2007 Financial statements
Note 49 - Post retirement benefits
Description of plans
The Group operates a number of pension and post retirement healthcare plans around the world. Some of these plans are defined contribution and some are defined benefit, with assets held in separate trustee administered funds. Valuations of these plans are produced and updated annually to 31 December by qualified actuaries. A number of defined benefit and defined contribution plans were brought into the Group as a result of the Alcan acquisition. These plans are reflected in this note, except for plans sponsored by the Packaging business. Those plans are accounted for as assets or liabilities held for sale.
Pension plans
The majority of the Group's pension obligations are in Canada, the UK, the US, Australia and Switzerland, with further notable obligations in other European countries.
There are a number of pension arrangements in the UK. The defined benefit sections of these arrangements are linked to final pay and are closed to new members, with new employees being admitted to defined contribution sections.
In Australia, there are two superannuation plans providing defined benefits linked to final pay, typically paid in lump sum form. The main plan contains principally defined contribution liabilities, but is accounted for as a defined benefit plan as it contains characteristics of both types of plan.
A number of defined benefit pension plans are sponsored by the US and Canadian entities. The main plans are two Canadian plans for salaried and bargaining employees. Benefits for salaried staff are generally linked to final average pay, while benefits for bargaining employees are reviewed in negotiation with unions.
In Europe, there are defined benefit plans in Switzerland, the Netherlands, Germany and France. The largest single plan is in Switzerland and provides benefits linked to final average pay.
The Group also operates a number of unfunded defined benefit plans, which are included in the figures below.
Post retirement healthcare plans
Certain subsidiaries of the Group, mainly in the US and Canada, provide health and life insurance benefits to retired employees and in some cases to their beneficiaries and covered dependants. Eligibility for cover is dependent upon certain age and service criteria. These arrangements are unfunded.
Plan assets
The proportions of the total fair value of assets in the pension plans for each asset class at the balance sheet date were:
| 2007 | 2006 | |
|---|---|---|
| Equities | 60.2% | 67.2% |
| Bonds | 29.4% | 25.2% |
| Property | 7.2% | 4.3% |
| Other | 3.2% | 3.3% |
| 100.0% | 100.0% |
The assets of the plans are generally managed on a day-to-day basis by external specialist fund managers. These managers may invest in the Group's securities subject to limits imposed by the relevant fiduciary committees and local legislation. The approximate total holding of Group securities within the defined benefit plans is US$44 million.
Main assumptions (rates per annum)
| UK | Australia (a) | US | Canada | Eurozone | Switzerland | Other (mainly Africa) (b) |
|
|---|---|---|---|---|---|---|---|
| At 31 December 2007 | |||||||
| Rate of increase in salaries | 5.0% | 5.5% | 3.9% | 3.4% | 2.8% | 2.6% | 7.5% |
| Rate of increase in pensions | 3.1% | 2.7% | - | 0.6% | 2.3% | 0.8% | 5.5% |
| Discount rate | 5.9% | 5.4% | 6.2% | 5.5% | 5.5% | 3.6% | 8.1% |
| Inflation | 3.4% | 3.6% | 2.4% | 2.2% | 2.3% | 1.4% | 5.5% |
| At 23 October 2007 (Alcan plans only) | |||||||
| Rate of increase in salaries | 4.3% | 5.0% | 3.9% | 3.5% | 2.5% | 2.3% | - |
| Rate of increase in pensions | 2.7% | - | - | 0.8% | 2.0% | 0.8% | - |
| Discount rate | 5.8% | 5.2% | 6.1% | 5.4% | 5.2% | 3.5% | - |
| Inflation | 3.3% | 3.5% | 2.4% | 2.3% | 2.0% | 1.1% | - |
| At 31 December 2006 | |||||||
| Rate of increase in salaries | 5.1% | 5.1% | 3.9% | 3.8% | - | - | 6.8% |
| Rate of increase in pensions | 3.1% | 3.1% | - | - | - | - | 4.8% |
| Discount rate | 5.2% | 5.0% | 5.9% | 5.0% | - | - | 7.4% |
| Inflation | 3.1% | 3.1% | 2.4% | 2.3% | - | - | 4.8% |
| Notes | Expand |
|
|
The main financial assumptions used for the healthcare plans, which are predominantly in the US, were: discount rate: 6.1 per cent (2006: 5.8 per cent), medical trend rate: 7.7 per cent reducing to 5.1 per cent by the year 2016 broadly on a straight line basis (2006: 8.2 per cent, reducing to 5.2 per cent by the year 2011), claims cost based on individual company experience.
For both the pension and healthcare arrangements the post retirement mortality assumptions allow for future improvements in mortality.
The mortality tables used for the main arrangements imply that a male aged 60 at the balance sheet date has an expected future lifetime of 24 years (2006: 24 years). A male reaching age 60 20 years after the balance sheet date would have an expected future lifetime of 25 years (2006: 25 years).
| UK | Australia | US | Canada | Eurozone | Switzerland | Other (mainly Africa) (a) |
|
|---|---|---|---|---|---|---|---|
| Long term rate of return expected at 23 October 2007 (Alcan plans only) | |||||||
| Equities | 7.8% | 8.9% | 7.9% | 7.7% | 7.8% | 6.6% | - |
| Bonds | 4.9% | 5.4% | 5.3% | 4.6% | 4.5% | 3.4% | - |
| Property | 6.1% | 7.0% | 6.2% | 6.0% | 6.1% | 4.9% | - |
| Other | 4.3% | 3.6% | 3.2% | 3.1% | 3.1% | 2.0% | - |
| Long term rate of return expected at 1 January 2007 | |||||||
| Equities | 7.5% | 8.7% | 8.1% | 7.4% | - | - | 10.7% |
| Bonds | 4.5% | 5.2% | 5.2% | 4.4% | - | - | 7.4% |
| Property | 5.8% | 6.8% | 6.4% | 5.7% | - | - | 9.0% |
| Other | 4.2% | 3.5% | 3.4% | 3.3% | - | - | 5.8% |
| Long term rate of return expected at 1 January 2006 | |||||||
| Equities | 7.3% | 6.8% | 6.9% | 7.1% | - | - | 9.0% |
| Bonds | 4.3% | 4.6% | 4.9% | 4.3% | - | - | 7.3% |
| Property | 5.7% | 5.6% | 5.7% | 5.6% | - | - | 8.2% |
| Other | 4.0% | 3.2% | 3.4% | 3.6% | - | - | 5.5% |
| Notes | Expand |
|
|
The expected rate of return on pension plan assets is determined as management's best estimate of the long term returns of the major asset classes -equities, bonds, property and other -weighted by the actual allocation of assets among the categories at the measurement date. The expected rate of return is calculated using geometric averaging. The expected rates of return shown have been reduced to allow for plan expenses including, where appropriate, taxes incurred within pension plans on investment returns.
The sources used to determine management's best estimate of long term returns are numerous and include country-specific bond yields, which may be derived from the market using local bond indices or by analysis of the local bond market, and country-specific inflation and investment market expectations derived from market data and analysts' or governments' expectations as applicable.
Total expense recognised in the income statement
| Pension benefits |
Other benefits |
2007 Total US$m |
2006 Total US$m |
|
|---|---|---|---|---|
| Current employer service cost for Defined Benefits ('DB') | (134) | (11) | (145) | (102) |
| Current employer service cost for Defined Contribution benefits within DB plans | (106) | - | (106) | (74) |
| Current employer service cost for Defined Contribution plans | (40) | - | (40) | (21) |
| Interest cost | (482) | (34) | (516) | (314) |
| Expected return on assets | 550 | - | 550 | 326 |
| Past service cost | (7) | 24 | 17 | (7) |
| Gains on curtailment and settlement | - | - | - | 3 |
| Total expense | (219) | (21) | (240) | (189) |
The above expense is included as an employee cost within net operating costs. It includes the pension expense of Alcan businesses, excluding Packaging, post 23 October 2007.
Total amount recognised in the Statement of Recognised Income and Expense
| 2007 US$m |
2006 US$m |
|
|---|---|---|
| Actuarial gain/(loss) | 141 | 373 |
| Cumulative amount recognised in the Statement of Recognised Income and Expense at 31 December | 489 | 348 |
Actuarial gain/(loss) includes US$(4) million loss related to equity accounted units.
Surpluses/(deficits) in the plans
| Pension benefits |
Other benefits |
2007 Total US$m |
2006 Total US$m |
2005 Total US$m |
2004 Total US$m |
|
|---|---|---|---|---|---|---|
| Total fair value of plan assets | 16,387 | - | 16,387 | 6,031 | 5,115 | 4,777 |
| Present value of obligations -funded | (16,856) | - | (16,856) | (5,847) | (5,315) | (5,118) |
| Present value of obligations - unfunded | (981) | (1,087) | (2,068) | (597) | (596) | (649) |
| Present value of obligations - Total | (17,837) | (1,087) | (18,924) | (6,444) | (5,911) | (5,767) |
| Unrecognised past service cost | - | (2) | (2) | 3 | - | - |
| Aggregate surplus/(deficit) to be shown in the balance sheet | (1,450) | (1,089) | (2,539) | (410) | (796) | (990) |
| Comprising: | ||||||
| -Deficits | (2,186) | (1,089) | (3,275) | (770) | (996) | (1,069) |
| -Surpluses | 736 | - | 736 | 360 | 200 | 79 |
| Net (deficits)/surpluses on pension plans | (1,450) | - | (1,450) | 48 | (324) | (450) |
| Unfunded post retirement healthcare obligation | - | (1,089) | (1,089) | (458) | (472) | (540) |
The surplus amounts shown above are included in the balance sheet as Trade
and Other Receivables. Deficits are shown in the balance sheet as Provision
for post retirement benefits.
Contributions to plans
Contributions to pension plans totalled US$246 million (2006: US$172 million).
These contributions include US$30 million (2006: US$26 million) for plans
providing purely defined contribution benefits (including 401k plans in the
US) and US$10 million (2006: US$9 million) to industry-wide or multi-employer
plans; these are charged against profits and are included in the figures
for 'current employer service cost' shown above. They include contributions
of Alcan businesses, excluding Packaging, post 23 October 2007.
Contributions for other benefits totalled US$30 million (2006: US$19 million).
Contributions to pension plans for 2008 are estimated to be around US$220 million higher than for 2007. Of this increase, US$140 million is due to the Alcan acquisition with most of the remainder relating to new US funding regulations. Healthcare plans are unfunded and contributions for future years will be equal to benefit payments and therefore cannot be predetermined.
Movements in the present value of the defined benefit obligation and in the fair value of assets
The amounts shown below include, where appropriate, 100 per cent of the costs, contributions, gains and losses in respect of employees who participate in the plans and who are employed in operations that are proportionally consolidated or equity accounted. Consequently, the costs, contributions, gains and losses do not correspond directly to the amounts disclosed above in respect of the Group. Pure defined contribution plans and industry-wide plans are excluded from the movements below.
| Pension benefits |
Other benefits |
2007 Total US$m |
2006 Total US$m |
|
|---|---|---|---|---|
| Change in present value of obligation: | ||||
| Present value of obligation at start of the year | (5,983) | (461) | (6,444) | (5,911) |
| Current employer service cost | (261) | (11) | (272) | (206) |
| Interest cost | (482) | (34) | (516) | (314) |
| Contributions by plan participants | (190) | - | (190) | (113) |
| Experience (loss)/gain | (73) | 11 | (62) | (89) |
| Changes in actuarial assumptions gain | 289 | 26 | 315 | 124 |
| Benefits paid | 542 | 30 | 572 | 361 |
| Alcan acquisition | (11,216) | (651) | (11,867) | - |
| Inclusion/removal of arrangements | - | - | - | 42 |
| Past service cost | (7) | 29 | 22 | (10) |
| Curtailment gains | - | - | - | 3 |
| Currency exchange rate loss | (456) | (26) | (482) | (331) |
| Present value of obligation at end of the year | (17,837) | (1,087) | (18,924) | (6,444) |
Gains and losses on obligations |
2007 | 2006 | 2005 | 2004 |
|---|---|---|---|---|
| Experience gains and (losses): (i.e. variances between the
estimate of obligations and the subsequent outcome) |
||||
| (Loss)/gain (US$ million) | (62) | (89) | 139 | (148) |
| As a percentage of the present value of the obligations | 0% | -1% | 2% | -3% |
| Change in assumptions gain/(loss) (US$ million) | 315 | 124 | (180) | (429) |
| Pension benefits |
Other benefits |
2007 Total US$m |
2006 Total US$m |
|
|---|---|---|---|---|
| Change in plan assets: | ||||
| Fair value of plan assets at the start of the year | 6,031 | - | 6,031 | 5,115 |
| Expected return on plan assets | 550 | - | 550 | 326 |
| Actuarial (loss)/gain on plan assets | (108) | - | (108) | 338 |
| Contributions by plan participants | 190 | - | 190 | 113 |
| Contributions by employer | 233 | 30 | 263 | 189 |
| Benefits paid | (542) | (30) | (572) | (361) |
| Alcan acquisition | 9,617 | - | 9,617 | - |
| Inclusion/removal of arrangements | - | - | - | (41) |
| Currency exchange rate gain | 416 | - | 416 | 352 |
| Fair value of plan assets at the end of the year | 16,387 | - | 16,387 | 6,031 |
| Actual return on plan assets | 442 | 664 |
| 2007 | 2006 | 2005 | 2004 | |
|---|---|---|---|---|
| Difference between the expected and actual return on plan assets: | ||||
| (Loss)/gain (US$ million) | (108) | 338 | 223 | 387 |
| As a percentage of plan assets | -1% | 6% | 4% | 8% |
Post retirement healthcare -sensitivity to changes in assumptions
An increase of one per cent in the assumed medical cost trend rates would increase the aggregate of the current service cost and interest cost components of the post retirement healthcare expense by US$5 million (2006: US$6 million), and increase the benefit obligation for these plans by US$89 million (2006: US$73 million). A decrease of one per cent in the assumed medical cost trend rates would decrease the aggregate of the current service cost and interest cost components of the post retirement healthcare expense by US$5 million (2006: US$5 million), and decrease the benefit obligation for these plans by US$77 million (2006: US$62 million).