Notes to the company accounts

8 Post-retirement benefits

The Company operates three defined benefit plans in the UK. The largest of them is a funded scheme with assets held in a separate trustee-administered fund. The Company is the sole employer in that scheme and, accordingly, accounts for it as a defined benefit pension plan, in accordance with FRS 17.

Pension costs are assessed in accordance with the advice of independent, professionally qualified actuaries. The most recent actuarial valuation of the funded scheme was performed using the Projected Unit Method as at 31 March 2006. This has been rolled forward to 31 July 2008.

Contributions to the funded scheme 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 principal assumptions used in updating the valuations are set out below:

	2008	2007
Rate of increase in salaries	4.1%	4.1%
Rate of increase in pensions in payment	3.5%	3.1%
Rate of increase in deferred pensions	3.6%	3.1%
Discount rate	6.6%	5.8%
Inflation rate	3.6%	3.1%
Healthcare cost increases	5.0%	5.0%

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.

The mortality assumptions used in the principal UK schemes are based on the recent actual mortality experience of members within each scheme. The assumptions are based on the PA92 birth 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 and a 1% underpin. The assumptions are that a member who retires next year at age 65 will live on average for a further 22 years after retirement if they are male and for a further 25 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 23 years after retirement if they are male and for a further 27 years after retirement if they are female.

The assets in the scheme and the expected rates of return as at 31 July 2008 were:

	2008 UK schemes		2007 UK schemes
	Long-term rate of return	Value £m	Long-term rate of return	Value £m
Equities	8.2%	620.2	8.2%	959.8
Government bonds	4.8%	30.9	4.9%	77.4
Corporate bonds	6.6%	242.7	5.8%	169.9
Property	7.2%	188.1	7.2%	201.4
Other	5.8%	229.1	6.0%	119.0
Total market value		1,311.0		1,527.5
Present value of funded pension scheme liabilities		(1,333.5)		(1,443.3)
(Deficit)/surplus		(22.5)		84.2
Unfunded pension plans		(34.3)		(33.6)
Post-retirement healthcare		(15.2)		(15.9)
		(72.0)		34.7
Related deferred tax asset/(liability)		20.3		(5.0)
Net pension (liability)/ asset		(51.7)		29.7

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.

History of experience gains and losses

	2008 £m	2007 £m	2006 £m	2005 £m
Actual return less expected return on pension scheme assets	(183.9)	52.6	23.5
As a percentage of scheme assets	(14%)	3%	2%
Experience gains and losses arising on the scheme liabilities	(4.5)	(36.7)	1.6	1.9
As a percentage of present value scheme liabilities	0%	(2)%	0%	5%

Changes in present value of defined benefit obligations

	2008 £m	2007 £m
At beginning of the period	(1,492.8)	(1,464.1)
Current service cost	(7.6)	(20.5)
Past service cost		(1.1)
Interest on obligations	(83.9)	(76.1)
Contributions by employees		(0.1)
Actuarial gain/(loss) on liabilities	36.0	(23.6)
Curtailment gain	1.1	32.5
Liabilities extinguished on settlements	97.2
Benefits paid	67.0	60.2
At end of the period	(1,383.0)	(1,492.8)

Changes in present value of scheme assets

	2008 £m	2007 £m
At beginning of the period	1,527.5	1,380.4
Expected return on assets	109.1	96.5
Contributions by employer	40.1	60.0
Contributions by employees		0.1
Assets distributed on settlements	(114.8)
Actuarial (loss)/gain on assets	(183.9)	50.7
Benefits paid	(67.0)	(60.2)
At end of the period	1,311.0	1,527.5

Cash contributions

Cash payments in 2009 are expected to be £39.0m.

A one percentage point change in assumed healthcare cost trend rates would have the following effects:

	One percentage point increase pound;m	One percentage point decrease £m
Effect on the aggregate of service cost and interest cost	0.1	(0.1)
Effect on defined benefit obligations	1.3	(1.2)

Smiths Group divisions:
Smiths Detection, Smiths Medical, John Crane, Smiths Interconnect, Flex-Tek