Printable Logo
Expect More
 

26. Post-employment obligations

Post-employment obligations as at the year end comprise: 2008
£m
2007
£m
Pensions   — funded (417) (24)
                  — unfunded (348) (260)
Medical     — funded (18) (9)
                  — unfunded (51) (38)
  (834) (331)

Pensions and medical — funded

The Group’s pension arrangements comprise various defined benefit and defined contribution schemes throughout the world. A number of retirement plans are operated which provide certain employees with post-employment medical benefits.

Pensions

In the UK, pension arrangements are made through an externally funded defined benefit scheme. In the USA and the Rest of the World there are a number of externally funded defined benefit schemes while in certain companies in Europe funds are retained within the business to provide for post-employment obligations.

(a) Defined benefit schemes — measurement and assumptions
Independent actuarial valuations of all major defined benefit scheme assets and liabilities were carried out at 31 December 2008. The present value of the defined benefit obligation, the related current service cost and the past service cost were measured using the projected unit credit method.

Key assumptions were:

  UK
%
Americas
%
Europe
%
ROW
%
2008        
Rate of increase in pensionable salaries 3.9 3.5 2.50 3.5
Rate of increase in payment and deferred pensions 3.0 2.0 1.75 n/a
Discount rate 6.5 5.8 6.00 2.0
Inflation assumption 2.9 2.5 1.75 1.0
Rate of increases in medical costs:        
  initial/long term 6.6/4.5 9.0/5.0 n/a n/a
2007        
Rate of increase in pensionable salaries 4.3 3.5 2.50 2.0
Rate of increase in payment and deferred pensions 3.4 2.0 1.75 n/a
Discount rate 5.9 6.4 5.60 2.3
Inflation assumption 3.3 2.5 1.75 1.0
Rate of increases in medical costs:        
  initial/long term 8.0/4.5 9.0/5.0 n/a n/a

Discount rates in the table above for the UK and Europe were referenced against specific iBoxx indices, whilst the Citigroup liability index was the reference point for the USA discount rate. The reference for the UK discount rate was the yield as at 31 December on the iBoxx Corporate rated AA bonds with a maturity of 15 years plus, which was 6.7%. Allowing for movements in the rate immediately after the end of the year a discount rate of 6.5% was selected. The equivalent reference rate for Europe is the iBoxx Corporate rated AA bonds with a maturity of 10 years plus. The constituents of this index also changed on 2 January and the selected 6% discount rate reflects a 30 bps reduction in the yield from the reported 31 December 2008 yield. For the USA, the discount rate matched the Citigroup liability index as at end 2008 of 5.8%.

The underlying mortality assumptions for the major schemes are as follows:

United Kingdom

Such is the size and profile of the UK scheme that data on the scheme’s mortality experience is collected and reviewed annually. The key current year mortality assumptions for the scheme use PA92 (Year of Birth) tables with a plus 2.5 year age adjustment to reflect actual mortality experience for the scheme together with medium cohort projected improvement in longevity. Using these assumptions a male aged 65 lives for a further 19.8 years, whilst a male aged 40 is expected to live a further 21 years after retiring at 65. The prior period valuations used the same mortality assumptions.

Overseas

In the USA, CL2007 tables which were first adopted in 2007 have been used whilst in Germany the RT2005-G tables have again been used. In the USA the longevity assumption for a male aged 65 is that he lives a further 18.8 years whilst in Germany for a further 17.7 years. The longevity assumption for a USA male currently aged 40 is that he also lives for a further 18.8 years once attaining 65 years, with the German equivalent assumption being 17.7 years. These assumptions are based solely on the prescribed tables not on actual GKN experience.

Assumption sensitivity analysis

The impact of a one percentage point movement in the primary assumptions as at 31 December 2008 is set out below:

  UK Americas Europe ROW
  Liabilities
£m
Income
statement £m
Liabilities £m Income
statement £m
Liabilities
£m
Income
statement
£m
Liabilities
£m
Income
statement
£m
Discount rate +1% 230 44 1 45 1 6
Discount rate -1% (279) (55) (1) (48) (1) (6)
Rate of inflation +1% (233) (29)
Rate of inflation -1% 195 32
Rate of increase in medical costs +1% (1)
Rate of increase in medical costs -1% 1

(b) Defined benefit schemes — reporting

The amounts recognised in the income statement are:

  2008 2007
  Trading Profit      
Included within
operating profit

Employee
benefit expense
£m
Redundancy
and other
employment
amounts
£m
Restructuring
and
impairment
charges
£m
Total £m Total £m
Current service cost (35) (35) (32)
Past service cost (1) (1) (1) (3) 7
Settlement/curtailments 12 12 2
  (24) (1) (1) (26) (23)
Included within
net financing costs
         
Expected return on pension scheme assets       163 146
Interest on post-employment obligations       (166) (149)
        (3) (3)

The 2008 past service cost charge relates to augmentations arising in the UK on redundancy programmes and additional charges in respect of a continental European subsidiary. The 2007 past service credit of £7 million included a £12 million credit from the impact of changes to retiree medical benefits in the USA, partly offset by a past service charge of £5 million, £4 million of which is within Restructuring and impairment charges primarily from further downsizing of a UK business in the Automotive portfolio.

The 2008 settlement/curtailment credit arises from changes to freeze pension benefit entitlements in Driveline and Powder Metallurgy businesses in the USA. The 2007 settlement/curtailments credit arises from changes in pension regulations in Italy.

The amounts recognised in respect of funded obligations in the balance sheet are:

  2008  
  UK
£m
Americas
£m
Europe
£m
ROW
£m
Total
£m
2007
£m
Present value of funded obligations (2,031) (354) (20) (39) (2,444) (2,528)
Fair value of plan assets 1,759 202 29 19 2,009 2,495
Net obligation recognised in the balance sheet (272) (152) 9 (20) (435) (33)

The contributions expected to be paid by the Group during 2009 to the UK scheme are £29 million and to overseas schemes are £30 million.

Cumulative actuarial gains and losses recognised in equity are as follows:

  2008
£m
2007
£m
At 1 January 242 17
Net actuarial gains in year (386) 225
At 31 December (144) 242

Movement in schemes’ obligations (funded and unfunded) during the year

  UK
£m
Americas
£m
Europe
£m
ROW
£m
Total
£m
At 1 January 2008 (2,264) (270) (268) (24) (2,826)
Current service cost (20) (7) (5) (3) (35)
Interest (131) (18) (16) (1) (166)
Contributions by participants (7) (7)
Actuarial gains and losses 258 (22) 10 (2) 244
Benefits paid 123 12 15 2 152
Past service cost (2) 1 (2) (3)
Curtailments 12 12
Currency variations (109) (87) (18) (214)
At 31 December 2008 (2,043) (401) (353) (46) (2,843)
At 1 January 2007 (2,375) (301) (277) (23) (2,976)
Subsidiaries acquired
Current service cost (16) (8) (6) (2) (32)
Interest (119) (17) (13) (149)
Contributions by participants (11) (11)
Actuarial gains and losses 141 28 36 205
Benefits paid 121 13 13 2 149
Past service cost (5) 12 7
Curtailments 2 2
Currency variations 3 (23) (1) (21)
At 31 December 2007 (2,264) (270) (268) (24) (2,826)

Movement in schemes’ assets during the year

  UK
£m
Americas
£m
Europe
£m
ROW
£m
Total
£m
At 1 January 2008 2,248 212 21 14 2,495
Expected return on assets 144 17 1 1 163
Actuarial gains and losses (539) (87) (4) (630)
Contributions by Group 22 12 1 2 37
Contributions by participants 7 7
Benefits paid (123) (11) (1) (2) (137)
Currency variations —­ 59 7 8 74
At 31 December 2008 1,759 202 29 19 2,009
At 1 January 2007 2,187 196 19 13 2,415
Subsidiaries acquired
Expected return on assets 131 14 1 146
Actuarial gains and losses 21 (1) (1) 19
Contributions by Group 19 15 1 2 37
Contributions by participants 11 11
Benefits paid (121) (11) (1) (1) (134)
Currency variations (2) 2 1 1
At 31 December 2007 2,248 212 21 14 2,495

The defined benefit obligation is analysed between funded and unfunded schemes as follows:

  2008  
  UK
£m
Americas
£m
Europe
£m
ROW
£m
Total
£m
2007
£m
Funded (2,031) (354) (20) (39) (2,444) (2,528)
Unfunded (12) (47) (333) (7) (399) (298)
  (2,043) (401) (353) (46) (2,843) (2,826)

The fair value of the assets in the schemes and the expected rates of return were:

  UK Americas Europe ROW
  Long term
rate of
return
expected
%



Value
£m
Long term
rate of
return
expected
%



Value
£m
Long term
rate of
return
expected
%



Value
£m
Long term
rate of
return
expected
%



Value
£m
At 31 December 2008                
Equities (inc. hedge funds) 8.0 667 8.5 125 5.6 7
Bonds 5.3 912 5.5 70 1.6 8
Property 6.8 80
Cash/short term mandate 2.0 74 4.4 7 1.1 2
Other assets 6.5 26 5.6 29 0.9 2
    1,759   202   29   19
At 31 December 2007                
Equities (inc. hedge funds) 8.0 1,114 8.5 142 6.2 8
Bonds 5.1 810 5.5 57 1.3 4
Property 6.7 102
Cash/short term mandate 5.7 190 4.7 13 1.0 1
Other assets 5.8 32 5.1 21 0.9 1
    2,248   212   21   14

The expected return on plan assets is a blended average of projected long term returns for the various asset classes. Equity returns are developed based on the selection of the equity risk premium above the risk-free rate which is measured in accordance with the yield on government bonds. Bond returns are selected by reference to the yields on government and corporate debt, as appropriate to the plan’s holdings of these instruments, all other asset classes returns are determined by reference to current experience.

The actual return on plan assets was negative £467 million (2007 – £165 million positive).

History of experience gains and losses

 

  UK Americas Europe ROW
2008        
Experience adjustments arising on scheme assets:        
  Amount — £m (539) (86) (4)
  Percentage of scheme assets (30.6%) (43.1%) 0.0% (21.0%)
Experience gains and losses on scheme liabilities:        
  Amount — £m 7 2 (5)
  Percentage of the present value of scheme liabilities 0.3% 0.5% (1.4%) 0.0%
Present value of scheme liabilities — £m (2,043) (401) (353) (46)
Fair value of scheme assets — £m 1,759 202 29 19
Deficit — £m (284) (199) (324) (27)
2007        
Experience adjustments arising on scheme assets:        
  Amount — £m 21 (1) (1)
  Percentage of scheme assets 0.9% (4.8%) (7.1%)
Experience gains and losses on scheme liabilities:        
  Amount — £m (7) 4 (3)
  Percentage of the present value of scheme liabilities (0.3%) 1.6% (1.4%) 0.0%
Present value of scheme liabilities — £m (2,264) (270) (268) (24)
Fair value of scheme assets — £m 2,248 212 21 14
Deficit — £m (16) (58) (247) (10)
2006        
Experience adjustments arising on scheme assets:        
  Amount — £m 35 15 (1)
  Percentage of scheme assets 1.6% 7.6% (4.5%)
Experience gains and losses on scheme liabilities:        
  Amount — £m 15 (1)
  Percentage of the present value of scheme liabilities 0.6% 0.0% 0.0% (6.7%)
Present value of scheme liabilities — £m (2,375) (301) (277) (23)
Fair value of scheme assets — £m 2,187 196 19 13
Deficit — £m (188) (105) (258) (10)
2005        
Experience adjustments arising on scheme assets:        
  Amount — £m 187 (1) 1 2
  Percentage of scheme assets 9.7% (0.7%) 5.0% 14.7%
Experience gains and losses on scheme liabilities:        
  Amount — £m (22) 3 (5) (1)
  Percentage of the present value of scheme liabilities (0.9%) 0.9% (1.8%) (3.0%)
Present value of scheme liabilities — £m (2,381) (316) (284) (23)
Fair value of scheme assets — £m 1,915 170 20 14
Deficit — £m (466) (146) (264) (9)
2004        
Experience adjustments arising on scheme assets:        
  Amount — £m 68 4 (1) (3)
  Percentage of scheme assets 4.0% 3.1% (7.3%) (17.6%)
Experience gains and losses on scheme liabilities:        
  Amount — £m (8) 1 1
  Percentage of the present value of scheme liabilities (0.4%) (0.4%) 0.0% 1.2%
Present value of scheme liabilities — £m (2,152) (262) (260) (41)
Fair value of scheme assets — £m 1,697 128 19 17
Deficit — £m (455) (134) (241) (24)

(c) Defined contribution schemes
The Group operates a number of defined contribution schemes outside the United Kingdom. The charge to the income statement in the year was £14 million (2007 – £10 million).

Back to Top