27 Post-employment obligations

 

Post-employment obligations as at the year end comprise:	2007 £m	2006 £m
Pensions
— funded	(24)	(217)
— unfunded	(260)	(268)
Medical
— funded	(9)	(28)
— unfunded	(38)	(48)
	(331)	(561)

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 2007. 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 %
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
2006
Rate of increase in pensionable salaries	4.1	3.5	2.50	2.0
Rate of increase in payment and deferred pensions	3.2	2.0	1.75	n/a
Discount rate	5.1	5.9	4.70	2.5
Inflation assumption	3.1	2.5	1.75	1.0
Rate of increases in medical costs:
initial/long term	8.0/4.5	10.0/5.0	n/a	n/a

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. At the recent annual review the age adjustment to PA92 (year of birth) was strengthened by 0.5 to 2.5 years to reflect actual scheme experience. Mortality assumptions were strengthened further by moving to medium cohort projections. The key current year mortality assumptions for the scheme are that 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 impact of this change in assumptions has increased liabilities by £75 million.

Overseas

In the USA, CL2007 tables were adopted in 2007 whilst in Germany the RT2005-G tables were again 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 US 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 on the defined benefit net obligations as at 31 December 2007 is set out below:

 

	UK £m	Americas £m	Europe £m	ROW £m
Discount rate +1%	282	32	31	3
Discount rate -1%	(346)	(40)	(39)	(3)
Rate of inflation +1%	(200)	—	(25)	—
Rate of inflation -1%	180	—	22	—
Rate of increase in medical costs +1%	(1)	(1)	n/a	n/a
Rate of increase in medical costs -1%	1	1	n/a	n/a

A one percentage point increase in the assumption on healthcare benefits would increase the total service and interest cost by £nil (2006 – £1 million) and the liability by £2 million (2006 – £11 million). A one percentage point decrease in the assumption on healthcare benefits would reduce liabilities by £2 million (2006 – £9 million).

(b) Defined benefit schemes—reporting

The amounts recognised in the income statement are:

	2007				2006
	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	(32)	—	—	(32)	(38)
Past service cost	12	(1)	(4)	7	(2)
Settlement/curtailments	2	—	—	2	(3)
	(18)	(1)	(4)	(23)	(43)
Included within net financing costs
Expected return on pension scheme assets				146	136
Interest on post-employment obligations				(149)	(140)
				(3)	(4)

The past service credit of £7 million within operating profit (2006 – £2 million charge) includes 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 (2006 – £2 million charge), £4 million of which is within Restructuring and impairment charges (2006 – £nil) primarily from further downsizing of a UK business in the Automotive portfolio. 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:

 

	2007					2006
	UK £m	Americas £m	Europe £m	ROW £m	Total £m	Total £m
Present value of funded obligations	(2,251)	(244)	(13)	(20)	(2,528)	(2,660)
Fair value of plan assets	2,248	212	21	14	2,495	2,415
Net obligation recognised in the balance sheet	(3)	(32)	8	(6)	(33)	(245)

The contributions expected to be paid by the Group during 2008 to the UK schemes is £12 million and to overseas schemes £26 million.

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

 

	2007 £m	2006 £m
At 1 January	17	(90)
Net actuarial gains in year	225	107
At 31 December	242	17

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

 

	UK £m	Americas £m	Europe £m	ROW £m	Total £m
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)
At 1 January 2006	(2,381)	(316)	(284)	(23)	(3,004)
Subsidiaries acquired	—	(23)	—	—	(23)
Current service cost	(18)	(10)	(8)	(2)	(38)
Interest	(111)	(17)	(12)	—	(140)
Contributions by participants	(11)	(1)	—	—	(12)
Actuarial gains and losses	35	13	12	(2)	58
Benefits paid	116	11	13	2	142
Past service cost	(1)	—	(1)	—	(2)
Curtailments — subsidiaries sold	(4)	1	—	—	(3)
Currency variations	—	41	3	2	46
At 31 December 2006	(2,375)	(301)	(277)	(23)	(2,976)

Movement in schemes’ assets during the year

 

	UK £m	Americas £m	Europe £m	ROW £m	Total £m
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
At 1 January 2006	1,915	170	20	14	2,119
Subsidiaries acquired	—	19	—	—	19
Expected return on assets	122	13	1	—	136
Actuarial gains and losses	35	15	(1)	—	49
Contributions by Group	220	13	—	2	235
Contributions by participants	11	—	—	—	11
Benefits paid	(116)	(10)	(1)	(2)	(129)
Currency variations	—	(24)	—	(1)	(25)
At 31 December 2006	2,187	196	19	13	2,415

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

 

	2007 £m	2006 £m
Funded	(2,528)	(2,660)
Unfunded	(298)	(316)
	(2,826)	(2,976)

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 2007
Equities	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	1
Other assets	5.8	32	—	—	5.1	21	0.9	1
		2,248		212		21		14
At 31 December 2006
Equities	7.5	1,093	8.5	134	—	—	7.2	7
Bonds	4.9	687	5	53	—	—	2.0	4
Property	6.8	109	—	—	—	—	—	—
Cash/short term mandate	5.1	265	3.8	9	—	—	—	—
Other assets	5.1	33	—	—	5.0	19	1.3	2
		2,187		196		19		13

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 £165 million (2006 – £185 million).

History of experience gains and losses

	UK	Americas	Europe	ROW
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	141	28	36	—
Percentage of the present value of scheme liabilities	6.2%	10.4%	13.4%	—
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	35	13	12	(2)
Percentage of the present value of scheme liabilities	1.5%	4.3%	4.3%	(11.2%)
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	(192)	(10)	(29)	(1)
Percentage of the present value of scheme liabilities	(8.1%)	(3.2%)	(10.2%)	(3.1%)
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	(95)	(6)	(13)	1
Percentage of the present value of scheme liabilities	(4.4%)	(2.1%)	(5.0%)	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 £10 million (2006 – £9 million).