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. In the United Kingdom, the most recent actuarial valuations of plan assets and the present value of the defined benefit obligations were carried out as at 31 March 2010 by independent actuaries, and the results of these valuations are being finalised.

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.

In the year ended 31 March 2010, the Group decided to close the main United Kingdom pension scheme 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. These changes gave 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.

During the year, the Group announced its intention to close its main US pension schemes, which closed to future accrual from 1 January 2011.

The Group expects to contribute approximately £40 million to its defined benefit plans in the year to 31 March 2012, subject to the finalisation of the 2010 actuarial valuations of the UK schemes.

(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 2011

UK

US

Others

Inflation rate

2.6/3.6%

2.5%

2.0%

2.5%

Expected rate of salary increases

4.4%

3.5%

2.0%

n/a

Expected rate of pension increases

3.4%

n/a

1.3%

n/a

Discount rate

5.5%

5.4%

5.2%

5.3%

Expected return on plan assets (total)

6.2%

7.2%

5.3%

n/a

Expected equity return on plan assets

8.4%

8.0%

6.5%

n/a

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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

During the year the UK government announced that the Consumer Price Index (CPI) rather than the Retail Price Index (RPI) should be used as the basis of the calculation of inflation for the statutory index linked features of retirement benefits. Accordingly, the obligations of the UK schemes have been calculated with reference to the CPI where permitted by the scheme rules. For the year ended 31 March 2011, the inflation rate applied for CPI and RPI are 2.6% and 3.6% respectively.

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Expected longevity post age 65

Mortality assumptions – Year to 31 March 2011

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

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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

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 9.3% (2010 – positive 26.5%), and amounted to a gain of £109 million (2010 – £258 million gain).

Medical cost trend rates are estimated at 9.5% per annum (2010 – 10%), 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 2011

31 March 2010

 

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

9

(7)

8

(7)

(c) Amounts recognised in the income statement

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Pension benefits

Medical
benefits
£m

Total
£m

Year to 31 March 2011

UK
£m

US
£m

Others
£m

Total
£m

Current service cost charged to operating profit

2

5

1

8

3

11

Past service cost

1

1

1

Curtailment benefit

(1)

(1)

(1)

Total charged to operating profit

1

6

1

8

3

11

Interest cost

47

22

2

71

5

76

Expected return on plan assets

(52)

(18)

(2)

(72)

(72)

(Credited)/charged to finance expense

(5)

4

(1)

5

4

Total

(4)

10

1

7

8

15

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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)

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 2011

% of plan assets

£m

% of plan assets

£m

% of plan assets

£m

% of plan assets

£m

Fair value of plan assets:

 

 

 

 

 

 

 

 

 

 

– equities

38%

349

53%

145

35%

18

41%

512

512

– bonds

47%

430

30%

81

44%

23

43%

534

534

– property and other

15%

140

17%

48

21%

11

16%

199

199

 

 

919

 

274

 

52

 

1 245

1 245

Present value of funded obligations

 

(823)

 

(366)

 

(55)

 

(1 244)

(1 244)

Present value of unfunded obligations

 

 

(42)

 

 

(42)

(97)

(139)

Unrecognised asset due to surplus restriction

 

 

 

(1)

 

(1)

(1)

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

 

96

 

(134)

 

(4)

 

(42)

(97)

(139)

Disclosed in the statement of financial position as:

 

 

 

 

 

 

 

 

 

 

– retirement benefit surplus

 

102

 

 

1

 

103

103

– retirement benefit deficits

 

(6)

 

(134)

 

(5)

 

(145)

(97)

(242)

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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)

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 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

(16)

(2)

(18)

(9)

(27)

At 31 March 2010

872

399

57

1 328

101

1 429

Total service cost

2

5

1

8

3

11

Past service cost

1

1

1

Curtailment benefits

(1)

(1)

(1)

Interest cost

47

22

2

71

5

76

Actuarial (gain)/loss

(48)

27

(21)

(1)

(22)

Benefits paid

(49)

(23)

(2)

(74)

(5)

(79)

Businesses sold

(2)

(2)

(2)

Exchange

(23)

(1)

(24)

(6)

(30)

At 31 March 2011

823

408

55

1 286

97

1 383

 

 

 

 

 

 

 

 

Pension benefits

Medical
benefits
£m

Total
£m

Assets

UK
£m

US
£m

Others
£m

Total
£m

At 1 April 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

(11)

(2)

(13)

(13)

At 31 March 2010

877

245

50

1 172

1 172

Expected return on assets

52

18

2

72

72

Actuarial gain

21

16

37

37

Contributions paid by employer

18

32

2

52

5

57

Benefits paid

(49)

(23)

(2)

(74)

(5)

(79)

Exchange

(14)

(14)

(14)

Unrecognised asset due to surplus restriction

(1)

(1)

(1)

At 31 March 2011

919

274

51

1 244

1 244

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

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31 March

 

2011
£m

2010
£m

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

(37)

(201)

Experience gains arising on scheme liabilities

(12)

Changes in assumptions underlying the present value of scheme liabilities

(10)

305

Unrecognised asset due to surplus restriction

1

Actuarial (gains)/losses recognised in the consolidated statement of comprehensive income

(58)

104

 

 

 

Cumulative actuarial loss recognised in the consolidated statement of comprehensive income

101

159

Deferred tax taken directly to equity on retirement benefit obligations was £19 million charge to equity (2010 – £29 million credit to equity).

(g) History of the plans and experience adjustments

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2011
£m

2010
£m

2009
£m

2008
£m

2007
£m

Present value of defined benefit obligation and medical benefits

1 383

1 429

1 186

1 203

1 317

Fair value of plan assets

(1 244)

(1 172)

(975)

(1 112)

(1 188)

Net deficit

139

257

211

91

129

 

 

 

 

 

 

Experience adjustments on plan liabilities
– (gain)/loss

(12)

(18)

(9)

25

Experience adjustments on plan assets
– (gain)/loss

(37)

(201)

247

69

3

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