Notes to the Financial Statements
for the year ended 31 December 2004
14 Employee Benefits
14(a) Employee pension plans
The Group operates a number of pension schemes around the world. These schemes have been designed and are administered in accordance
with local conditions and practices in the countries concerned and include both defined contribution and defined benefit schemes. The assets of
these schemes are held in separate trustee administered funds.
Pension costs and contributions relating to defined benefit schemes are assessed in accordance with the advice of qualified actuaries. Actuarial advice confirms that the current level of contributions payable to each pension scheme, together with existing assets, are adequate to secure members’ benefits over the remaining service lives of participating employees. The schemes are reviewed at least on a triennial basis or in accordance with local practice and regulations. In the intervening years, the actuary reviews the continuing appropriateness of the assumptions applied. The actuarial assumptions used to calculate the projected benefit obligations of the Group’s pension schemes vary according to the economic conditions of the countries in which they operate.
The last full actuarial valuations were performed for the various schemes between 30 June 2002 and 31 December 2004 and, in accordance with the transitional arrangements of FRS 17, have been updated by either internal or external actuaries at 31 December 2004. The major assumptions used in these valuations were:
At 31 December 2004 |
At 31 December 2003 |
At 31 December 2002 |
||||
South African schemes |
UK schemes |
South African schemes |
UK schemes |
South African schemes |
UK schemes |
|
| Inflation assumption | 4.0% | 2.75-3.0% | 5.0% | 2.0-2.5% | 6.5% | 1.8-2.5% |
| Rate of increase in salaries | 5.5% | 5.0-4.75% | 6.5% | 4.0-4.5% | 7.5 - 8.0% | 3.5-4.5% |
| Rate of increase in pensions in payment | 4.0% | 2.7-3.0% | 4.8% | 2.0-3.0% | 11.0% | 1.8-3.1% |
| Discount rate | 8.5% | 2.25-2.3% | 9.5% | 5.3-5.5% | 11.0-11.5% | 5.5-6.5% |
The assumptions used by the actuaries are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice.
The fair value of and expected return on the schemes’ assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the schemes’ liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were:
| Expected long term rate of return |
£m | ||
| South African schemes |
UK schemes |
Value of assets |
|
| At 31 December 2004 | |||
| Equities | 11.5% |
7.5- 8.3% |
129 |
| Bonds | 8.5% |
4.5-5.3% |
91 |
| Insurance policies and annuities | 6.5% |
5.3% |
150 |
| Cash | 9.5% |
4.75-4.8% |
12 |
| Total market value of assets | 382 |
||
| Present value of liabilities | (364) |
||
| Net pension surplus | 18 |
||
| Associated deferred tax asset | (1) |
||
| Net pension surplus after deferred tax | 17 |
||
| Expected long term rate of return |
£m | ||
| 14(a) Employee pension plans continued | South African schemes |
UK schemes |
Value of assets |
| At 31 December 2003 | |||
| Equities | 12.5% |
7.5% |
103 |
| Bonds | 9.5% |
4.8 - 5.5% |
67 |
| Insurance policies and annuities | 9.5% |
4.8 - 5.3% |
155 |
| Cash | 7.5% |
3.8 - 4.8% |
4 |
| Total market value of assets | 329 |
||
| Present value of liabilities | (324) |
||
| Net pension surplus | 5 |
||
| At 31 December 2002 | |||
| Equities | 12.0 -14.0% |
7.5% |
103 |
| Bonds | 9.0 -12.0% |
4.5 - 5.5% |
50 |
| Insurance policies and annuities | 12% |
4.5 -7.5% |
123 |
| Cash | 10% |
3.5 - 4.5% |
20 |
| Total market value of assets | 296 |
||
| Present value of liabilities | (299) |
||
| Net pension deficit | (3) |
||
| 14(a) Employee pension plans continued | Year to 31 December 2004 |
Year to 31 December 2003 |
Year to 31 December 2002 |
| Movement during the year | |||
| Net surplus/(deficit) in schemes at beginning of year | 5 |
(3) |
24 |
| Disposed operations | - |
12 |
- |
| Acquired operations | - |
- |
4 |
| Contributions | 8 |
4 |
4 |
| Current service cost | (2) |
(4) |
(3) |
| Finance income | |||
| Expected return on pension scheme assets | 27 |
31 |
23 |
| Interest on pension scheme liabilities | (25) |
(28) |
(18) |
| Actuarial gain/loss* | 2 |
(13) |
(46) |
| Foreign exchange translation | 3 |
6 |
9 |
| Net surplus/(deficit) in schemes at end of year | 18 |
5 |
(3) |
* The actuarial gain for the year to 31 December 2004 represents 0.6% (2003: actuarial loss, 4.0%; 2002: actuarial loss, 15.4%) of the total present value of scheme liabilities. The actual return on pension scheme assets was £11 million (R130 million) more than the expected return (2003: £6 million (R75 million) less), representing 3.0% (2003: 1.8%) of the total scheme assets. Experience gains arising on scheme liabilities were £0.2 million (R2 million) (2003: £2 million (R25 million)). Changes in the assumptions underlying the present value of scheme liabilities resulted in an actuarial loss of £9 million (R106 million) (2003: £9 million (R111 million)).
At 31 December 2004, the provision for pension contributions included in other provisions and charges in the Group’s balance sheet amounted to £55 million (R597 million) (2003: £53 million (R632 million)). The charges to the technical and non-technical accounts represent the regular pension cost, offset by the investment return on the surplus scheme assets, and variations from regular cost arising from the schemes’ surplus being amortised on a straight-line basis over the average expected remaining service lives of current employees. An analysis of the charge is presented below.
| £m | ||
| Year to 31 December 2004 |
Year to 31 December 2003 |
|
| Regular cost | 51 |
52 |
| Variations from regular cost | (6) |
(14) |
| Profit and loss charge | 45 |
38 |
14(b) Post retirement benefits
Certain Group subsidiary undertakings provide medical and mortgage bond benefits to qualifying employees beyond the date of retirement.
The charge and related liability included in the Group’s financial statements are presented below.
| £m | ||
| Year to 31 December 2004 |
Year to 31 December 2003 |
|
| Profit and loss (credit)/charge | (1) |
5 |
| Provisions for other risks and charges | 20 |
21 |
14(c) Employee share ownership plans (ESOPs)
The ESOPs currently in use are described in the Remuneration Report on pages 44 to 52.
As described in note 1, in accordance with UITF38, shares held by ESOP Trusts are no longer recognised as current assets in the balance sheet, but are shown as a deduction from shareholders’ equity.
The number and market value of the Company’s ordinary shares held by ESOP Trusts at 31 December 2004 were 93 million (2003: 102 million) and £123 million (R1,333 million) (2003: £94 million (R1,122 million)), respectively.
