Financial statements
Note 49 - POST RETIREMENT BENEFITS
Post retirement benefits (PDF 72KB)
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 trusts, foundations and similar entities. 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 in October 2007. Plans sponsored by the Rio Tinto Alcan Packaging business continue to be accounted for as assets or liabilities held for sale, and are not included in this note.
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, and are included in the figures below.
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:
| 2008 | 2007 | |
|---|---|---|
| Equities | 52.4% | 60.2% |
| Bonds | 35.1% | 29.4% |
| Property | 7.7% | 7.2% |
| Other | 4.8% | 3.2% |
| 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 plans is US$6 million (2007: US$44 million).
Main assumptions (rates per annum)
The main assumptions for the valuations of the plans are set out below. Information on the sensitivity of the results to the main assumptions is included in the Financial review.
| UK | Australia (a) | US | Canada | Eurozone | Switzerland | Other (mainly Africa) (b) | |
|---|---|---|---|---|---|---|---|
| At 31 December 2008 | |||||||
| Rate of increase in salaries | 4.4% | 3.9% | 3.0% | 2.7% | 2.4% | 2.7% | 6.2% |
| Rate of increase in pensions | 2.7% | 1.5% | - | 0.4% | 1.6% | - | 4.2% |
| Discount rate | 6.3% | 3.3% | 6.1% | 7.4% | 5.6% | 3.3% | 7.3% |
| Inflation | 2.8% | 2.0% | 1.5% | 1.4% | 1.8% | 1.5% | 4.2% |
| 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% |
| Notes | Expand |
|
|
The main financial assumptions used for the healthcare plans, which are predominantly in the US and Canada, were: discount rate: 6.5 per cent (2007: 6.1 per cent), medical trend rate: 7.0 per cent reducing to 5.0 per cent by the year 2015 broadly on a straight line basis (2007: 7.7 per cent, reducing to 5.1 per cent by the year 2016), claims costs based on individual company experience.
For both the pension and healthcare arrangements the post retirement mortality assumptions allow for future improvements in longevity. 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 (2007: 24 years) and that a man aged 60 in 2028 would have an expected future lifetime of 26 years (2007: 25 years).
| UK | Australia | US | Canada | Eurozone | Switzerland | Other (mainly Africa) (a) | |
|---|---|---|---|---|---|---|---|
| Long term rate of return expected at 1 January 2008 | |||||||
| Equities | 7.7% | 9.1% | 7.7% | 7.4% | 7.7% | 6.6% | 11.4% |
| Bonds | 4.9% | 5.9% | 5.0% | 4.4% | 4.5% | 3.4% | 7.9% |
| Property | 6.0% | 7.2% | 6.0% | 5.7% | 6.0% | 4.9% | 9.7% |
| Other | 4.2% | 3.7% | 3.2% | 3.0% | 3.0% | 2.3% | 6.3% |
| 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% |
| 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. Based on the assumptions made and the distribution of assets the weighted average expected return on assets as at 1 January 2008 was 6.4 per cent (2007: 6.9 per cent) and is expected to be 5.9 per cent as at 1 January 2009.
The sources used to determine management's best estimate of long term returns are numerous and include countryspecific 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 before tax
| Pension benefits | Other benefits | 2008 Total US$m |
2007 Total US$m |
|
|---|---|---|---|---|
| Current employer service cost for Defined Benefits ("DB") plans | (265) | (19) | (284) | (145) |
| Current employer service cost for Defined Contribution benefits within DB plans | (133) | - | (133) | (106) |
| Current employer service cost for Defined Contribution plans | (62) | - | (62) | (40) |
| Interest cost | (963) | (62) | (1,025) | (516) |
| Expected return on assets | 1,000 | - | 1,000 | 550 |
| Past service cost | (8) | 5 | (3) | 17 |
| Gains on curtailment and settlement | 3 | 2 | 5 | - |
| Total expense | (428) | (74) | (502) | (240) |
The above expense is included as an employee cost within net operating costs.
Total amount recognised in the Statement of Recognised Income and Expense before tax
| 2008 US$m |
2007 US$m |
|
|---|---|---|
| Actuarial (loss)/gain | (1,666) | 141 |
| Gain on currency translation on plans using US dollar functional currency | 321 | - |
| Loss on application of asset limit | 26 | - |
| Total (loss)/gain recognised in the Statement of Recognised Income and Expense | (1,319) | 141 |
| Cumulative amount recognised in the Statement of Recognised | ||
| Income and Expense at 31 December | (830) | 489 |
Actuarial (loss)/gain includes US$5 million loss related to equity accounted units (2007: US$4 million loss)
Surpluses/(deficits) in the plans
The following amounts were measured in accordance with IAS 19:
| Pension benefits | Other benefits | 2008 Total US$m |
Restated 2007 Total US$m |
2006 Total US$m |
2005 Total US$m |
2004 Total US$m |
|
|---|---|---|---|---|---|---|---|
| Total fair value of plan assets | 10,505 | - | 10,505 | 16,150 | 6,031 | 5,115 | 4,777 |
| Present value of obligations - funded | (12,243) | - | (12,243) | (16,622) | (5,847) | (5,315) | (5,118) |
| Present value of obligations - unfunded | (891) | (893) | (1,784) | (2,089) | (597) | (596) | (649) |
| Present value of obligations - total | (13,134) | (893) | (14,027) | (18,711) | (6,444) | (5,911) | (5,767) |
| Unrecognised past service cost | - | (12) | (12) | (2) | 3 | - | - |
| Effect of asset limit | (19) | - | (19) | (45) | - | - | - |
| Aggregate surplus/(deficit) to be shown in the balance sheet | (2,648) |
(905) |
(3,553) |
(2,608) |
(410) |
(796) |
(990) |
| Comprising: | |||||||
| -Deficits shown in balance sheet | (2,808) | (905) | (3,713) | (3,313) | (770) | (996) | (1,069) |
| -Surpluses shown in balance sheet | 160 | - | 160 | 705 | 360 | 200 | 79 |
| Net (deficits)/surpluses on pension plans | (2,648) |
- |
(2,648) |
(1,519) |
48 |
(324) |
(450) |
| Unfunded post retirement healthcare obligation | - |
(905) |
(905) |
(1,089) |
(458) |
(472) |
(540) |
The surplus amounts shown above are included in the balance sheet as Trade and Other Receivables. See note 17. Deficits are shown in the balance sheet as Post Retirement benefits. See note 27.
Contributions to plans
Contributions to pension plans totalled US$615 million (2007: US$246 million). These contributions include US$52 million (2007: US$30 million) for plans providing purely defined contribution benefits (including 401k plans in the US) and US$10 million (2007: US$10 million) to industrywide or multi-employer plans; these are charged against profits and are included in the figures for "current employer service cost" shown above.
Contributions for other benefits totalled US$53 million (2007: US$30 million).
Contributions to pension plans for 2009 are estimated to be around US$150 million higher than for 2008. Healthcare plans are unfunded and contributions for future years will be equal to benefit payments and therefore cannot be predetermined.
Movements in the present value of the defined benefit obligation and in the fair value of assets
The amounts shown below include, where appropriate, 100 per cent of the costs, contributions, gains and losses in respect of employees who participate in the plans and who are employed in operations that are proportionally consolidated or equity accounted. Consequently, the costs, contributions, gains and losses do not correspond directly to the amounts disclosed above in respect of the Group. Pure defined contribution plans and industry-wide plans are excluded from the movements below.
| Pension benefits |
Other benefits |
2008 Total US$m |
2007 Total US$m |
|
|---|---|---|---|---|
| Change in present value of obligation: | ||||
| Present value of obligation at start of the year | (17,624) | (1,087) | (18,711) | (6,444) |
| Current employer service cost | (423) | (19) | (442) | (272) |
| Interest cost | (963) | (62) | (1,025) | (516) |
| Contributions by plan participants | (253) | - | (253) | (190) |
| Experience gain/(loss) | 554 | 11 | 565 | (62) |
| Changes in actuarial assumptions gain | 1,583 | 101 | 1,684 | 315 |
| Benefits paid | 1,097 | 53 | 1,150 | 572 |
| Alcan acquisition (restated) | - | - | - | (11,654) |
| Inclusion of arrangements | (3) | - | (3) | - |
| Past service cost | (7) | 15 | 8 | 22 |
| Curtailment gains | 4 | 2 | 6 | - |
| Settlement gains | 28 | - | 28 | - |
| Currency exchange rate gain/(loss) | 2,873 | 93 | 2,966 | (482) |
| Present value of obligation at end of the year | (13,134) | (893) | (14,027) | (18,711) |
Gains and losses on obligations
| 2008 | 2007 | 2006 | 2005 | 2004 | |
|---|---|---|---|---|---|
| Experience gains and (losses): (i.e. variances between the estimate of obligations and the subsequent outcome) | |||||
| Gain/(loss) (US$m) | 565 | (62) | (89) | 139 | (148) |
| As a percentage of the present value of the year end obligations | 4% | 0% | -1% | 2% | -3% |
| Change in assumptions gain/(loss) (US$ million) | 1,684 | 315 | 124 | (180) | (429) |
| Pension benefits |
Other benefits |
2008 Total US$m |
2007 Total US$m |
|
|---|---|---|---|---|
| Change in plan assets: | ||||
| Fair value of plan assets at the start of the year | 16,150 | - | 16,150 | 6,031 |
| Expected return on plan assets | 1,000 | - | 1,000 | 550 |
| Actuarial loss on plan assets | (3,910) | - | (3,910) | (108) |
| Contributions by plan participants | 253 | - | 253 | 190 |
| Contributions by employer | 586 | 53 | 639 | 263 |
| Benefits paid | (1,097) | (53) | (1,150) | (572) |
| Alcan acquisition (restated) | - | - | - | 9,380 |
| Inclusion of arrangements | 8 | - | 8 | - |
| Settlement losses | (29) | - | (29) | - |
| Currency exchange rate loss/(gain) | (2,456) | - | (2,456) | 416 |
| Fair value of plan assets at the end of the year | 10,505 | - | 10,505 | 16,150 |
| Actual return on plan assets | (2,910) | 442 |
| 2008 | 2007 | 2006 | 2005 | 2004 | |
|---|---|---|---|---|---|
| Difference between the expected and actual return on plan assets: | |||||
| (Loss)/gain (US$m) | (3,910) | (108) | 338 | 223 | 387 |
| As a percentage of year end plan assets | -37% | -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 postretirement healthcare expense by US$8 million (2007: US$5 million), and increase the benefit obligation for these plans by US$85 million (2007: US$89 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$7 million (2007: US$5 million), and decrease the benefit obligation for these plans by US$75 million (2007: US$77 million).
To
read the PDF documents on this page you may need to download the free Adobe
Reader or you can use the free
online conversion tools.