Notes to the consolidated financial statements

(a) Plan information

The Group maintains pension plans for its operations throughout the world. Some of these arrangements are defined benefit pension schemes with retirement, disability, death and termination income benefits. The retirement income benefits are generally a function of years of employment and final salary.

The principal schemes are funded and their assets held in separate trustee-administered funds. The schemes are funded in line with local practice and contributions are assessed in accordance with local independent actuarial advice. The schemes operated by the Group are subject to independent actuarial valuation at regular intervals using consistent assumptions appropriate to conditions prevailing in the relevant country. The most recent actuarial valuations of plan assets and the present value of the defined benefit obligations were carried out as at 31 March 2007 by independent actuaries.

The Group also maintains defined contribution pension schemes and some fully insured pension schemes.

On 1 April 2002, the main United Kingdom scheme was closed to new members. A defined contribution pension scheme has been established to provide pension benefits to new United Kingdom employees. Under the projected unit method, the service cost of the closed scheme will increase as the members approach retirement.

During the year, the Group initiated a consultation process on the proposal that the main United Kingdom pension scheme be closed to future accrual from 6 April 2011. At the same time, the decision that the Group would no longer fund early retirements was communicated to members. The proposal to close to future accrual was confirmed by the Group on 31 March 2010. These changes give rise to exceptional items in the income statement for the year ended 31 March 2010 (Note 7).

The Group’s subsidiaries in the USA provide unfunded retirement medical and life assurance benefits to their employees.

The Group expects to contribute approximately £38 million to its defined benefit plans in the year to 31 March 2011.

(b) Principal assumptions

The principal assumptions used for the purpose of the actuarial valuations were as follows:

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Pension benefits

Medical benefits

Year to 31 March 2010

UK

US

Others

Inflation rate

3.7%

2.5%

2.0%

2.5%

Expected rate of salary increases

4.5%

3.5%

2.0%

n/a

Expected rate of pension increases

3.5%

n/a

1.3%

n/a

Discount rate

5.5%

5.7%

4.8%

5.6%

Expected return on plan assets (total)

5.9%

7.5%

6.3%

n/a

Expected equity return on plan assets

8.1%

8.4%

7.5%

n/a

 

 

 

 

 

 

Pension benefits

Medical
benefits

Year to 31 March 2009

UK

US

Others

Inflation rate

2.7%

2.5%

2.0%

2.5%

Expected rate of salary increases

3.5%

3.5%

2.0%

n/a

Expected rate of pension increases

2.7%

n/a

1.0%

n/a

Discount rate

6.9%

7.3%

6.3%

7.1%

Expected return on plan assets (total)

6.6%

7.9%

5.9%

n/a

Expected equity return on plan assets

8.5%

8.8%

7.0%

n/a

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Expected longevity post age 65

Mortality assumptions – Year to 31 March 2010

UK

US

Male aged 65 now

21 years

19 years

Male aged 65 in 20 years’ time

24 years

19 years

Female aged 65 now

22 years

21 years

Female aged 65 in 20 years’ time

24 years

21 years

 

 

 

 

Expected longevity post age 60

Mortality assumptions – Year to 31 March 2009

UK

US

Male aged 60 now

26 years

23 years

Male aged 60 in 15 years’ time

28 years

23 years

Female aged 60 now

27 years

25 years

Female aged 60 in 15 years’ time

29 years

25 years

The expected retirement age assumption has been changed to 65 due to the removal of the discretionary early retirement terms as described in (a) above.

Shorter longevity assumptions are used for members who retire on grounds of ill-health.

The expected rates of return on individual categories of plan assets are estimated by reference to indices published by the relevant exchanges. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the plan’s investment portfolio. The actual rate of return on the plan assets for the year was positive 26.5% (2009 – negative 15.4%), and amounted to a gain of £258 million (2009 – £171 million loss).

Medical cost trend rates are estimated at 10% per annum (2009 – between 8.5%-10.5%), grading down to 5% by 2020. If medical cost trend rates were to increase or decrease by 1%, the effects are estimated as follows:

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31 March 2010

31 March 2009

 

Increase
£m

Decrease
£m

Increase
£m

Decrease
£m

Increase/(decrease) in medical benefits current service
and interest cost

1

(1)

1

(1)

Increase/(decrease) in medical benefits obligation

8

(7)

7

(6)

(c) Amounts recognised in the income statement

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Pension benefits

Medical
benefits
£m

Total
£m

Year to 31 March 2010

UK
£m

US
£m

Others
£m

Total
£m

Current service cost charged to operating profit

3

5

1

9

2

11

Exceptional items (Note 7):

 

 

 

 

 

 

– negative past service cost

(32)

(32)

(32)

– curtailment benefit

(10)

(10)

(10)

Total (credited)/charged to operating profit

(39)

5

1

(33)

2

(31)

Interest cost

46

22

2

70

6

76

Expected return on plan assets

(42)

(13)

(2)

(57)

(57)

Charged to finance expense

4

9

13

6

19

Total

(35)

14

1

(20)

8

(12)

 

 

 

 

 

 

 

 

Pension benefits

Medical
benefits
£m

Total
£m

Year to 31 March 2009

UK
£m

US
£m

Others
£m

Total
£m

Current service cost charged to operating profit

5

6

1

12

2

14

Interest cost

52

20

2

74

5

79

Expected return on plan assets

(55)

(19)

(2)

(76)

(76)

(Credited)/charged to finance expense

(3)

1

(2)

5

3

Total

2

7

1

10

7

17

Current service costs are presented in staff costs (Note 9); expected return on plan assets and interest cost are presented in net finance expense (Note 10).

(d) Amounts recognised in the statement of financial position

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Pension benefits

 

 

 

UK

US

Others

Total

Medical benefits £m

Total
£m

At 31 March 2010

% of plan assets

£m

% of plan assets

£m

% of plan assets

£m

% of plan assets

£m

Fair value of plan assets:

 

 

 

 

 

 

 

 

 

 

Equities

29%

249

54%

131

32%

16

34%

396

396

Bonds

34%

301

29%

72

44%

22

34%

395

395

Property and other

37%

327

17%

42

24%

12

32%

381

381

 

 

877

 

245

 

50

 

1 172

1 172

Present value of funded obligations

 

(872)

 

(357)

 

(57)

 

(1 286)

(1 286)

Present value of unfunded obligations

 

 

(42)

 

 

(42)

(101)

(143)

Net asset/(liability) recognised in the statement of financial position

 

5

 

(154)

 

(7)

 

(156)

(101)

(257)

Disclosed in the statement of financial position as:

 

 

 

 

 

 

 

 

 

 

Retirement benefit surplus

 

15

 

 

1

 

16

16

Retirement benefit obligations

 

(10)

 

(154)

 

(8)

 

(172)

(101)

(273)

 

 

 

 

 

 

 

 

 

 

 

 

Pension benefits

 

 

 

UK

US

Others

Total

Medical benefits £m

Total
£m

At 31 March 2009

% of plan assets

£m

% of plan assets

£m

% of plan assets

£m

% of plan assets

£m

Fair value of plan assets:

 

 

 

 

 

 

 

 

 

 

Equities

25%

185

49%

96

27%

12

30%

293

293

Bonds

36%

267

34%

68

42%

19

36%

354

354

Property and other

39%

280

17%

34

31%

14

34%

328

328

 

 

732

 

198

 

45

 

975

975

Present value of funded obligations

 

(687)

 

(318)

 

(50)

 

(1 055)

(1 055)

Present value of unfunded obligations

 

 

(37)

 

 

(37)

(94)

(131)

Net asset/(liability) recognised in the statement of financial position

 

45

 

(157)

 

(5)

 

(117)

(94)

(211)

Disclosed in the statement of financial position as:

 

 

 

 

 

 

 

 

 

 

Retirement benefit surplus

 

45

 

 

2

 

47

47

Retirement benefit obligations

 

 

(157)

 

(7)

 

(164)

(94)

(258)

The plan assets do not include any of the Group’s financial instruments, nor any property occupied by, or other assets used by, the Group.

e) Reconciliation of movement in plan assets and liabilities

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Pension benefits

Medical
benefits
£m

Total
£m

Liabilities

UK
£m

US
£m

Others
£m

Total
£m

At 1 April 2008

810

273

45

1 128

75

1 203

Total service cost

5

6

1

12

2

14

Interest cost

52

20

2

74

5

79

Actuarial gain

(136)

(27)

(4)

(167)

(9)

(176)

Benefits paid

(47)

(19)

(1)

(67)

(5)

(72)

Exchange differences

3

102

7

112

26

138

At 31 March 2009

687

355

50

1 092

94

1 186

Total service cost

3

5

1

9

2

11

Negative past service cost

(32)

(32)

(32)

Curtailment benefits

(10)

(10)

(10)

Interest cost

46

22

2

70

6

76

Actuarial loss

229

55

8

292

13

305

Benefits paid

(51)

(22)

(2)

(75)

(5)

(80)

Exchange differences

(16)

(2)

(18)

(9)

(27)

At 31 March 2010

872

399

57

1 328

101

1 429

 

 

 

 

 

 

 

 

Pension benefits

Medical
benefits
£m

Total
£m

Assets

UK
£m

US
£m

Others
£m

Total
£m

At 1 April 2008

859

209

44

1 112

1 112

Expected return on assets

55

19

2

76

76

Actuarial loss

(148)

(89)

(10)

(247)

(247)

Contributions paid by employer

12

11

3

26

5

31

Benefits paid

(47)

(19)

(1)

(67)

(5)

(72)

Exchange differences

1

67

7

75

75

At 31 March 2009

732

198

45

975

975

Expected return on assets

42

13

2

57

57

Actuarial gain

141

55

5

201

201

Contributions paid by employer

13

12

2

27

5

32

Benefits paid

(51)

(22)

(2)

(75)

(5)

(80)

Exchange differences

(11)

(2)

(13)

(13)

At 31 March 2010

877

245

50

1 172

1 172

(f) Analysis of actuarial losses/(gains) recognised in the consolidated statement of comprehensive income

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31 March

 

2010
£m

2009
£m

Difference between the actual return and the expected return on plan assets

(201)

247

Experience gains arising on scheme liabilities

(18)

Changes in assumptions underlying the present value of scheme liabilities

305

(158)

Actuarial losses recognised in the consolidated statement of comprehensive income

104

71

 

 

 

Cumulative actuarial loss recognised in the consolidated statement of comprehensive income

159

55

Deferred tax taken directly to equity on retirement benefit obligations was £29 million credit to equity (2009 – £31 million credit to equity).

(g) History of the plans and experience adjustments

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2010
£m

2009
£m

2008
£m

2007
£m

2006
£m

Present value of defined benefit obligation
and medical benefits

1 429

1 186

1 203

1 317

1 351

Fair value of plan assets

(1 172)

(975)

(1 112)

(1 188)

(1 179)

Net deficit

257

211

91

129

172

 

 

 

 

 

 

Experience adjustments on plan liabilities
– (gain)/loss

(18)

(9)

25

7

Experience adjustments on plan assets
– (gain)/loss

(201)

247

69

3

(108)

All experience adjustments are recognised directly in equity, net of related tax (see the consolidated statement of comprehensive income).