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27. Retirement benefits

The Group operates defined contribution and defined benefit pension plans for the majority of its employees. It also operates post retirement medical arrangements in southern Africa and North America.

Defined contribution plans

The defined contribution pension and medical cost represents the actual contributions payable by the Group to the various plans. At 31 December 2008 there were no material outstanding or prepaid contributions and so no accrual or prepayment has been disclosed in the balance sheet in relation to these plans.

The assets of the defined contribution plans are held separately in independently administered funds. The charge in respect of these plans is calculated on the basis of the contribution payable by the Group in the financial year. The charge for the year for defined contribution pension schemes for continuing operations was $134 million (2007: $157 million) and for defined contribution medical schemes for continuing operations was $9 million (2007: $5 million).

Defined benefit pension plans and post retirement medical plans

The majority of the defined benefit pension plans are funded. The assets of these plans are held separately from those of the Group, in independently administered funds, in accordance with statutory requirements or local practice throughout the world. The unfunded pension plans are principally in South America.

The post retirement medical arrangements provide health benefits to retired employees and certain dependants. Eligibility for cover is dependent upon certain criteria. The majority of these plans are unfunded.

The Group's provision of anti-retroviral therapy to HIV positive staff has not significantly impacted the post retirement medical plan liability.

Independent qualified actuaries carry out full valuations every three years using the projected unit method. The actuaries have updated the valuations to 31 December 2008.

The Group's plans in respect of pension and post retirement healthcare are summarised as follows:

  2008 2007
US$ million Southern Africa The Americas Europe Total Southern Africa The Americas Europe Total
Assets(1)
Defined benefit pension plans in surplus 32 32 48 4 52
(1)
Amounts are included in 'Other non-current assets'.
  2008 2007
US$ million Southern Africa The Americas Europe Total Southern Africa The Americas Europe Total
Liabilities
Defined benefit pension plans in deficit (132) (45) (177) (129) (6) (135)
Post retirement medical plans in deficit (204) (20) (224) (277) (32) (309)
  (204) (152) (45) (401) (277) (161) (6) (444)

US$ million 2008 2007 2006 2005 2004
Defined benefit pension plans
Present value of liabilities (2,157) (3,095) (4,256) (3,985) (4,041)
Fair value of plan assets 2,073 3,148 4,160 3,539 3,479
Net (deficit)/surplus (84) 53 (96) (446) (562)
Surplus restriction (61) (136) (163) (107)
Net deficit after surplus restriction (145) (83) (259) (553) (562)
 
Actuarial (loss)/gain on plan assets(1) (392) 39 308 438 163
Actuarial gain/(loss) on plan liabilities(2) 208 (48) (156) (435) (198)
 
Post retirement medical plans
Present value of liabilities (241) (329) (422) (650) (654)
Fair value of plan assets 17 20 16 22 15
Net deficit (224) (309) (406) (628) (639)
 
Actuarial gain on plan assets(3) 1 1
Actuarial gain/(loss) on plan liabilities(4)(5) 16 (29) 15 (67) (22)
(1)
Net experience losses on pension plan assets were $392 million (2007: gains of $32 million; 2006: gains of $314 million).
(2)
Net experience losses on pension plan liabilities were $29 million (2007: $112 million; 2006: $113 million).
(3)
Net experience gains on medical plan assets were $1 million (2007: losses of $1 million; 2006: losses of $1 million).
(4)
Net experience losses on medical plan liabilities were $7 million (2007: $4 million; 2006: gains of $36 million).
(5)
Includes actuarial gains of $11 million due to a change in modelling methodology.

Cumulative net actuarial losses recognised in the Consolidated statement of recognised income and expense are $292 million (2007: $163 million; 2006: $126 million; 2005: $228 million; 2004: $57 million).

The market value of assets was used to determine the funding level of the plans. The market value of the assets of the funded plans was sufficient to cover 101% (2007: 105%) of the benefits that had accrued to members after allowing for expected increases in future earnings and pensions. Companies within the Group are paying contributions as required in accordance with local actuarial advice. As the majority of the defined benefit pension plans are closed to new members, it is expected that contributions (in local currency) will increase as the members age.

The actual return on plan assets in respect of defined benefit pension schemes for continuing and discontinued operations was a loss of $178 million (2007: gain of $307 million).

Income statement

The amounts recognised in the income statement are as follows:

  2008 2007
US$ million Pension plans Post retirement medical plans Total
plans
Pension plans Post retirement medical plans Total
plans
Analysis of the amount charged to operating profit
Current service costs 43 5 48 54 8 62
Past service costs 1 1 3 3
Total within operating costs – continuing operations 44 5 49 57 8 65
Analysis of the amount charged to net finance costs
Expected return on plan assets(1) (214) (1) (215) (255) (2) (257)
Interest costs on plan liabilities(2) 180 21 201 207 22 229
Net (credit)/charge to net finance costs – continuing operations (34) 20 (14) (48) 20 (28)
Total charge to the income statement – continuing operations 10 25 35 9 28 37
(1)
Included in 'Investment income'.
(2)
Included in 'Interest expense'.

Actuarial assumptions

The principal assumptions used to determine the actuarial present value of benefit obligations and pension charges and credits under IAS 19 are detailed below (shown as weighted averages):

  2008 2007
% Southern Africa The Americas Europe Southern Africa The Americas Europe
Defined benefit pension plans
Average discount rate for plan liabilities 7.3 8.6 6.0 8.2 7.5 5.7
Average rate of inflation 4.0 3.7 2.7 5.5 3.6 3.4
Average rate of increase in salaries 5.3 5.4 2.7 6.8 4.5 3.5
Average rate of increase of pensions in payment 4.0 3.2 2.8 5.5 1.8 3.4
Average long term rate of return on plan assets(1) 7.6 11.3 5.9 8.5 10.6 6.8
Post retirement medical plans
Average discount rate for plan liabilities 7.3 7.1 n/a 8.0 5.5 n/a
Average rate of inflation 4.0 0.5 n/a 5.3 2.6 n/a
Expected average increase in healthcare costs 5.4 3.8 n/a 6.8 4.4 n/a
(1)
The long term expected return on plan assets has been set with reference to current market yields on government and corporate bonds and expected equity bond-outperformance in the relevant jurisdictions. The expected return on cash assets has been set with reference to expected bank base rates. The overall long term expected rate of return for each class is weighted by the asset allocation to the class at the balance sheet date.

Mortality assumptions are determined based on standard mortality tables with adjustments, as appropriate, to reflect experience of conditions locally. In southern Africa, the PA90 tables (2007: the SA85-90 and the PA90 tables) are used. The main schemes in Europe use the PXA00 tables (2007: PA92 tables). The main schemes in the Americas use the RV2004, AT83 and UP24 tables (2007: RV2004, AT83 and GAM94 tables). The mortality tables used imply that a male or female aged 60 at the balance sheet date has the following future life expectancy:

  Male Female
Years 2008 2007 2008 2007
Southern Africa 20.5 20.3 25.5 25.2
The Americas 22.4 22.0 26.5 26.1
Europe 25.7 25.3 28.1 26.8

The market value of the pension assets in defined benefit pension plans and long term expected rate of return as at 31 December 2008 and 31 December 2007 are as follows:

  Southern Africa The Americas Europe Total
  Rate of return % Fair value US$ million Rate of return % Fair value US$ million Rate of return % Fair value US$ million Fair value US$ million
At 31 December 2008
Equity 10.0 231 10.5 49 7.4 568 848
Bonds 6.6 422 11.7 137 5.2 427 986
Other 5.2 42 8.9 7 2.7 190 239
Fair value of pension plan assets   695   193   1,185 2,073
Present value of unfunded obligations     (102)   (6) (108)
Present value of funded obligations   (602)   (223)   (1,224) (2,049)
Present value of pension plan liabilities   (602)   (325)   (1,230) (2,157)
Net surplus/(deficit) in pension plans   93   (132)   (45) (84)
Surplus restriction related to pension plans   (61)     (61)
Recognised pension plan assets/(liabilities)   32   (132)   (45) (145)
Amounts in the balance sheet
Pension assets   32     32
Pension liabilities     (132)   (45) (177)
    32   (132)   (45) (145)
 
At 31 December 2007
Equity 11.0 273 10.7 68 8.1 1,021 1,362
Bonds 7.6 654 10.8 167 5.2 568 1,389
Other 7.1 54 7.8 10 5.5 333 397
Fair value of pension plan assets   981   245   1,922 3,148
Present value of unfunded obligations     (105)   (4) (109)
Present value of funded obligations   (853)   (269)   (1,864) (2,986)
Present value of pension plan liabilities   (853)   (374)   (1,868) (3,095)
Net surplus/(deficit) in pension plans   128   (129)   54 53
Surplus restriction related to pension plans   (80)     (56) (136)
Recognised pension plan assets/(liabilities)   48   (129)   (2) (83)
Amounts in the balance sheet
Pension assets   48     4 52
Pension liabilities     (129)   (6) (135)
    48   (129)   (2) (83)

Movement analysis

The changes in the present value of defined benefit obligations are as follows:

  2008 2007
US$ million Pension plans Post retirement medical plans Total
plans
Pension plans Post retirement medical plans Total
plans
At 1 January (3,095) (329) (3,424) (4,256) (422) (4,678)
Current service costs(1) (43) (5) (48) (57) (9) (66)
Acquisition, disposal and demerger of businesses 1,442 150 1,592
Past service costs and effects of settlements and curtailments(2) (1) (1) (1) (1)
Interest costs(3) (180) (21) (201) (220) (25) (245)
Actuarial gains/(losses) 208 16 224 (48) (29) (77)
Benefits paid 145 16 161 137 18 155
Contributions paid by other members (9) (3) (12) (7) (2) (9)
Reclassifications (2) (2)
Currency movements 818 85 903 (83) (10) (93)
At 31 December (2,157) (241) (2,398) (3,095) (329) (3,424)
(1)
Includes nil (2007: $3 million) for pension plans and nil (2007: $1 million) for post retirement medical plans in respect of discontinued operations.
(2)
Includes nil (2007: a gain of $2 million) for pension plans in respect of discontinued operations.
(3)
Includes nil (2007: $13 million) for pension plans and nil (2007: $3 million) for post retirement medical plans in respect of discontinued operations.

The changes in the fair value of plan assets are as follows:

  2008 2007
US$ million Pension plans Post retirement medical plans Total
plans
Pension plans Post retirement medical plans Total
plans
At 1 January 3,148 20 3,168 4,160 16 4,176
Expected return(1) 214 1 215 268 2 270
Actuarial (losses)/gains (392) 1 (391) 39 1 40
Acquisition, disposal and demerger of businesses (1,329) (1,329)
Contributions paid by employer 50 11 61 69 16 85
Contributions paid by other members 9 5 14 7 2 9
Benefits paid (145) (16) (161) (137) (18) (155)
Reclassifications 2 2
Currency movements (811) (5) (816) 69 1 70
At 31 December 2,073 17 2,090 3,148 20 3,168
(1)
Includes nil (2007: $13 million) for pension plans in respect of discontinued operations.

Assumed healthcare trend rates have a significant effect on the amounts recognised in the income statement. A 1% change in assumed healthcare cost trend rates would have the following effects:

  1% increase 1% decrease
US$ million 2008 2007 2008 2007
Effect on the sum of service costs and interest costs 3 4 (3) (2)
Effect on defined benefit obligations 28 39 (26) (22)

The Group expects to contribute approximately $39 million to its defined benefit pension plans and $20 million to its post retirement medical plans in 2009.

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