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 assets held in separate trustee-administered funds. The Group also provides a defined contribution (401K) plan for its US employees.
Pension costs are assessed in accordance with the advice of independent, professionally-qualified actuaries. 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 2008. These valuations have been updated by independent qualified actuaries in order to assess the liabilities of the schemes as at 31 July 2008. Scheme assets are stated at their market values.
Contributions to the 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 principal assumptions used in updating the valuations are set out below:
UK |
US |
2008 |
UK |
US |
2007 |
|
|
Rate of increase in salaries |
4.1% |
3.8% |
3.7% |
4.1% |
3.8% |
3.0% |
|
Rate of increase in pensions in payment |
3.6% |
n/a |
1.4% |
3.1% |
n/a |
1.0% |
|
Rate of increase in deferred pensions |
3.5% |
n/a |
0.7% |
3.1% |
n/a |
0.6% |
|
Discount rate |
6.6% |
6.8% |
6.0% |
5.8% |
6.4% |
5.1% |
|
Inflation rate |
3.6% |
3.3% |
2.5% |
3.1% |
2.8% |
1.6% |
|
Healthcare cost increases |
5.0% |
* |
3.8% |
5.0% |
** |
2.7% |
*8% p.a. reducing 0.5% p.a. to 5% in 2014
**9% p.a. reducing 1% p.a. to 5% in 2012
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 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 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 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 2008 were:
2008 |
||||||
UK schemes |
US schemes |
Other countries |
||||
Long-term |
Value |
Long-term |
Value |
Long-term |
Value |
|
|
Equities |
8.2% |
1,165.8 |
8.8% |
187.5 |
8.8% |
7.1 |
|
Government bonds |
4.8% |
445.1 |
5.3% |
83.8 |
6.6% |
4.9 |
|
Corporate bonds |
6.6% |
258.4 |
6.8% |
25.8 |
7.1% |
1.8 |
|
Insured liabilities |
6.6% |
271.4 |
6.8% |
1.5 |
n/a |
|
|
Property |
7.2% |
188.7 |
7.2% |
3.2% |
0.2 |
|
Other |
5.8% |
289.0 |
6.0% |
17.9 |
5.0% |
11.0 |
|
Total market value |
2,618.4 |
316.5 |
25.0 |
|||
|
Present value of funded scheme liabilities |
(2,468.8) |
(357.0) |
(30.7) |
|||
|
Surplus/(deficit) |
149.6 |
(40.5) |
(5.7) |
|||
|
Unfunded pension plans |
(34.3) |
(3.7) |
(16.4) |
|||
|
Post-retirement healthcare |
(15.2) |
(42.0) |
(0.8) |
|||
|
Unrecognised asset due to surplus restriction |
(1.5) |
|||||
|
Net pension asset/(liability) |
100.1 |
(86.2) |
(24.4) |
|||
During the year, the Trustees of the TI pension scheme invested £250.0m in annuities which are matched with specific liabilities of the fund, As a result, this investment category is separately analysed.
Other assets in the UK and US comprise cash and current assets.
|
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 |
||
|
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) |
|||
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.
Amounts recognised in the income statement – continuing and discontinued operations
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
|||||||
|
Funded defined benefit pension schemes |
Unfunded pension/post-retirement healthcare plans |
Funded defined benefit pension schemes |
Unfunded pension/post-retirement healthcare plans |
|||||
|
UK |
US |
Other |
£m |
UK |
US |
Other |
£m |
|
|
Current service cost |
11.3 |
7.6 |
1.3 |
2.4 |
28.2 |
10.6 |
1.2 |
2.6 |
|
Past service cost |
1.0 |
0.1 |
0.7 |
0.2 |
0.4 |
|||
|
Settlement losses/(gains) |
20.7 |
(0.4) |
2.8 |
|||||
|
Curtailment gains |
(1.1) |
(36.5) |
(20.6) |
(9.3) |
||||
|
Total charge/(credit) |
30.9 |
8.6 |
1.4 |
2.4 |
(8.0) |
(7.0) |
1.2 |
(6.3) |
|
Expected return on pension scheme assets |
(199.5) |
(24.5) |
(1.5) |
(179.6) |
(24.2) |
(1.2) |
||
|
Interest on pension scheme liabilities |
148.3 |
23.0 |
1.5 |
6.7 |
136.3 |
23.5 |
1.4 |
7.0 |
|
Net return |
(51.2) |
(1.5) |
6.7 |
(43.3) |
(0.7) |
0.2 |
7.0 |
|
|
Total (credited)/charged to income statement |
(20.3) |
7.1 |
1.4 |
9.1 |
(51.3) |
(7.7) |
1.4 |
0.7 |
The actual return on scheme assets was a loss of £124.5m (2007: gain of £300.7m).
The operating cost is charged as follows:
|
Year ended |
Period ended |
|
|
Cost of sales |
6.6 |
7.3 |
|
Sales and distribution costs |
5.0 |
4.4 |
|
Administrative expenses |
12.1 |
11.3 |
|
Discontinued operations |
20.7 |
20.5 |
|
Exceptional operating items |
(0.3) |
|
|
Profit on disposal of business/curtailment gain |
(1.1) |
(63.3) |
Actuarial losses of £254.5m (2007: gains of £70.3m) have been reported in the statement of recognised income and expense. This includes a gain of £0.9m (2007: loss of £1.9m) in respect of unrecognised assets owing to surplus restriction. Cumulative actuarial losses from 1 August 2004 reported in the statement of recognised income and expense are £113.1m (2007: cumulative gain of £141.4m).
During the year, the pension settlement relating to the active Aerospace employees was completed, resulting in a £20.7m settlement charge to discontinued operations. In 2007 a provision of £24.3m was made to cover the expected costs of this settlement. The balance of the provision has been released in the current year.
Amounts recognised in the balance sheet
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
|||||||
|
Funded defined benefit pension schemes |
Unfunded pension/post-retirement healthcare plans |
Funded defined benefit pension schemes |
Unfunded pension/post-retirement healthcare plans |
|||||
|
UK |
US |
Other |
£m |
UK |
US |
Other |
£m |
|
|
Present value of funded obligations |
(2,468.8) |
(357.0) |
(30.7) |
(2,637.6) |
(355.0) |
(26.6) |
||
|
Fair value of scheme assets |
2,618.4 |
316.5 |
25.0 |
2,969.1 |
327.6 |
22.2 |
||
|
149.6 |
(40.5) |
(5.7) |
331.5 |
(27.4) |
(4.4) |
|||
|
Present value of unfunded obligations |
(112.4) |
(113.7) |
||||||
|
Irrecoverable surplus |
(1.5) |
(2.4) |
||||||
|
Net asset/(liability) recognised in the balance sheet |
149.6 |
(40.5) |
(7.2) |
(112.4) |
331.5 |
(27.4) |
(6.8) |
(113.7) |
Changes in present value of defined benefit obligations
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
|||||||
|
Funded defined benefit pension schemes |
Unfunded |
Funded defined benefit pension schemes |
Unfunded |
|||||
|
UK |
US |
Other |
£m |
UK |
US |
Other |
£m |
|
|
At beginning of period |
(2,637.6) |
(355.0) |
(26.6) |
(113.7) |
(2,630.1) |
(394.3) |
(11.4) |
(126.8) |
|
Transfers in of territories outside UK and USA |
(0.1) |
(5.2) |
(7.1) |
|||||
|
Liabilities assumed on acquisitions |
(0.1) |
(1.3) |
(0.2) |
|||||
|
Liabilities transferred on disposal |
0.3 |
|||||||
|
Current service cost |
(11.3) |
(7.6) |
(1.3) |
(2.4) |
(28.2) |
(10.6) |
(1.2) |
(2.6) |
|
Interest on obligations |
(148.3) |
(23.0) |
(1.5) |
(6.7) |
(136.3) |
(23.5) |
(1.4) |
(7.0) |
|
Employee contributions |
(0.2) |
(0.2) |
(0.4) |
(0.2) |
||||
|
Past service cost |
(1.0) |
(0.1) |
(0.7) |
(0.2) |
(0.4) |
|||
|
Actuarial gain/(loss) on liabilities |
66.7 |
20.3 |
0.9 |
6.7 |
(14.0) |
(10.4) |
(9.3) |
10.2 |
|
Curtailment gain |
1.1 |
36.5 |
20.6 |
9.3 |
||||
|
Liabilities extinguished on settlements |
131.3 |
12.7 |
23.6 |
|||||
|
Exchange adjustments |
(1.3) |
(9.7) |
(2.7) |
(3.8) |
24.0 |
0.8 |
3.7 |
|
|
Benefits paid |
130.8 |
19.0 |
0.9 |
8.6 |
122.9 |
15.8 |
1.3 |
7.2 |
|
At end of period |
(2,468.8) |
(357.0) |
(30.7) |
(112.4) |
(2,637.6) |
(355.0) |
(26.6) |
(113.7) |
Changes in present value of scheme assets
|
Year ended 31 July 2008 |
Period ended 31 July 2007 |
|||||||
|
Funded defined benefit pension schemes |
Unfunded |
Funded defined benefit pension schemes |
Unfunded |
|||||
|
UK |
US |
Other |
£m |
UK |
US |
Other |
£m |
|
|
At beginning of period |
2,969.1 |
327.6 |
22.2 |
2,770.4 |
332.8 |
7.8 |
||
|
Transfers in of territories outside UK and USA |
5.1 |
|||||||
|
Expected return on assets |
199.5 |
24.5 |
1.5 |
179.6 |
24.2 |
1.2 |
||
|
Actuarial (losses)/gains on scheme assets |
(312.1) |
(35.4) |
(2.5) |
67.2 |
20.4 |
8.1 |
||
|
Employer contributions |
43.5 |
10.0 |
2.6 |
8.6 |
86.7 |
13.9 |
1.9 |
7.2 |
|
Employee contributions |
0.2 |
0.2 |
0.4 |
0.2 |
||||
|
Assets distributed on settlements |
(152.0) |
(12.3) |
(26.4) |
|||||
|
Exchange adjustments |
1.0 |
8.8 |
1.9 |
(21.5) |
(0.8) |
|||
|
Benefits paid |
(130.8) |
(19.0) |
(0.9) |
(8.6) |
(122.9) |
(15.8) |
(1.3) |
(7.2) |
|
At end of period |
2,618.4 |
316.5 |
25.0 |
2,969.1 |
327.6 |
22.2 |
||
Cash contributions
Company contributions to the funded defined benefit pension plans for 2008 totalled £56.1m (2007: £102.5m). 2008 included special UK contributions of £17.1m (2007: £55.9m) including: £13.1 (2007: £13.1m) for special covenant payments; £4.0m (2007: £20.6m) arising from the sale of Aerospace; and £nil (2007: £22.2m) in respect of back-dated payments resulting from trustee valuations. Cash payments in 2009 are expected to be £51.7m.
History of schemes
|
2008 |
2007 |
2006 |
2005 |
|
|
Balance sheet |
||||
|
Present value of defined benefit obligation |
(2,968.9) |
(3,132.9) |
(3,162.6) |
(3,127.4) |
|
Fair value of scheme assets |
2,959.9 |
3,318.9 |
3,111.0 |
2,890.8 |
|
Unrecognised asset due to surplus restriction |
(1.5) |
(2.4) |
(0.5) |
|
|
(Deficit)/surplus |
(10.5) |
183.6 |
(52.1) |
(236.6) |
|
Post-retirement assets |
174.2 |
333.7 |
183.7 |
134.6 |
|
Post-retirement liabilities |
(184.7) |
(150.1) |
(235.8) |
(371.2) |
|
(Deficit)/surplus |
(10.5) |
183.6 |
(52.1) |
(236.6) |
|
Year ended |
Period ended |
Period ended |
Year ended |
|
|
Experience gains/(losses) |
||||
|
Experience gains/(losses) on scheme liabilities |
(6.4) |
(57.6) |
17.6 |
0.5 |
|
Experience (losses)/gains on scheme assets |
(350.0) |
95.7 |
76.6 |
242.9 |
|
Movement on restricted surplus |
0.9 |
(1.9) |
(0.5) |
The disclosures above are determined prospectively from 2005. The experience gains and losses on scheme liabilities have been represented to exclude gains and losses arising from changes in actuarial assumptions.
Balance sheet reconciliation
The balance sheet records the retirement assets and liabilities as follows:
2008 |
2007 |
||
UK surplus |
149.6 |
331.5 |
|
US deficit |
(40.5) |
(27.4) |
|
Other countries deficit |
(7.2) |
(6.8) |
|
Unfunded |
(112.4) |
(113.7) |
|
(Deficit)/surplus |
(10.5) |
183.6 |
|
Post-retirement assets |
174.2 |
333.7 |
|
Post-retirement liabilities |
(184.7) |
(150.1) |
|
(Deficit)/surplus |
(10.5) |
183.6 |
At 31 July 2008 the net UK funded pension surplus of £149.6m (2007: £331.5m) represented individual plan surpluses of £174.2m (2007: £333.7m) and deficits of £24.6m (2007: £2.2m).
Sensitivity
Valuation of post-retirement schemes involves judgements about uncertain future events. Sensitivities in respect of the key assumptions used to measure the principal pension schemes as at 31 July 2008 are set out below. These sensitivities show the hypothetical impact of a change in each of the listed assumptions in isolation, with the exception of the sensitivity to inflation which incorporates the impact of certain correlating assumptions such as salary increases. While each of these sensitivities holds all other assumptions constant, in practice such assumptions rarely change in isolation and the impacts may offset to some extent.
Profit before tax |
Increase/ |
(Increase)/ |
|
Rate of mortality – 1 year increase in life expectancy |
(6.0) |
(86.8) |
|
Rate of mortality – 1 year decrease in life expectancy |
6.3 |
89.8 |
|
Rate of inflation – 0.25% increase |
(5.0) |
(65.8) |
|
Discount rate – 0.25% increase |
1.3 |
100.7 |
|
Expected return on scheme assets – 0.25% increase |
7.4 |
||
|
Market value of scheme assets – 2.5% increase |
5.0 |
73.9 |
|
|
Healthcare cost trends – 1% increase |
(0.6) |
(5.4) |
|
|
Healthcare cost trends – 1% decrease |
0.5 |
4.7 |
The effect on profit before tax reflects the impact of current service cost, interest cost and expected return on assets.
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 £13.7m (2007: £19.1m).