2010 Annual report

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.

For plans that are within the perimeter of the Engineered Products business which was divested early in 2011, the asset and obligation amounts as at 31 December 2010 have been transferred to “Assets and liabilities held for sale” and are therefore excluded from the closing balances shown in this note. The expense, cash flow and actuarial gains/losses for these plans during 2010 are reflected in full in this note.

Pension plans

The majority of the Group’s pension obligations are in Canada, the UK, the US, Switzerland and the Eurozone. There are some defined benefit obligations in Australia but the retirement arrangements there are predominantly defined contribution. In general the Group has a policy of moving towards defined contribution provision.

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. During 2010, the UK Government announced changes to the index that must be used for increasing certain pensions. This change automatically affects some benefits, and has resulted in actuarial gains of approximately US$35 million which are reflected in the figures disclosed below. No amendments were made to plan rules in relation to this change.

In Australia, the main arrangements are principally defined contribution in nature but there are sections providing defined benefits linked to final pay, typically paid in lump sum form.

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 generally 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 statement of financial position date were:

	2010	2009
Equities	53.6%	54.9%
Bonds	34.8%	33.6%
Property	7.1%	5.5%
Other	4.5%	6.0%
	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$24 million (2009: US$19 million).

Main assumptions (rates per annum)

The main assumptions for the valuations of the plans under IAS 19 are set out below. Information on the sensitivity of the results to the main assumptions is set out in the sensitivity section.

	UK	Australia(a)	US	Canada	Eurozone	Switzerland	Other (mainly Africa)(b)
At 31 December 2010
Rate of increase in salaries	4.9%	4.3%	3.8%	3.5%	2.5%	2.6%	4.3%
Rate of increase in pensions	3.2%	2.6%	–	0.9%	1.9%	–	2.3%
Discount rate	5.4%	4.7%	5.3%	5.5%	4.9%	2.6%	5.0%
Inflation(c)	3.4%	2.6%	2.3%	2.3%	2.1%	1.6%	2.3%
At 31 December 2009
Rate of increase in salaries	5.0%	4.1%	4.0%	3.5%	2.4%	2.7%	7.7%
Rate of increase in pensions	3.4%	2.4%	–	0.8%	1.5%	–	5.7%
Discount rate	5.5%	4.8%	5.9%	6.5%	5.2%	2.9%	8.9%
Inflation	3.5%	2.4%	2.5%	2.3%	2.1%	1.5%	5.7%

1. (a) The discount rate shown for Australia is after tax.
2. (b) The assumptions vary by location for the ‘Other’ plans. Assumptions shown are for Southern Africa.
3. (c) The inflation assumption shown for the UK is for the Retail Price Index. The assumption for the Consumer Price Index at 31 December 2010 was 2.7 per cent.

The main financial assumptions used for the healthcare plans, which are predominantly in the US and Canada, were: discount rate: 5.3 per cent (2009: 6.0 per cent), medical trend rate: 7.4 per cent reducing to 4.9 per cent by the year 2017 broadly on a straight line basis (2009: 7.5 per cent, reducing to 5.1 per cent by the year 2015), 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 imply that a man aged 60 at the statement of financial position date has a weighted average expected future lifetime of 24 years (2009: 24 years) and that a man aged 60 in 2030 would have a weighted average expected future lifetime of 26 years (2009: 26 years).

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	UK	Australia	US	Canada	Eurozone	Switzerland	Other (mainly Africa)(a)
Long term rate of return expected at 1 January 2010
Equities	8.0%	8.7%	8.4%	7.7%	7.8%	6.4%	12.7%
Bonds	4.5%	4.8%	5.0%	4.8%	4.8%	2.8%	8.7%
Property	6.1%	6.6%	6.4%	5.8%	6.1%	4.4%	10.7%
Other	4.2%	2.5%	3.2%	3.1%	2.9%	2.4%	6.5%
Long term rate of return expected at 1 January 2009
Equities	7.4%	7.0%	7.6%	7.2%	7.4%	6.5%	11.1%
Bonds	4.5%	3.9%	4.0%	5.2%	3.8%	3.1%	7.1%
Property	5.5%	5.0%	5.1%	5.2%	5.4%	4.5%	9.1%
Other	3.6%	2.4%	2.3%	2.2%	2.5%	2.4%	5.0%

1. (a) The assumptions vary by location for the “Other” plans. Assumptions shown are for Southern Africa.

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 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 2010 was 6.4 per cent (2009: 5.9 per cent) and is expected to be 5.9 per cent as at 1 January 2011.

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	2010 Total US$m	2009 Total US$m	2008 Total US$m
Current employer service cost for defined benefit plans	(218)	(15)	(233)	(193)	(285)
Interest cost	(897)	(77)	(974)	(826)	(882)
Expected return on assets	776	1	777	581	857
Past service cost	(15)	(14)	(29)	(11)	(3)
Gains on curtailment and settlement	69	42	111	124	5
Total defined benefit expense	(285)	(63)	(348)	(325)	(308)
Current employer service cost for defined contribution and industry-wide plans	(224)	(1)	(225)	(199)	(194)
Total expense recognised in the income statement	(509)	(64)	(573)	(524)	(502)

The above expense amounts are included as an employee cost within net operating costs. In 2010, US$88 million (pre-tax) of curtailment and settlement gains relating to the sale of businesses have been excluded from Underlying earnings (2009: US$61 million, 2008: nil).

Total amount recognised in other comprehensive income before tax

	2010 US$m	2009 US$m	2008 US$m
Actuarial losses	(719)	(919)	(1,666)
(Loss)/gain on currency translation on plans using US dollar functional currency	(67)	(70)	321
Gain on application of asset limit	–	19	26
Total loss recognised in other comprehensive income(a)	(786)	(970)	(1,319)
Cumulative amount recognised in Other comprehensive income at 31 December	(2,586)	(1,800)	(830)

1. (a) Actuarial loss includes US$4 million loss related to equity accounted units (2009: US$126 million loss; 2008: US$5 million loss).

(Deficits)/surpluses in the plans

The following amounts were measured in accordance with IAS 19 at 31 December:

	Pension benefits	Other benefits	2010 Total US$m	2009 Total US$m	2008 Total US$m	2007 Total US$m	2006 Total US$m
Total fair value of plan assets	13,144	–	13,144	12,407	9,306	14,350	4,656
Present value of obligations – funded	(15,499)	(8)	(15,507)	(15,148)	(11,044)	(14,822)	(4,472)
Present value of obligations – unfunded	(892)	(1,110)	(2,002)	(2,385)	(1,784)	(2,089)	(597)
Present value of obligations – total	(16,391)	(1,118)	(17,509)	(17,533)	(12,828)	(16,911)	(5,069)
Unrecognised past service cost	9	(6)	3	(7)	(12)	(2)	3
Effect of asset limit	–	–	–	–	(19)	(45)	–
Aggregate deficit to be shown in the statement of financial position	(3,238)	(1,124)	(4,362)	(5,133)	(3,553)	(2,608)	(410)
Comprising:
– Deficits	(3,348)	(1,124)	(4,472)	(5,150)	(3,713)	(3,313)	(770)
– Surpluses	110	–	110	17	160	705	360
Net (deficits)/surpluses on pension plans	(3,238)	–	(3,238)	(3,803)	(2,648)	(1,519)	48
Unfunded post retirement healthcare obligation	–	(1,124)	(1,124)	(1,330)	(905)	(1,089)	(458)

The surplus amounts shown above are included in the statement of financial position as Trade and other receivables. See note 17.

Deficits are shown in the statement of financial position as Post retirement benefits. See note 27.

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Contributions to plans

Contributions to defined benefit pension plans during 2010 totalled US$1,036 million (2009: US$560 million; 2008: US$421 million). The increase compared to 2009 results from a combination of special contributions as a result of the sale of the Packaging business and the acceleration of some contributions from 2011 into 2010. Contributions of US$212 million (2009: US$190 million; 2008: US$184 million) were made to defined contribution arrangements and US$12 million (2009: US$9 million; 2008: US$10 million) to industry-wide plans; these are charged against profits and are included in the figures for defined contribution current employer service costs shown above.

Contributions for other benefits totalled US$79 million (2009: US$46 million; 2008: US$53 million).

Contributions to defined benefit pension plans for 2011 are estimated to be around US$375 million less than for 2010. This is kept under regular review and actual contributions will be determined in line with the Group’s wider financing strategy. Healthcare plans are generally 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 may not correspond directly to the amounts disclosed above in respect of the Group. Defined contribution plans and industry-wide plans are excluded from the movements below.

	Pension benefits	Other  benefits	2010 Total US$m	2009 Total US$m
Change in present value of obligation:
Present value of obligation at start of the year	(16,209)	(1,324)	(17,533)	(12,828)
Current employer service cost	(218)	(15)	(233)	(204)
Interest cost	(897)	(77)	(974)	(826)
Contributions by plan participants	(50)	(3)	(53)	(121)
Experience gain/(loss)	124	22	146	(139)
Changes in actuarial assumptions loss	(1,088)	(119)	(1,207)	(1,671)
Benefits paid	962	83	1,045	951
Transfers to/(from) Assets held for sale(a)	808	311	1,119	(1,656)
Inclusion of arrangements	(15)	–	(15)	(3)
No longer consolidated	–	–	–	21
Past service cost	(24)	(15)	(39)	(11)
Curtailments	62	42	104	80
Settlements	428	–	428	181
Currency exchange rate loss	(274)	(23)	(297)	(1,307)
Present value of obligation at end of the year	(16,391)	(1,118)	(17,509)	(17,533)

Gains and losses on obligations	2010	2009	2008	2007	2006
Experience gains/(losses): (ie variances between the estimate of obligations and the subsequent outcome)	146	(139)	(37)	(41)	(7)
As a percentage of the present value of the year end obligations	1%	(1%)	0%	0%	0%
Change in assumptions (loss)/gain (US$m)	(1,207)	(1,671)	1,684	315	124

1. (a) In 2010, plans within the perimeter of the Engineered Products divestment have been transferred to “Assets and liabilities held for sale”. In 2009, any plans sponsored by the Rio Tinto Alcan Packaging business that were not expected to be sold were transferred out of ‘Assets held for sale’ and reflected in this note.

	Pension benefits	Other benefits	2010 Total US$m	2009 Total US$m
Change in plan assets:
Fair value of plan assets at the start of the year	12,406	1	12,407	9,306
Expected return on plan assets	776	1	777	581
Actuarial gain on plan assets	346	–	346	891
Contributions by plan participants	50	3	53	121
Contributions by employer	1,038	78	1,116	627
Benefits paid	(962)	(83)	(1,045)	(951)
Transfers (to)/from Assets held for sale(a)	(401)	–	(401)	882
Inclusion of arrangements	15	–	15	–
Refunds of contributions	–	–	–	(27)
Settlements	(421)	–	(421)	(137)
Currency exchange rate gain	297	–	297	1,114
Fair value of plan assets at the end of the year	13,144	–	13,144	12,407
Actual return on plan assets			1,123	1,472

	2010	2009	2008	2007	2006
Difference between the expected and actual return on plan assets:
Gain/(loss) (US$m)	346	891	(3,308)	(129)	256
As a percentage of year end plan assets	3%	7%	(36%)	(1%)	5%

1. (a) In 2010, plans within the perimeter of the Engineered Products divestment have been transferred to Assets and liabilities held for sale. In 2009, any plans sponsored by the Rio Tinto Alcan Packaging business that were not expected to be sold were transferred out of ‘Assets held for sale’ and reflected in this note.

Sensitivity

The values reported for the defined benefit pension obligations are sensitive to the actuarial assumptions used for projecting future benefit payments and discounting those payments. The approximate sensitivities to the principal assumptions used to measure the obligations are:

		Approximate (increase)/decrease in obligations
Assumption	Change in assumption	Pensions US$m	Other US$m
Discount rate	increase of 0.5 percentage points	1,012	64
	decrease of 0.5 percentage points	(1,081)	(68)
Inflation	increase of 0.5 percentage points	(609)	(37)
	decrease of 0.5 percentage points	578	32
Salary increases	increase of 0.5 percentage points	(131)	(3)
	decrease of 0.5 percentage points	127	3
Demographic – allowance for future improvements in longevity	participants assumed to have the mortality rates of individuals who are one year older	390	19
	participants assumed to have the mortality rates of individuals who are one year younger	(390)	(19)

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$7 million (2009: US$6 million; 2008: US$8 million), and increase the benefit obligation for these plans by US$72 million (2009: US$98 million; 2008: US$85 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$6 million (2009: US$5 million; 2008: US$7 million), and decrease the benefit obligation for these plans by US$62 million (2009: US$83 million; 2008: US$75 million).