Notes to the accounts
10 Post-retirement benefits
Smiths operates a number of defined benefit plans throughout the world. The principal schemes are in the United Kingdom and in the United States and are of the defined benefit type, with assets held in separate trustee-administered funds.
Pension costs are assessed in accordance with the advice of independent, professionally-qualified actuaries. The Group accounts for its pension and other post-retirement benefit costs, principally post-retirement healthcare, in accordance with ‘IAS 19 Employee Benefits’. The most recent actuarial valuations of the two principal UK schemes were performed using the Projected Unit Method as at 31 March 2006. The most recent valuations of the six principal US pension and post-retirement healthcare plans were performed at 1 January 2005. These valuations have been updated by independent qualified actuaries for the purposes of IAS 19 in order to assess the liabilities of the schemes as at 31 July 2007. Scheme assets are stated at their market values at 31 July 2007.
Contributions to these schemes are made on the advice of the actuaries with the objective that the benefits be fully funded during the scheme members’ average working lives.
The Group provides a defined contribution (401K) plan for its US employees.
In prior years, disclosure in respect of defined benefit plans was abbreviated for some territories outside the United Kingdom and the United States. In the current year, full disclosure is set out below and the consequent inclusion of certain territories is reflected in the changes in assumption. The tables showing prior year comparative have been expanded to include disclosures for these territories.
The principal assumptions used in updating the valuations are set out below:
|
|
UK |
US |
2007 |
UK |
US |
2006 |
|
Rate of increase in salaries |
4.1% |
3.8% |
3.0% |
3.8% |
3.8% |
2.2% |
|
Rate of increase in pensions in payment |
3.1% |
n/a |
1.0% |
2.7% |
n/a |
1.7% |
|
Rate of increase in deferred pensions |
3.1% |
n/a |
0.6% |
2.8% |
n/a |
1.1% |
|
Discount rate |
5.8% |
6.4% |
5.1% |
5.3% |
6.2% |
4.3% |
|
Inflation rate |
3.1% |
2.8% |
1.6% |
2.8% |
2.8% |
1.4% |
|
Healthcare cost increases |
5.0% |
* |
2.7% |
5.0% |
** |
n/a |
*9% p.a. reducing 1% p.a. to 5% in 2012.
**9% p.a. reducing 1% p.a. to 5% in 2011.
The assumptions used are estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily occur in practice. For countries outside the UK and USA these are disclosed as a weighted average.
The mortality assumptions used in the UK schemes are based on the recent actual mortality experience of members within each scheme. The assumptions are based on the PA92 birth year tables with relevant scaling factors based on the experience of the schemes. The assumption also allows for future improvements in life expectancy in line with the medium cohort. The assumptions are that a member who retires next year at age 65 will live on average for a further 21 years after retirement if they are male and for a further 24 years if they are female. For a member who is currently 45, when they retire in 20 years’ time they are assumed to live on average for a further 22 years after retirement if they are male and for a further 25 years if they are female.
The mortality assumptions used in the principal US schemes are based on the most recent mortality study table produced for retired pensioners in the US (RP 2000 table). The table selected allows for future mortality improvements and applies an adjustment for job classification (blue collar versus white collar). The assumptions are that a member who retires at age 65 will live on average for a further 18 years after retirement if they are male and for a further 20 years after retirement if they are female. For a member who is currently 45, when they retire in 20 years time they are assumed to live on average for a further 19 years after retirement if they are male and for a further 21 years if they are female.
The assets in the scheme and the expected rates of return as at 31 July 2007 were:
|
|
2007 |
|||||
|
|
UK schemes |
US schemes |
Other countries |
|||
|
|
Long-term |
Value |
Long-term |
Value |
Long-term |
Value |
|
Equities |
8.2% |
1,624.1 |
8.8% |
202.9 |
8.2% |
7.1 |
|
Government bonds |
4.9% |
591.6 |
5.0% |
94.9 |
6.5% |
3.6 |
|
Corporate bonds |
5.8% |
364.9 |
6.4% |
23.8 |
7.7% |
2.5 |
|
Property |
7.2% |
201.8 |
n/a |
n/a |
n/a |
n/a |
|
Other |
6.0% |
186.7 |
5.0% |
6.0 |
4.1% |
9.0 |
|
Total market value |
|
2,969.1 |
|
327.6 |
|
22.2 |
|
Present value of funded scheme liabilities |
|
(2,637.6) |
|
(355.0) |
|
(26.6) |
|
Surplus/(deficit) |
|
331.5 |
|
(27.4) |
|
(4.4) |
|
Unfunded pension plans |
|
(33.6) |
|
(3.8) |
|
(14.1) |
|
Post-retirement healthcare |
|
(15.9) |
|
(45.4) |
|
(0.9) |
|
Unrecognised asset due to surplus restriction |
|
|
|
|
|
(2.4) |
|
Net pension asset/(liability) |
|
282.0 |
|
(76.6) |
|
(21.8) |
|
|
2006 |
|||||
|
|
UK schemes |
US schemes |
Other countries |
|||
|
|
Long-term |
Value |
Long-term |
Value |
Long-term |
Value |
|
Equities |
8.0% |
1,513.2 |
8.8% |
212.3 |
n/a |
n/a |
|
Government bonds |
4.9% |
720.2 |
5.1% |
76.2 |
n/a |
n/a |
|
Corporate bonds |
5.3% |
248.1 |
6.2% |
42.1 |
n/a |
n/a |
|
Property |
7.0% |
162.1 |
n/a |
n/a |
n/a |
n/a |
|
Other |
4.8% |
126.8 |
5.0% |
2.2 |
3.6% |
7.8 |
|
Total market value |
|
2,770.4 |
|
332.8 |
|
7.8 |
|
Present value of funded scheme liabilities |
|
(2,630.1) |
|
(394.3) |
|
(11.4) |
|
Surplus/(deficit) |
|
140.3 |
|
(61.5) |
|
(3.6) |
|
Unfunded pension plans |
|
(31.9) |
|
(4.3) |
|
(9.1) |
|
Post-retirement healthcare |
|
(17.0) |
|
(64.5) |
|
|
|
Unrecognised asset due to surplus restriction |
|
|
|
|
|
(0.5) |
|
Net pension asset/(liability) |
|
91.4 |
|
(130.3) |
|
(13.2) |
The scheme assets do not include any of the Group’s own financial instruments, nor any property occupied by, nor other assets used by, the Group. The expected rates of return on individual categories of scheme assets are determined by reference to relevant industries. The overall rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the scheme’s investment portfolios.
The effect of retirement benefits calculated in accordance with IAS 19 is included in the financial statements as follows:
Amounts recognised in the income statement – continuing and discontinued operations
|
|
Period ended 31 July 2007 |
Period ended 5 August 2006 |
||||||
|
|
Funded defined benefit pension schemes |
Unfunded |
Funded defined benefit pension schemes |
Unfunded |
||||
|
|
UK |
US |
Other |
£m |
UK |
US |
Other |
£m |
|
Current service cost |
28.2 |
10.6 |
1.2 |
2.6 |
33.9 |
17.5 |
0.6 |
3.2 |
|
Past service cost |
0.7 |
0.2 |
|
0.4 |
0.2 |
0.1 |
|
|
|
Settlement (gains)/losses |
(0.4) |
2.8 |
|
|
|
|
|
|
|
Curtailment gains |
(36.5) |
(20.6) |
|
(9.3) |
|
|
|
|
|
Total (credit)/charge |
(8.0) |
(7.0) |
1.2 |
(6.3) |
34.1 |
17.6 |
0.6 |
3.2 |
|
|
||||||||
|
Expected return on pension scheme assets |
(179.6) |
(24.2) |
(1.2) |
|
(161.5) |
(23.9) |
(0.3) |
|
|
Interest on pension scheme liabilities |
136.3 |
23.5 |
1.4 |
7.0 |
124.5 |
25.8 |
0.6 |
7.2 |
|
Net return |
(43.3) |
(0.7) |
0.2 |
7.0 |
(37.0) |
1.9 |
0.3 |
7.2 |
|
Total (credited)/charged to income statement |
(51.3) |
(7.7) |
1.4 |
0.7 |
(2.9) |
19.5 |
0.9 |
10.4 |
The actual return on scheme assets was £300.7m (2006: £261.7m).
The operating cost is charged as follows:
|
|
Period ended |
Period ended |
|
Cost of sales |
7.3 |
8.9 |
|
Sales and distribution costs |
4.4 |
5.6 |
|
Administrative expenses |
11.3 |
14.7 |
|
Discontinued operations |
20.5 |
26.3 |
|
Exceptional operating items |
(0.3) |
|
|
Profit on disposal of business/curtailment gain |
(63.3) |
|
Actuarial gains of £70.3m (2006: £94.5m) have been reported in the statement of recognised income and expense. This includes a loss of £1.9m (2006: £0.5m) in respect of unrecognised assets owing to surplus restriction. Cumulative actuarial gains from 1 August 2004 reported in the statement of recognised income and expense are £141.4m (2006: £71.1m).
Amounts recognised in the balance sheet
|
|
Period ended 31 July 2007 |
Period ended 5 August 2006 |
||||||
|
|
Funded defined benefit pension schemes |
Unfunded |
Funded defined benefit pension schemes |
Unfunded |
||||
|
|
UK |
US |
Other |
£m |
UK |
US |
Other |
£m |
|
Present value of funded obligations |
(2,637.6) |
(355.0) |
(26.6) |
|
(2,630.1) |
(394.3) |
(11.4) |
|
|
Fair value of scheme assets |
2,969.1 |
327.6 |
22.2 |
|
2,770.4 |
332.8 |
7.8 |
|
|
|
331.5 |
(27.4) |
(4.4) |
|
140.3 |
(61.5) |
(3.6) |
|
|
Present value of unfunded obligations |
|
|
|
(113.7) |
|
|
|
(126.8) |
|
Irrecoverable surplus |
|
|
(2.4) |
|
|
|
(0.5) |
|
|
Net asset/(liability) recognised in the balance sheet |
331.5 |
(27.4) |
(6.8) |
(113.7) |
140.3 |
(61.5) |
(4.1) |
(126.8) |
Changes in present value of defined benefit obligations
|
|
Period ended 31 July 2007 |
Period ended 5 August 2006 |
||||||
|
|
Funded defined benefit pension schemes |
Unfunded |
Funded defined benefit pension schemes |
Unfunded |
||||
|
|
UK |
US |
Other |
£m |
UK |
US |
Other |
£m |
|
At beginning of period |
(2,630.1) |
(394.3) |
(11.4) |
(126.8) |
(2,529.1) |
(467.2) |
|
(131.1) |
|
Transfers in of territories outside UK and USA |
|
|
(5.2) |
(7.1) |
|
|
(10.4) |
(8.2) |
|
Liabilities assumed on acquisitions |
|
|
|
(0.2) |
|
|
(0.1) |
|
|
Current service cost |
(28.2) |
(10.6) |
(1.2) |
(2.6) |
(33.9) |
(17.5) |
(0.6) |
(3.2) |
|
Interest on obligations |
(136.3) |
(23.5) |
(1.4) |
(7.0) |
(124.5) |
(25.8) |
(0.6) |
(7.2) |
|
Employee contributions |
(0.4) |
|
(0.2) |
|
(2.5) |
|
|
|
|
Past service cost |
(0.7) |
(0.2) |
|
(0.4) |
(0.2) |
(0.1) |
|
|
|
Actuarial (loss)/gain on liabilities |
(14.0) |
(10.4) |
(9.3) |
10.2 |
(57.0) |
65.6 |
(0.4) |
10.2 |
|
Curtailment gain |
36.5 |
20.6 |
|
9.3 |
|
|
|
|
|
Liabilities extinguished on settlements |
12.7 |
23.6 |
|
|
|
|
|
|
|
Exchange adjustments |
|
24.0 |
0.8 |
3.7 |
0.2 |
34.1 |
0.4 |
6.1 |
|
Benefits paid |
122.9 |
15.8 |
1.3 |
7.2 |
116.9 |
16.6 |
0.3 |
6.6 |
|
At end of period |
(2,637.6) |
(355.0) |
(26.6) |
(113.7) |
(2,630.1) |
(394.3) |
(11.4) |
(126.8) |
Changes in present value of scheme assets
|
|
Period ended 31 July 2007 |
Period ended 5 August 2006 |
||||||
|
|
Funded defined benefit pension schemes |
Unfunded |
Funded defined benefit pension schemes |
Unfunded |
||||
|
|
UK |
US |
Other |
£m |
UK |
US |
Other |
£m |
|
At beginning of period |
2,770.4 |
332.8 |
7.8 |
|
2,546.9 |
343.9 |
|
|
|
Transfers in of territories outside UK and USA |
|
|
5.1 |
|
|
|
7.5 |
|
|
Assets acquired on acquisitions |
|
|
|
|
|
|
|
|
|
Expected return on assets |
179.6 |
24.2 |
1.2 |
|
161.5 |
23.9 |
0.3 |
|
|
Actuarial gains on scheme assets |
67.2 |
20.4 |
8.1 |
|
77.1 |
(0.6) |
0.1 |
|
|
Employer contributions |
86.7 |
13.9 |
1.9 |
7.2 |
99.5 |
10.1 |
0.6 |
6.6 |
|
Employee contributions |
0.4 |
|
0.2 |
|
2.5 |
|
|
|
|
Assets distributed on settlements |
(12.3) |
(26.4) |
|
|
|
|
|
|
|
Exchange adjustments |
|
(21.5) |
(0.8) |
|
(0.2) |
(27.9) |
(0.4) |
|
|
Benefits paid |
(122.9) |
(15.8) |
(1.3) |
(7.2) |
(116.9) |
(16.6) |
(0.3) |
(6.6) |
|
At end of period |
2,969.1 |
327.6 |
22.2 |
|
2,770.4 |
332.8 |
7.8 |
|
Cash contributions
Company contributions to the funded defined benefit pension plans for 2007 totalled £102.5m (2006: £110.2m). 2007 included special UK contributions of £55.9m (2006: £61.0m). Special contributions include £20.6m arising from the sale of Aerospace, £13.1m for special covenant payments and £22.2m in respect of back-dated payments resulting from trustee valuations. Cash payments in 2008 will be about £52m.
History of schemes
The history of the schemes for the last three years is:
|
|
2007 £m |
2006 £m |
2005 £m |
|
Balance sheet |
|
|
|
|
Present value of defined benefit obligation |
(3,132.9) |
(3,162.6) |
(3,127.4) |
|
Fair value of scheme assets |
3,318.9 |
3,111.0 |
2,890.8 |
|
Unrecognised asset due to surplus restriction |
(2.4) |
(0.5) |
|
|
Surplus/(deficit) |
183.6 |
(52.1) |
(236.6) |
|
Post-retirement assets |
333.7 |
183.7 |
134.6 |
|
Post-retirement liabilities |
(150.1) |
(235.8) |
(371.2) |
|
Surplus/(deficit) |
183.6 |
(52.1) |
(236.6) |
|
|
Period ended 31 July 2007 |
Period ended 5 August 2006 |
Year ended 31 July 2005 |
|
Experience gains/(losses) |
|
|
|
|
Experience (losses)/gains on scheme liabilities |
(23.5) |
18.4 |
(266.3) |
|
Experience gains on scheme assets |
95.7 |
76.6 |
242.9 |
|
Movement on restricted surplus |
(1.9) |
(0.5) |
|
In accordance with the transitional provision for the amendments to IAS 19 ‘Employee Benefits’ in December 2004, the disclosures above are determined prospectively from 2005.
Balance sheet reconciliation
At 31 July 2007 the net UK funded pension surplus of £331.5m (2006: £140.3m) represented individual plan surpluses of £333.7m (2006: £183.7m) and deficits of £2.2m (2006: £43.4m). The balance sheet records the retirement assets and liabilities as follows.
|
|
|
2007 £m |
2006 £m |
|
UK surplus |
|
331.5 |
140.3 |
|
US deficit |
|
(27.4) |
(61.5) |
|
Other countries deficit |
|
(6.8) |
(4.1) |
|
Unfunded |
|
(113.7) |
(126.8) |
|
Surplus/(deficit) |
|
183.6 |
(52.1) |
|
Post-retirement assets |
|
333.7 |
183.7 |
|
Post-retirement liabilities |
|
(150.1) |
(235.8) |
|
Surplus/(deficit) |
|
183.6 |
(52.1) |
Sensitivity to healthcare cost trends
A one percentage point change in assumed healthcare cost trend rates would have the following effects:
|
|
One percentage |
One |
|
Effect on the aggregate of service cost and interest cost |
0.7 |
(0.5) |
|
Effect on defined benefit obligations |
6.4 |
(5.4) |
Defined contribution plans
The Group operates a number of defined contribution plans. The total expense recognised in the income statement in respect of these plans was £19.1m (2006: £16.9m).