Notes 21-25
- 21 Reserves
- 22 Minority interests
- 23 Dividends to shareholders
- 24 Acquisitions of business operations
- 25 Post-retirement benefits
25 POST-RETIREMENT BENEFITS
Pensions
Background
The Company and most of its subsidiaries offer retirement plans which cover the majority of employees in the Group. Many of these plans are “defined contribution”, where the company contribution and resulting income statement charge is fixed at a set level or is a set percentage of employees’ pay. However, several plans, mainly in the UK, the US and Sweden, are “defined benefit”, where benefits are based on employees’ length of service and average final salary (typically averaged over 1, 3 or 5 years). The major defined benefit plans, apart from the collectively bargained Swedish plan (which is still open to employees born before 1979), have been closed to new entrants since 2000.
The UK plan, which is the single largest plan, has specific restrictions imposed on one section of the membership preventing amendments that will prejudice the rights or interest of that section of the membership.
The major defined benefit plans are funded through legally separate fiduciary administered funds. The cash funding of the plans, which may from time to time involve special payments, is designed, in consultation with independent qualified actuaries, to ensure that the assets together with future contributions should be sufficient to meet future obligations. The funding is monitored rigorously by the Company and appropriate fiduciaries specifically with reference to the Company’s credit rating, market capitalisation and cash flows.
Post-retirement scheme deficit
The assets and obligations of the defined benefit schemes operated by the Group at 31 December 2007 as calculated in accordance with IAS 19 are shown below. The fair values of the schemes’ assets are not intended to be realised in the short term and may be subject to significant change before they are realised. The present value of the schemes’ obligations is derived from cash flow projections over long periods and is thus inherently uncertain.
| Value at 31 December 2007 | Value at 31 December 2006 | |||||
|---|---|---|---|---|---|---|
| UK $m |
Rest of Group $m |
Total $m |
UK $m |
Rest of Group $m |
Total $m |
|
| Scheme assets | ||||||
| Equities | 2,581 | 1,453 | 4,034 | 2,669 | 1,497 | 4,166 |
| Bonds | 2,517 | 888 | 3,405 | 2,154 | 735 | 2,889 |
| Others | 1,212 | 303 | 1,515 | 1,255 | 261 | 1,516 |
| Total fair value of assets | 6,310 | 2,644 | 8,954 | 6,078 | 2,493 | 8,571 |
| Present value of scheme obligations | (7,644) | (3,348) | (10,992) | (7,352) | (3,109) | (10,461) |
| Past service cost not yet recognised | – | 40 | 40 | – | 48 | 48 |
| Deficit in the scheme as recognised in the balance sheet |
(1,334) | (664) | (1,998) | (1,274) | (568) | (1,842) |
96.9% of the Group’s defined benefit obligations at 31 December 2007 are in schemes within the UK, the US, Sweden or Germany. In these countries the pension obligations are funded with reference to the following financing principles:
Financing Principles
- The Group has a fundamental belief in funding the benefits it promises to employees.
- The Group considers its pension arrangements in the context of its broader capital structure. In general it does not believe in committing excessive capital for funding whilst it has better uses of capital within the business nor does it wish to generate surpluses.
- The pension funds are not part of the Group’s core business. Pension funds may take rewarded risks with the investments underlying the funding, subject to adequate controls and the expected rewards outweighing the risks.
- The Group recognises that deciding to hold certain investments may cause volatility in the funding position. The Group would not wish to amend its contribution level for relatively small deviations from its preferred funding level, because it is expected that there will be short term volatility, but it is prepared to react appropriately to more significant deviations.
- In the event that local regulations require an additional level of financing, the Group would consider the use of alternative methods of providing this that do not require immediate cash funding but help mitigate exposure of the pension arrangement to the credit risk of the Group.
These principles are appropriate to AstraZeneca’s business at the present date; should circumstances change they may require review.
The Company has developed a funding framework to implement these principles. This determines the cash contributions payable to the pension funds, but does not affect the IAS 19 liabilities. To reduce the risk of committing excess capital to pension funds, liabilities are based on the expected return on the actual pension assets, rather than a corporate bond yield. At present this puts a lower value on the liabilities than IAS 19 and so the Company’s expectation is to continue to run an IAS 19 pension deficit for the foreseeable future.
UK
With regard to the Group’s UK defined benefit fund, the above principles are modified in light of the UK regulatory requirements and resulting discussions with the pension fund Trustee. The most recent full actuarial valuation was carried out at 31 March 2006.
Under the agreed funding principles for the UK, cash contributions will be paid to the fund to target a level of assets in excess of the current expected cost of providing benefits. The Company will make additional contributions to an escrow account which will be held outside of the pension fund. The escrow account assets will be payable to the fund in agreed circumstances, for example in the event of the Company and Trustee agreeing a change to the current long term investment strategy.
The market value of the fund’s assets at the valuation date was £3,070m ($5,363m equivalent), representing 97% of the fund’s actuarially assessed liabilities as valued in accordance with the fund’s technical provisions. The shortfall will be funded over nine years through payments of about £62m per annum which include the regular contributions required to meet the benefits accruing of about £53m per annum. In addition to this, contributions of around £27m per annum will be payable to the escrow account which is outside of the pension fund.
Under the agreed funding principles, the key assumptions as at 31 March 2006 for contributions to both the fund and escrow account are as follows: Long-term UK price inflation set at 2.8% pa, salary increases at 4.1% pa, pension increases at 2.8% pa and investment returns at 6.8% pa (pre-retirement) and 5.1% pa (post-retirement).
Rest of Group
The IAS 19 positions as at 31 December 2007 are shown below for each of the other countries with large defined benefit plans. These plans account for 90% of the Group’s defined benefit obligations outside of the UK. In principle, these plans are funded in line with the financing principles and contributions paid as prescribed by the funding framework.
- The US defined benefits programme was actuarially revalued at 31 December 2007, when plan obligations were $1,693m and plan assets were $1,591m. This includes obligations in respect of the non-qualified plan which is largely unfunded.
- The Swedish defined benefits programme was actuarially revalued at 31 December 2007, when plan obligations were estimated to amount to $1,087m and plan assets were $752m.
- The German defined benefits programme was actuarially revalued at 31 December 2007, when plan obligations amounted to $226m and plan assets were $35m. The plan is largely unfunded but work is currently underway to put in place a funding strategy during 2008.
Post-retirement benefits other than pensions
In the US, and to a lesser extent in certain other countries, AstraZeneca’s employment practices include the provision of healthcare and life assurance benefits for retired employees. As at 31 December 2007, some 3,511 retired employees and covered dependants currently benefit from those provisions and some 13,860 current employees will be eligible on their retirement. AstraZeneca accrues for the present value of such retiree obligations over the working life of the employee. In practice these benefits will be funded with reference to the Financing Principles.
The cost of post-retirement benefits other than pensions for the Group in 2007 was $26m (2006 $12m, 2005 $12m). Plan assets were $274m and plan obligations were $355m at 31 December 2007. These benefit plans have been included in the disclosure of post-retirement benefits under IAS 19.
Financial assumptions
Qualified independent actuaries have updated the actuarial valuations of the major defined benefit schemes operated by the Group to 31 December 2007. The assumptions used by the actuaries are chosen from a range of possible actuarial assumptions which, due to the long-term nature of the scheme, may not necessarily be borne out in practice. These assumptions were as follows:
| 2007 | 2006 | |||
|---|---|---|---|---|
| UK | Rest of Group | UK | Rest of Group | |
| Inflation assumption | 3.3% | 2.3% | 3.0% | 2.2% |
| Rate of increase in salaries | 4.5% | 3.7% | 4.3% | 3.8% |
| Rate of increase in pensions in payment | 3.3% | 0.9% | 3.0% | 0.7% |
| Discount rate | 5.8% | 5.4% | 5.1% | 5.2% |
| Long term rate of return expected at 31 December | ||||
| Equities | 8.0% | 8.9% | 8.2% | 8.3% |
| Bonds | 5.6% | 5.0% | 5.1% | 6.1% |
| Others | 6.5% | 4.8% | 6.2% | 4.6% |
| Rate of increase in medical costs | 10.0% | 9.0% | 10.0% | 10.0% |
The expected return on assets is determined with reference to the expected long term level of dividends, interest and other returns derived from the plan assets, together with realised and unrealised gains or losses on the plan assets, less any costs of administering the plan, less any tax payable by the plan. The expected returns are based on long term market expectations and analysed on a regular basis to ensure any sustained movements in underlying markets are reflected.
Demographic assumptions
The mortality assumptions are based on country specific mortality tables. These are compared to actual AstraZeneca experience and adjusted where sufficient data is available. Additional allowance for future improvements in life expectancy is included for all major schemes where there is credible data to support this continuing trend.
The table below illustrates life expectancy assumptions at age 65 for male members retiring in 2007 and members expected to retire in 2027.
| Life expectancy assumption for a male member retiring at age 65 | ||||
|---|---|---|---|---|
| Country | 2007 | 2027 | 2006 | 2026 |
| UK | 23.7 | 25.7 | 20.6 | 22.0 |
| US | 19.6 | 21.1 | 19.6 | 21.0 |
| Sweden | 20.4 | 22.4 | 19.2 | 20.0 |
| Germany | 17.7 | 20.5 | 17.7 | 20.5 |
Sensitivity of medical cost assumptions
| Effect of change in medical cost assumption increase/(decrease) | ||||
|---|---|---|---|---|
| +1% | 2007 –1% |
+1% | 2006 –1% |
|
| Current service and interest cost of net periodic post-employment medical costs ($m) | 4 | (4) | 3 | (2) |
| Accumulated post-employment benefit obligation for medical costs ($m) | 30 | (19) | 26 | (24) |
Actuarial gains and losses
| 2007 | 2006 | 2005 | |
|---|---|---|---|
| UK | |||
| Present value of obligations ($m) | (7,644) | (7,352) | (6,309) |
| Fair value of plan assets ($m) | 6,310 | 6,078 | 5,314 |
| Deficit in the scheme ($m) | (1,334) | (1,274) | (995) |
| Experience adjustments on: | |||
| Scheme assets | |||
| Amount ($m) | (185) | (259) | 636 |
| Percentage of scheme assets | 2.9% | 4.3% | 12.0% |
| Scheme obligations | |||
| Amount ($m) | 114 | 71 | (539) |
| Percentage of scheme obligations | 1.5% | 1.0% | 8.5% |
| Rest of Group | |||
| Present value of obligations ($m) | (3,348) | (3,109) | (2,995) |
| Fair value of plan assets ($m) | 2,644 | 2,493 | 2,284 |
| Deficit in the scheme ($m) | (704) | (616) | (711) |
| Experience adjustments on: | |||
| Scheme assets | |||
| Amount ($m) | (24) | 55 | 63 |
| Percentage of scheme assets | 0.9% | 2.2% | 2.8% |
| Scheme obligations | |||
| Amount ($m) | (18) | 25 | (195) |
| Percentage of scheme obligations | 0.5% | 0.8% | 6.5% |
| Total | |||
| Present value of obligations ($m) | (10,992) | (10,461) | (9,304) |
| Fair value of plan assets ($m) | 8,954 | 8,571 | 7,598 |
| Deficit in the scheme ($m) | (2,038) | (1,890) | (1,706) |
| Experience adjustments on: | |||
| Scheme assets | |||
| Amount ($m) | (209) | (204) | 699 |
| Percentage of scheme assets | 2.3% | 2.4% | 9.2% |
| Scheme obligations | |||
| Amount ($m) | 96 | 96 | (734) |
| Percentage of scheme obligations | 0.9% | 0.9% | 7.9% |
The obligation arises from the following plans:
| 2007 | 2006 | |||
|---|---|---|---|---|
| UK $m |
Rest of Group $m |
UK $m |
Rest of Group $m |
|
| Funded | (7,616) | (2,911) | (7,321) | (2,650) |
| Unfunded | (28) | (437) | (31) | (459) |
| Total | (7,644) | (3,348) | (7,352) | (3,109) |
Income statement disclosures
The amounts that have been charged to the consolidated income statement and consolidated statement of recognised income and expense, in respect of defined benefit schemes 31 December 2007 are set out below:
| 2007 | 2006 | |||||
|---|---|---|---|---|---|---|
| UK $m |
Rest of Group $m |
Total $m |
UK $m |
Rest of Group $m |
Total $m |
|
| Operating profit | ||||||
| Current service cost | (187) | (113) | (300) | (153) | (139) | (292) |
| Past service cost | (38) | (6) | (44) | (18) | (10) | (28) |
| Finance expense | ||||||
| Expected return on post-retirement scheme assets | 402 | 171 | 573 | 364 | 154 | 518 |
| Interest on post-retirement scheme obligations | (379) | (160) | (539) | (330) | (145) | (475) |
| Net return | 23 | 11 | 34 | 34 | 9 | 43 |
| Charge before taxation | (202) | (108) | (310) | (137) | (140) | (277) |
| Consolidated statement of recognised income and expense | ||||||
| Difference between the actual return and the expected return on the post-retirement schemes’ assets | (185) | (24) | (209) | (259) | 55 | (204) |
| Experience (losses)/gains arising on the post-retirement schemes’ obligations | (359) | (62) | (421) | 55 | (9) | 46 |
| Changes in assumptions underlying the present value of the post-retirement schemes’ obligations | 473 | 44 | 517 | 16 | 34 | 50 |
| Actuarial (losses)/gains recognised | (71) | (42) | (113) | (188) | 80 | (108) |
Movement in post-retirement scheme obligations
| 2007 | 2006 | |||||
|---|---|---|---|---|---|---|
| UK $m |
Rest of Group $m |
Total $m |
UK $m |
Rest of Group $m |
Total $m |
|
| Present value of obligation in schemes at beginning of year | (7,352) | (3,109) | (10,461) | (6,309) | (2,995) | (9,304) |
| Current service cost | (187) | (113) | (300) | (153) | (139) | (292) |
| Past service cost | (38) | (6) | (44) | (18) | (10) | (28) |
| Participant contributions | (29) | (2) | (31) | (27) | (6) | (33) |
| Benefits paid | 311 | 99 | 410 | 296 | 97 | 393 |
| Other finance expense | (379) | (160) | (539) | (330) | (145) | (475) |
| Expenses | 9 | – | 9 | 9 | – | 9 |
| Actuarial gain/(loss) | 114 | (18) | 96 | 71 | 25 | 96 |
| Amendments | – | – | – | – | (48) | (48) |
| Settlements | – | – | – | – | 290 | 290 |
| Exchange | (93) | (39) | (132) | (891) | (178) | (1,069) |
| Present value of obligations in schemes at end of year | (7,644) | (3,348) | (10,992) | (7,352) | (3,109) | (10,461) |
Fair value of scheme assets
| 2007 | 2006 | |||||
|---|---|---|---|---|---|---|
| UK $m |
Rest of Group $m |
Total $m |
UK $m |
Rest of Group $m |
Total $m |
|
| At beginning of year | 6,078 | 2,493 | 8,571 | 5,314 | 2,284 | 7,598 |
| Expected return on plan assets | 402 | 171 | 573 | 364 | 154 | 518 |
| Expenses | (9) | – | (9) | (9) | – | (9) |
| Actuarial (loss)/gain | (185) | (24) | (209) | (259) | 55 | (204) |
| Exchange | 90 | 2 | 92 | 760 | 126 | 886 |
| Contributions | 245 | 101 | 346 | 204 | 157 | 361 |
| Benefits paid | (311) | (99) | (410) | (296) | (97) | (393) |
| Settlements | – | – | – | – | (186) | (186) |
| At end of year | 6,310 | 2,644 | 8,954 | 6,078 | 2,493 | 8,571 |
It is expected that the contributions to the scheme during the year ended 31 December 2008 will be $236m.
Included in total assets and obligations for the UK scheme is £166m in respect of members defined contribution sections. Costs in respect of defined contribution schemes during the year were $105m (2006 $62m, 2005 $71m).
Reserves
Included within the retained earnings reserve is the actuarial reserve. Movements on this reserve are as follows:
| 2007 $m |
2006 $m |
2005 $m |
|
|---|---|---|---|
| At 1 January | (401) | (328) | (303) |
| Actuarial losses | (113) | (108) | (35) |
| Deferred tax | 35 | 35 | 10 |
| At 31 December | (479) | (401) | (328) |
The cumulative amount of actuarial losses before deferred tax recognised in the statement of recognised income and expense is $635m (2006 $522m).
