | 1,123 | 874 | |
| Present value of funded scheme liabilities | (902) | (901) | (847) | (619) | (1,217) | (1,194) | (1,128) | (918) | |
| Net assets/(deficits) for funded schemes | 32 | 53 | (12) | 9 | 54 | 57 | (5) | (44) | |
| Present value of unfunded scheme liabilities | – | – | – | – | (93) | (98) | (96) | (80) | |
| Net assets/(deficits) | 32 | 53 | (12) | 9 | (39) | (41) | (101) | (124 ) | |
| Net assets/(deficits) are analysed as: | |||||||||
| Assets | 32 | 53 | – | 9 | 65 | 82 | 19 | 12 | |
| Liabilities | – | – | (12) | – | (104) | (123) | (120) | (136) | |
It is expected that contributions of £82 million will be paid into the Group’s defined benefit retirement schemes during the year ending 31 March 2009.
Actual return on pension assets
| 2008 £m |
2007 £m |
2006 £m |
|
|---|---|---|---|
| Actual return on pension assets | (87) | 99 | 178 |
| Analysis of pension assets at 31 March is as follows: | % | % | % |
| Equities | 68.5 | 72.1 | 71.9 |
| Bonds | 17.7 | 27.5 | 26.5 |
| Property | 0.3 | 0.4 | 0.4 |
| Other | 13.5 | – | 1.2 |
| 100.0 | 100.0 | 100.0 |
The schemes have no direct investments in the Group’s equity securities or in property currently used by the Group.
History of experience adjustments
| 2008 £m |
2007 £m |
2006 £m |
2005 £m |
|
|---|---|---|---|---|
| Experience adjustments on pension liabilities: | ||||
| Amount | (5) | (2) | (4) | (60) |
| Percentage of pension liabilities | – | – | – | 6% |
| Experience adjustments on pension assets: | ||||
| Amount | (176) | 26 | 121 | 24 |
| Percentage of pension assets | (14%) | 2% | 11% | 3% |