Employee Benefits

1. Employee Benefits Gavin Aspden Head of Innovation and Technical Development 8 September 2009

2. IAS 19 Short-term benefits Terminationbenefits Post-employment benefits Otherlong-term benefits Employee benefits

3. IAS 19 Short-term benefits Employee benefits • Include: • Wages, salaries and social insurance • Short-term compensated absences • Profit sharing/bonuses (payable within 12 months of year end) • Non-monetary benefits • Accounted for on an accrualsbasis Examples Accumulating compensated absences An employee is owed 5 days’ holiday at the year end, but is only allowed to carry forward 3 days - accrue 3 days’ holiday at the average daily rate of pay -only accrue for paid leave where absence has occurred that is unpaid at the year end Non-accumulating compensated absences An entity offers paid maternity leave and military service

4. IAS 19 Otherlong-term benefits Employee benefits • Include: • Long-term compensated absences • Long-service benefits • Profit sharing/bonuses (payable 12 months or more after year end) • Deferred compensation • Post-employment healthcare Accounted for similarly to post-employment benefits

5. IAS 19 Terminationbenefits Employee benefits Accrued for when the enterprise is demonstrably committed to either: • Terminate the employment of an employee or group of employees before the normal retirement date; or • Provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

6. IAS 19 Post-employment benefits IAS 19 covers 2 types of post-employment (pension) scheme Defined contribution schemes Definedbenefit schemes The entity pays agreed contributions into a plan and has no further liability Any other type of scheme. Typically a pension is guaranteed based on final salary Accounted for on anaccruals basis Accounted for using theprojected unit credit method

7. IAS 19 Pension scheme surplus or deficit on statement of financial position. Defined benefit schemes Defined Benefit Schemes Scheme Assets Scheme Liabilities Measure at fair value at reporting date Measure at present value of future obligations

8. IAS 19 FTSE 100 UK as a whole Defined benefit schemes £130 bn (double the level of 2007) May get even worse if there is a significant recession Source: Deloitte, December 2008 £194.5 bn (compared to a surplus of £11.7bn in 2007) Source: Pension Protection Fund, December 2008 See www.pensionprotectionfund.org.uk/index/ppf_7800_index.htm for the latest position

9. IAS 19 Increase in annual pension payments Service performed Defined benefit schemes Present value of pension obligation discount Current service cost Dr Current service cost (I/S) Cr PV obligation Now Year end Death Retirement Discount/compound using market yields on high quality corporate bonds compound Dr Interest cost (I/S) Cr PV obligation

10. IAS 19 Increase in annual pension payments Service performed Defined benefit schemes Fair value of plan assets Contributions are paid in as advised by an actuary Now Year end Death Retirement Dr FV plan assets Cr Company cash Any difference between actual and expected return is an actuarial gain/loss growth Dr FV plan assets Cr Expected return (I/S)

11. IAS 19 Defined benefit schemes Actuarial gains and losses Present value of defined benefit obligation £m Actuarial loss (balancing figure) 34 At 1 January 1,990 Interest cost 158 Current service cost 170 Benefits paid (212) At 31 December 2,140 Fair value of plan assets £m Actuarial loss (balancing figure) (423) At 1 January 1,827 Expected return 180 Contributions 128 Benefits paid (212) At 31 December 1,500

12. IAS 19 Defined benefit schemes • In December 2004, the IASB amended IAS 19 to allow the option of recognising actuarial gains and losses in full in the period in which they occur via the statement of comprehensive income. • This option is similar to the requirements of the UK standard, FRS 17 Retirement Benefits. • The corridor method also continues to be allowed under IAS 19.

13. IAS 19 Defined benefit schemes IAS 19 corridor method £m Fair value of plan assets 1,500 Present value of obligation (2,140) (640) Net unrecog. losses (34 + 423) 457* Pension liability (183) IAS 19 immediate recognition £m Fair value of plan assets 1,500 Present value of obligation (2,140) Pension liability(640) Reserves P&L reserves (34 + 423) 457* *Assuming no gains/losses brought forward Allowing these two alternatives will lead to inconsistencies between what is shown on the statement of financial position of different companies

14. IAS 19 Defined benefit schemes IAS 19 corridor method £m Income statement Interest cost 158 Current service cost 170 Expected return on plan assets (180) Actuarial losses ?? IAS 19 immediate recognition £m Income statement Interest cost 158 Current service cost 170 Expected return on plan assets (180) Comprehensive income Actuarial losses 457 Under the corridor method unrecognised actuarial gains & losses are deducted from the surplus or deficit on the statement of financial position until they exceed what is known as the ‘corridor limits’. If they exceed these levels the excess is then recognised in the income statement over the average remaining working life of plan members.

15. IAS 19 IAS 19 also allows faster recognition (including immediate recognition) Net actuarial gains or losses outside the ‘10% corridor’ Average remaining working lives of participating employees Defined benefit schemes Recognition of actuarial gains and losses IAS 19 Corridor method £m Fair value of plan assets 1,500 Present value of obligation (2,140) (640) Net unrecog. losses (34 + 423) 457* Pension liability (183) ‘10% Corridor’ limits (for following year): Higher of:£m 10% b/d obligation (10% x 2,140) 214 10% b/d assets (10% x 1,500) 150 ...Corridor limit 214 Losses outside corridor (457–214) 243 Recognition test: Debit to income statement in following year: 243m ÷ (say)13 years = 18.7m P&L expense next year

16. IAS 19 Example Brutus Co operates a defined benefit pension plan for its employees. The company elects to use the corridor method under IAS 19. 110 (10% x 110) 11Dr Income statement Present value of defined benefit obligation £’m b/d Interest cost Current service cost Benefits paid Actuarial gain (balancing figure) c/d Notes (1) The present value of the future benefit obligations on 1 January 2008 were £110 million. • The yield on high quality corporate bonds in the year to 31 December 2008 was 10%.

17. IAS 19 Example 13Dr Income statement (10) Cr Plan assets Present value of defined benefit obligation £’m b/d 110 Interest cost(10% x 110)11Dr Income statement Current service cost Benefits paid Actuarial gain (balancing figure) c/d Notes (3) The present cost of pensions earned this year was £13m. (4) Pensions paid to former employees during the year amountedto £10m.

18. IAS 19 Example (8) 116 Present value of defined benefit obligation £’m b/d 110 Interest cost (10% x 110) 11Dr Income statement Current service cost13Dr Income statement Benefits paid (10)Cr Plan assets Actuarial gain (balancing figure) c/d Unrecognisedactuarialgains/losses • Notes • Extracts from the most recent actuary's report show the following: •   31.12.2008 • Present value of pension plan obligation £116m

19. IAS 19 Example (12% x 150)18Cr Income statement 150 7Cr Company cash (10) Dr PV obligation (done) Fair value of plan assets £’m b/d Expected return Contributions received Benefits paid Actuarial loss (balancing figure) c/d Notes (7) The fair value of plan assets on 1 January 2008 was £150 million. (8) The expected return on investments is 12%. (9) The pension plan received contributions of £7m and paidpensions to former employees of £10m.

20. IAS 19 Unrecognisedactuarialgains/losses Example Fair value of plan assets £’m b/d 150 Expected return (12% x 150)18Cr Income statement Contributions received 7Cr Company cash Benefits paid (10) Dr PV obligation (done) Actuarial loss (balancing figure) c/d 140 Actuarial loss(25) Notes (10) Extracts from the most recent actuary's report show the following:   31.12.2008 Market value of plan assets £140m

21. IAS 19 Example Unrecognised/recognised actuarial gains and losses £’m Unrecognised gains b/d Gains b/d recognised in the income statement Actuarial gain on obligation during year Actuarial loss on assets during year Unrecognised gains c/d 63 • Notes • In the financial statements for the year ended 31 December 2007, there was an actuarial gain of £63 million although this had not been recognised. • The average remaining working life of plan members at 1 January 2008 is 7 years.

22. IAS 19 IAS 19 also allows faster recognition (including immediate recognition) Example (from before) 8 (from before) (25) 39 (Working)(7)Cr Income statement Unrecognised/recognised actuarial gains and losses £’m Unrecognised gains b/d 63 Gains b/d recognised in the income statement Actuarial gain on obligation during year Actuarial loss on assets during year Unrecognised gains c/d Working – The 10% Corridor Corridor limits, greater of: £’m 10% obligation b/d(10% x £110m) 11 10% plan assets b/d (10% x £150m) 15 Therefore, corridor limit 15 Gains b/d recognised in the income statement: (£63m – £15m)/ 7 years7

23. IAS 19 Example - disclosures INCOME STATEMENT Income statement expense £’m Current service cost 13 Interest cost 11 Expected return on plan assets (18) Net actuarial (gains)/losses recognised(7) (1) IAS 19 is flexible about exactly where in the income statement each of the above is recognised, but the line item in which each is recorded must be disclosed.

24. IAS 19 Example - disclosures STATEMENT OF FINANCIAL POSITION £m Fair value of plan assets 140 Present value of defined benefit obligation (116) 24 Unrecognised actuarial gains(39) Net pension liability(15)

25. IAS 19 Example - disclosures Opening net liability (110 – 150 + 63)23 Expense recognised in the income statement (1) Contributions paid(7) Closing net liability 15 MOVEMENT IN NET PENSION LIABILITY £’m

26. Employee Benefits Gavin Aspden Head of Innovation and Technical Development 8 September 2009