22. Provision for post-employment benefits

Companies within the Group operate a large number of pension plans, the forms and benefits of which vary with conditions and practices in the countries concerned. The Group’s pension costs are analysed as follows:


	2018 £m		2017 £m		2016 £m
Defined contribution plans		172.3		175.9		153.5
Defined benefit plans charge to operating profit		18.9		16.1		24.6
Pension costs (note 5)		191.2		192.0		178.1
Net interest expense on pension plans (note 6)		4.4		6.3		6.7
		195.6		198.3		184.8

Defined benefit plans

The pension costs are assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various pension plans were carried out at various dates in the last three years. These valuations have been updated by the local actuaries to 31 December 2018.

The Group’s policy is to close existing defined benefit plans to new members. This has been implemented across a significant number of the pension plans.

Contributions to funded plans are determined in line with local conditions and practices. Contributions in respect of unfunded plans are paid as they fall due. The total contributions (for funded plans) and benefit payments (for unfunded plans) paid for 2018 amounted to £44.9 million (2017: £68.2 million, 2016: £43.7 million). Employer contributions and benefit payments in 2019 are expected to be approximately £50 million.

(a) Assumptions

There are a number of areas in pension accounting that involve estimates made by management based on advice of qualified advisors. These include establishing the discount rates, rates of increase in salaries and pensions in payment, inflation, and mortality assumptions. The main weighted average assumptions used for the actuarial valuations at 31 December are shown in the following table:


	2018 % pa		2017 % pa		2016 % pa		2015 % pa
UK
Discount rate¹		2.8		2.4		2.5		3.7
Rate of increase in salaries²		n/a		n/a		3.5		3.1
Rate of increase in pensions in payment		4.3		4.1		4.1		3.9
Inflation		2.8		2.7		2.8		2.4
North America
Discount rate¹		4.1		3.5		3.8		4.0
Rate of increase in salaries		3.0		3.1		3.1		3.0
Inflation		n/a		4.0		4.0		2.5
Western Continental Europe
Discount rate¹		2.0		1.9		1.7		2.5
Rate of increase in salaries		2.3		1.9		2.0		2.3
Rate of increase in pensions in payment		1.2		1.2		1.3		1.6
Inflation		1.7		1.7		1.7		2.0
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe
Discount rate¹		5.0		4.2		4.2		4.2
Rate of increase in salaries		5.8		5.5		5.9		5.8
Inflation		3.6		4.0		4.0		4.0

Notes

Discount rates are based on high-quality corporate bond yields. In countries where there is no deep market in corporate bonds, the discount rate assumption has been set with regard to the yield on long-term government bonds.

The salary assumptions are no longer applicable to the UK as all plans were frozen since 2017. Active participants will not accrue additional benefits for future services under these plans.

For the Group’s pension plans, the plans’ assets are invested with the objective of being able to meet current and future benefit payment needs, while controlling balance sheet volatility and future contributions. Pension plan assets are invested with a number of investment managers, and assets are diversified among equities, bonds, insured annuities, property and cash or other liquid investments. The primary use of bonds as an investment class is to match the anticipated cash flows from the plans to pay pensions. The Group is invested in high-quality corporate and government bonds which share similar risk characteristics and are of equivalent currency and term to the plan liabilities. Various insurance policies have also been bought historically to provide a more exact match for the cash flows, including a match for the actual mortality of specific plan members. These insurance policies effectively provide protection against both investment fluctuations and longevity risks. The strategic target allocation varies among the individual plans.

Management considers the types of investment classes in which the pension plan assets are invested. The types of investment classes are determined by economic and market conditions and in consideration of specific asset class risk.

Management periodically commissions detailed asset and liability studies performed by third-party professional investment advisors and actuaries that generate probability-adjusted expected future returns on those assets. These studies also project the estimated future pension payments and evaluate the efficiency of the allocation of the pension plan assets into various investment categories.

At 31 December 2018, the life expectancies underlying the value of the accrued liabilities for the main defined benefit pension plans operated by the Group were as follows:


Years life expectancy after age 65	All plans		North America		UK		Western Continental Europe		Other¹
– current pensioners (at age 65) – male		22.2		22.1		23.2		21.1		17.0
– current pensioners (at age 65) – female		23.9		23.6		24.3		24.0		21.4
– future pensioners (current age 45) – male		24.0		23.7		24.8		23.5		17.0
– future pensioners (current age 45) – female		25.7		25.2		26.1		26.2		21.4

Note

Includes Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe.

The life expectancies after age 65 at 31 December 2017 were 22.4 years and 24.0 years for male and female current pensioners (at age 65), respectively, and 23.8 years and 25.7 years for male and female future pensioners (current age 45), respectively.

In the determination of mortality assumptions, management uses the most up-to-date mortality tables available in each country.

The following table provides information on the weighted average duration of the defined benefit pension obligations and the distribution of the timing of benefit payments for the next 10 years. The duration corresponds to the weighted average length of the underlying cash flows.


	All plans		North America		UK		Western Continental Europe		Other¹
Weighted average duration of the defined benefit obligation (years)		11.8		8.5		14.2		15.7		8.2
Expected benefit payments over the next 10 years (£m)
Benefits expected to be paid within 12 months		67.2		36.3		16.4		9.3		5.1
Benefits expected to be paid in 2020		58.4		34.3		12.9		8.6		2.5
Benefits expected to be paid in 2021		58.3		33.7		12.8		8.6		3.1
Benefits expected to be paid in 2022		59.1		33.6		12.7		9.1		3.6
Benefits expected to be paid in 2023		56.6		30.4		12.9		9.4		3.9
Benefits expected to be paid in the next five years		276.6		131.0		66.1		52.8		26.6

Note

Includes Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe.

The following table presents a sensitivity analysis for each significant actuarial assumption showing how the defined benefit obligation would have been affected by changes in the relevant actuarial assumption that were reasonably possible at the balance sheet date. This sensitivity analysis applies to the defined benefit obligation only and not to the net defined benefit pension liability in its entirety, the measurement of which is driven by a number of factors including, in addition to the assumptions below, the fair value of plan assets.

The sensitivity analyses are based on a change in one assumption while holding all other assumptions constant so that interdependencies between the assumptions are excluded. The methodology applied is consistent with that used to determine the recognised defined benefit obligation. The sensitivity analysis for inflation is not shown as it is an underlying assumption to build the pension and salary increase assumptions. Changing the inflation assumption on its own without changing the salary or pension assumptions will not result in a significant change in pension liabilities.


	Increase/(decrease) in benefit obligation
Sensitivity analysis of significant actuarial assumptions	2018 £m			2017 £m
Discount rate
Increase by 25 basis points
UK		(9.8	)		(13.1	)
North America		(8.8	)		(9.9	)
Western Continental Europe		(8.7	)		(9.2	)
Other¹		(0.7	)		(0.6	)
Decrease by 25 basis points
UK		10.3			13.8
North America		9.1			10.2
Western Continental Europe		9.3			9.8
Other¹		0.7			0.6
Rate of increase in salaries
Increase by 25 basis points
North America		–			0.1
Western Continental Europe		1.3			1.5
Other¹		0.7			0.6
Decrease by 25 basis points
North America		–			(0.1	)
Western Continental Europe		(1.2	)		(1.5	)
Other¹		(0.6	)		(0.6	)
Rate of increase in pensions in payment
Increase by 25 basis points
UK		1.3			2.4
Western Continental Europe		5.3			6.2
Decrease by 25 basis points
UK		(0.8	)		(1.9	)
Western Continental Europe		(5.0	)		(5.8	)
Life expectancy
Increase in longevity by one additional year
UK		13.6			16.9
North America		5.7			6.0
Western Continental Europe		6.9			7.0

Note

Includes Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe.

(b) Assets and liabilities

At 31 December, the fair value of the assets in the pension plans, and the assessed present value of the liabilities in the pension plans are shown in the following table:


	2018 £m			%		2017 £m			%		2016 £m			%
Equities		76.5			9.1		124.6			13.4		161.9			17.3
Bonds		544.9			64.8		520.0			55.9		566.0			60.6
Insured annuities		90.9			10.8		178.5			19.2		63.5			6.8
Property		0.9			0.1		1.3			0.1		1.6			0.2
Cash		31.1			3.7		9.9			1.1		44.9			4.8
Other		96.3			11.5		95.7			10.3		96.3			10.3
Total fair value of assets		840.6			100.0		930.0			100.0		934.2			100.0
Present value of liabilities		(1,024.0	)				(1,135.4	)				(1,209.8	)
Deficit in the plans		(183.4	)				(205.4	)				(275.6	)
Irrecoverable surplus		(0.9	)				(0.9	)				(0.9	)
Net liability¹		(184.3	)				(206.3	)				(276.5	)
Plans in surplus		42.8					43.9					28.0
Plans in deficit		(227.1	)				(250.2	)				(304.5	)

Note

The related deferred tax asset is discussed in note 15.

All plan assets have quoted prices in active markets with the exception of insured annuities and other assets.


Surplus/(deficit) in plans by region	2018 £m			2017 £m			2016 £m
UK		33.7			31.5			20.0
North America		(68.7	)		(89.2	)		(133.8	)
Western Continental Europe		(104.6	)		(107.7	)		(116.9	)
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe		(43.8	)		(40.0	)		(44.9	)
Deficit in the plans		(183.4	)		(205.4	)		(275.6	)

Some of the Group’s defined benefit plans are unfunded (or largely unfunded) by common custom and practice in certain jurisdictions. In the case of these unfunded plans, the benefit payments are made as and when they fall due. Pre-funding of these plans would not be typical business practice.

The following table shows the split of the deficit at 31 December between funded and unfunded pension plans.


	2018 Surplus/ (deficit) £m			2018 Present value of liabilities £m			2017 Surplus/ (deficit) £m			2017 Present value of liabilities £m			2016 Surplus/ (deficit) £m			2016 Present value of liabilities £m
Funded plans by region
UK		33.7			(290.5	)		31.5			(387.5	)		20.0			(406.4	)
North America		(4.6	)		(375.3	)		(21.4	)		(385.4	)		(56.0	)		(420.4	)
Western Continental Europe		(35.8	)		(168.4	)		(37.9	)		(173.3	)		(48.9	)		(180.9	)
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe		(6.6	)		(19.7	)		(4.2	)		(15.8	)		(5.8	)		(17.2	)
Deficit/liabilities in the funded plans		(13.3	)		(853.9	)		(32.0	)		(962.0	)		(90.7	)		(1,024.9	)

Unfunded plans by region
UK		–			–			–			–			–			–
North America		(64.1	)		(64.1	)		(67.8	)		(67.8	)		(77.8	)		(77.8	)
Western Continental Europe		(68.8	)		(68.8	)		(69.8	)		(69.8	)		(68.0	)		(68.0	)
Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe		(37.2	)		(37.2	)		(35.8	)		(35.8	)		(39.1	)		(39.1	)
Deficit/liabilities in the unfunded plans		(170.1	)		(170.1	)		(173.4	)		(173.4	)		(184.9	)		(184.9	)

Deficit/liabilities in the plans		(183.4	)		(1,024.0	)		(205.4	)		(1,135.4	)		(275.6	)		(1,209.8	)

In accordance with IAS 19, plans that are wholly or partially funded are considered funded plans.

(c) Pension expense

The following table shows the breakdown of the pension expense between amounts charged to operating profit, amounts charged to finance costs and amounts recognised in the consolidated statement of comprehensive income (OCI):


	2018 £m			2017 £m			2016 £m
Service cost¹		15.5			13.0			22.4
Administrative expenses		3.4			3.1			2.2
Charge to operating profit		18.9			16.1			24.6
Net interest expense on pension plans		4.4			6.3			6.7
Charge to profit before taxation for defined benefit plans		23.3			22.4			31.3
Return on plan assets (excluding interest income)		(43.9	)		13.4			66.3
Changes in demographic assumptions underlying the present value of the plan liabilities		3.8			12.7			6.7
Changes in financial assumptions underlying the present value of the plan liabilities		45.2			(17.0	)		(92.6	)
Experience gain arising on the plan liabilities		3.8			7.9			1.0
Change in irrecoverable surplus		–			–			2.7
Actuarial gain/(loss) recognised in OCI		8.9			17.0			(15.9	)

Note

Includes current service cost, past service costs related to plan amendments and (gain)/loss on settlements and curtailments.

(d) Movement in plan liabilities

The following table shows an analysis of the movement in the pension plan liabilities for each accounting period:


	2018 £m			2017 £m			2016 £m
Plan liabilities at beginning of year		1,135.4			1,209.8			1,039.9
Service cost¹		15.5			13.0			22.4
Interest cost		30.7			32.9			37.2
Actuarial (gain)/loss
Effect of changes in demographic assumptions		(3.8	)		(12.7	)		(6.7	)
Effect of changes in financial assumptions		(45.2	)		17.0			92.6
Effect of experience adjustments		(3.8	)		(7.9	)		(1.0	)
Benefits paid		(75.6	)		(79.7	)		(92.4	)
Loss/(gain) due to exchange rate movements		30.0			(36.4	)		124.2
Settlement payments²		(70.4	)		(1.2	)		(4.8	)
Other³		11.2			0.6			(1.6	)
Plan liabilities at end of year		1,024.0			1,135.4			1,209.8

Notes

Includes current service cost, past service costs related to plan amendments and (gain)/loss on settlements and curtailments.

In 2018, the Group completed the transfer of the defined benefit obligations for certain UK plans to an insurer resulting in £70.4 million settlement payments.

Other includes acquisitions, disposals, plan participants’ contributions and reclassifications. The reclassifications represent certain of the Group’s defined benefit plans which are included in this note for the first time in the periods presented.

(e) Movement in plan assets

The following table shows an analysis of the movement in the pension plan assets for each accounting period:


	2018 £m			2017 £m			2016 £m
Fair value of plan assets at beginning of year		930.0			934.2			814.2
Interest income on plan assets		26.3			26.6			30.5
Return on plan assets (excluding interest income)		(43.9	)		13.4			66.3
Employer contributions		44.9			68.2			43.7
Benefits paid		(75.6	)		(79.7	)		(92.4	)
Gain/(loss) due to exchange rate movements		23.0			(28.7	)		78.8
Settlement payments¹		(70.4	)		(1.2	)		(4.8	)
Administrative expenses		(3.4	)		(3.1	)		(2.2	)
Other²		9.7			0.3			0.1
Fair value of plan assets at end of year		840.6			930.0			934.2
Actual return on plan assets		(17.6	)		40.0			96.8

Notes

In 2018, the Group completed the transfer of the defined benefit obligations for certain UK plans to an insurer resulting in £70.4 million settlement payments.