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Notes to the financial statements

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 2009 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 (net of amounts capitalised) was $172 million (2008: $134 million) and for defined contribution medical schemes (net of amounts capitalised) was $18 million (2008: $9 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 2009.

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

  2009   2008
US$ million Southern Africa The
Americas
Europe Total   Southern Africa The
Americas
Europe Total
Assets(1)                  
Defined benefit pension plans in surplus 54 - - 54   32 - - 32
(1)
Amounts are included in 'Other non-current assets'.
  2009   2008
US$ million Southern Africa The
Americas
Europe Total   Southern Africa The
Americas
Europe Total
Liabilities                  
Defined benefit pension plans in deficit - (173) (231) (404)   - (132) (45) (177)
Post retirement medical plans in deficit (271) (31) - (302)   (204) (20) - (224)
  (271) (204) (231) (706)   (204) (152) (45) (401)
US$ million 2009 2008 2007 2006 2005
Defined benefit pension plans          
Present value of liabilities (2,975) (2,157) (3,095) (4,256) (3,985)
Fair value of plan assets 2,731 2,073 3,148 4,160 3,539
Net (deficit)/surplus (244) (84) 53 (96) (446)
Surplus restriction (106) (61) (136) (163) (107)
Net deficit after surplus restriction (350) (145) (83) (259) (553)

         
Actuarial gain/(loss) on plan assets(1) 184 (392) 39 308 438
Actuarial (loss)/gain on plan liabilities(2) (361) 208 (48) (156) (435)

         
Post retirement medical plans          
Present value of liabilities (322) (241) (329) (422) (650)
Fair value of plan assets 20 17 20 16 22
Net deficit (302) (224) (309) (406) (628)

         
Actuarial gain on plan assets(3) - 1 1 - -
Actuarial (loss)/gain on plan liabilities(4) (10) 16(5) (29) 15 (67)
(1)
Net experience gains on pension plan assets were $184 million (2008: loss of $392 million; 2007: gains of $32 million; 2006: gains of $314 million).
(2)
Net experience losses on pension plan liabilities were $17 million (2008: $29 million; 2007: $112 million; 2006: $113 million).
(3)
Net experience gains on medical plan assets were nil (2008: $1 million; 2007: losses of $1 million; 2006: losses of $1 million).
(4)
Net experience losses on medical plan liabilities were $3 million (2008: $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 comprehensive income are $509 million (2008: $292 million; 2007: $163 million; 2006: $126 million; 2005: $228 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 97% (2008: 101%) 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 was a gain of $340 million (2008: loss of $178 million).

Income statement

The amounts recognised in the income statement are as follows:

  2009   2008
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 32 4 36   43 5 48
Past service costs - - -   1 - 1
Total within operating costs 32 4 36   44 5 49
Analysis of the amount charged to net finance costs              
Expected return on plan assets(1) (156) (1) (157)   (214) (1) (215)
Interest costs on plan liabilities(2) 156 18 174   180 21 201
Net charge/(credit) to net finance costs - 17 17   (34) 20 (14)
Total charge to the income statement 32 21 53   10 25 35
(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 Employee Benefits are detailed below (shown as weighted averages):

  2009   2008
% Southern Africa The
Americas
Europe   Southern Africa The
Americas
Europe
Defined benefit pension plans            
Average discount rate for plan liabilities 9.0 8.5 5.7   7.3 8.6 6.0
Average rate of inflation 5.8 3.7 3.7   4.0 3.7 2.7
Average rate of increase in salaries 7.0 6.1 3.7   5.3 5.4 2.7
Average rate of increase of pensions in payment 5.8 3.1 3.7   4.0 3.2 2.8
Average long term rate of return on plan assets(1) 9.6 10.5 6.6   7.6 11.3 5.9
Post retirement medical plans              
Average discount rate for plan liabilities 9.0 6.6 n/a   7.3 7.1 n/a
Average rate of inflation 5.8 1.1 n/a   4.0 0.5 n/a
Expected average increase in healthcare costs 7.2 4.1 n/a   5.4 3.8 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-out performance 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 (2008: the PA90 tables) are used. The main schemes in Europe use the SAPS and PXA00 tables (2008: PXA00 tables). The main schemes in the Americas use the RV2004, AT2000 and UP94 tables (2008: RV2004, AT83 and UP24 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 2009 2008   2009 2008
Southern Africa 20.5 20.5   25.4 25.5
The Americas 23.2 22.4   26.9 26.5
Europe 27.3 25.7   29.9 28.1

The market value of the pension assets in defined benefit pension plans and long term expected rate of return as at 31 December 2009 and 31 December 2008 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 2009                    
Equity 11.7 332   9.5 75   8.1 774   1,181
Bonds 8.5 558   10.9 196   5.1 687   1,441
Other 7.0 44   9.4 10   4.0 55   109
Fair value of pension plan assets   934     281     1,516   2,731
Present value of unfunded obligations   -     (146)     (5)   (151)
Present value of funded obligations   (791)     (308)     (1,725)   (2,824)
Present value of pension plan liabilities   (791)     (454)     (1,730)   (2,975)
Net surplus/(deficit) in pension plans   143     (173)     (214)   (244)
Surplus restriction related to pension plans   (89)     -     (17)(1)   (106)
Recognised pension plan assets/(liabilities)   54     (173)     (231)   (350)
Amounts in the balance sheet                    
Pension assets   54     -     -   54
Pension liabilities   -     (173)     (231)   (404)
    54     (173)     (231)   (350)
                     
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)
(1)
Relates to an additional liability required in accordance with IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.

Movement analysis

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

  2009   2008
US$ million Pension
plans
Post
retirement
medical
plans
Total plans   Pension
plans
Post
retirement
medical
plans
Total plans
At 1 January (2,157) (241) (2,398)   (3,095) (329) (3,424)
Current service costs (32) (4) (36)   (43) (5) (48)
Past service costs and effects of settlements and curtailments - - -   (1) - (1)
Interest costs (156) (18) (174)   (180) (21) (201)
Actuarial (losses)/gains (361) (10) (371)   208 16 224
Benefits paid 135 16 151   145 16 161
Contributions paid by other members (7) (3) (10)   (9) (3) (12)
Transfer to liabilities directly associated with assets held for sale (1) - (1)   - - -
Currency movements (396) (62) (458)   818 85 903
At 31 December (2,975) (322) (3,297)   (2,157) (241) (2,398)

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

  2009   2008
US$ million Pension
plans
Post
retirement
medical
plans
Total plans   Pension
plans
Post
retirement
medical
plans
Total plans
At 1 January 2,073 17 2,090   3,148 20 3,168
Expected return 156 1 157   214 1 215
Actuarial gains/(losses) 184 - 184   (392) 1 (391)
Contributions paid by employer 62 13 75   50 11 61
Contributions paid by other members 7 3 10   9 5 14
Benefits paid (135) (16) (151)   (145) (16) (161)
Currency movements 384 2 386   (811) (5) (816)
At 31 December 2,731 20 2,751   2,073 17 2,090

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 2009 2008   2009 2008
Effect on the sum of service costs and interest costs 4 3   (3) (3)
Effect on defined benefit obligations 36 28   (30) (26)

The Group expects to contribute approximately $58 million to its defined benefit pension plans and $30 million to its post retirement medical plans in 2010.

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Annual Report 2009