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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 are held in separate trustee-administered funds. The Group also provides a defined contribution (401K) plan for its US employees. The US defined benefit pension plan was closed with effect from 30 April 2009, from which date no further benefits have accrued. In addition, future benefits accruing under the US and UK post-retirement healthcare schemes were substantially reduced; for most members the company will contribute 50% of the 2009 premium and the member will pay the remainder of the premium.

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 2009. 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:

*8% p.a. reducing 0.5% p.a. to 5% in 2014

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 principal UK schemes are based on the new SAPS All Birth year tables with relevant scaling factors based on recent actual mortality experience of members within each. They allow for future improvements in life expectancy in line with 80% and 60% of the long cohort for males and females respectively with an annual 1% underpin. 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 give the following:

The assets in the scheme and the expected rates of return as at 31 July 2009 were:

Other assets in the UK and US comprise cash and current assets.

During 2009 the Trustees of the TI Pension Scheme invested £249.3m (2008: £250.0m) in annuities which are matched with specific liabilities of the scheme.

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

The actual return on scheme assets was a loss of £141.3m (2008: loss of £124.5m).

The past service gain of £51.5m includes £41.9m relating to benefit changes in the US post-retirement healthcare plans, £9.0m relating to benefit changes in the UK post-retirement healthcare plans and £0.6m relating to the withdrawal of a UK Christmas bonus scheme. £50.9m of this gain is recorded under exceptional operating items in the income statement.

The curtailment gain of £19.4m relates to the closure of the US defined benefit scheme.

The operating cost is charged as follows:

In 2008 the pension settlement relating to the active Aerospace employees was completed, resulting in a £20.7m settlement charge to discontinued operations.

Amounts recognised directly in the consolidated statement of recognised income and expense

Actuarial losses of £429.9m (2008: losses of £254.5m) have been reported in the statement of recognised income and expense. This includes a loss of £0.5m (2008: gain of £0.9m) 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 £543.0m (2008: cumulative losses of £113.1m).

Changes in present value of defined benefit obligations

Changes in present value of scheme assets

Cash contributions

Company contributions to the funded defined benefit pension plans for 2009 totalled £53.1m (2008: £56.1m). Company contributions in 2009 included special covenant payments of £13.1m (2008: £13.1m). In 2008 there was a further special payment of £4.0m arising from the sale of Aerospace. Agreed cash payments in 2010 are £50.6m. Discussions are in progress with the UK pension trustees in respect of additional contributions.

History of schemes

Experience gains in 2009 include the impact of using the latest member data for the UK triennial valuations which are in progress.

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 2009 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.

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 £15.6m (2008: £13.7m).