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Notes to the consolidated financial statements
Year ended 31 July 2007
27. Retirement benefit obligations
(i) Description of schemes
United Kingdom The principal scheme operated for UK employees is the Wolseley Group Retirement Benefits Plan which provides benefits based on final pensionable salaries. The assets are held in separate trustee administered funds. The scheme’s retirement benefits are funded by a contribution from employees with the balance being paid by Group companies. The contribution rates paid by employees at 31 July 2007 are either 5 per cent or 8 per cent of earnings depending on the level of benefits that were accruing at that date. The Group and employee contribution rates are calculated on the Projected Unit Method and agreed with an independent consulting actuary.
Outside the United Kingdom
North America
The principal scheme operated for US employees are defined contribution schemes, which are established in accordance with US 401k rules. Companies contribute to both employee compensation deferral and profit sharing schemes. Contributions are charged to the income statement in the period in which they fall due. In the year to 31 July 2007 the cost of defined contribution schemes charged to the income statement was £24 million (2006: £23 million).
In addition, the Group operates three defined benefit schemes in the United States. In Canada a defined benefit scheme and a defined contribution scheme are operated. Two of the US schemes and the Canadian scheme are funded; two schemes are closed to new entrants. The majority of assets are held in trustee administered funds independent of the assets of the companies. The closed schemes now provide a minimum pension guarantee in conjunction with a defined contribution scheme. The remaining schemes provide benefits based on final pensionable salaries. The contribution rate is calculated on the Projected Unit (credit) Method as agreed with independent consulting actuaries.
Europe Both defined contribution and defined benefit schemes are operated. Liabilities arising under defined benefit schemes are calculated in accordance with actuarial advice. Contributions to defined contribution schemes are accounted for in the period in which they fall due. The cost of defined contribution schemes charged to the income statement was £15 million (2006: £5 million).
Post-retirement healthcare There are no material obligations to provide post-retirement healthcare benefits.
The Group expects to contribute £26 million to the UK defined benefit scheme in the year ending 31 July 2008 and £8 million to the non-UK defined benefit schemes.
(ii) Financial impact of plans
| As disclosed in the balance sheet | 2007 £m |
2006 £m |
|---|---|---|
| Current liability | (24) | (29) |
| Non-current liability | (87) | (160) |
| Total liability | (111) | (189) |
| Analysis of balance sheet liability | 2007 £m |
2007 £m |
2006 £m |
2006 £m |
|---|---|---|---|---|
| Fair value of plan assets: | 588 | 501 | ||
| UK | 123 | 112 | ||
| Non-UK | 711 | 613 | ||
| Present value of defined benefit obligation: | ||||
| UK | (630) | (619) | ||
| Non-UK | (188) | (182) | ||
| (818) | (801) | |||
| Net deficit | (107) | (188) | ||
| Unrecognised past service cost | – | 1 | ||
| Unrecognised surplus | (4) | (2) | ||
| Net liability recognised in balance sheet | (111) | (189) | ||
| Analysis of total expense recognised in income statement | 2007 £m |
2006 £m |
|---|---|---|
| Current service cost | 23 | 19 |
| Past service cost | 2 | 1 |
| Curtailment | (5) | (1) |
| Settlement | – | (5) |
| Charged to administrative expenses | 20 | 14 |
| Interest on pension liabilities | 41 | 36 |
| Expected return on scheme assets | (39) | (35) |
| Charged to finance costs | 2 | 1 |
| Total expense recognised in income statement | 22 | 15 |
| Analysis of amount recognised in the statement of recognised income and expense | 2007 £m |
2006 £m |
|---|---|---|
| Actuarial gain | 72 | 8 |
| Unrecognised past service cost | – | 1 |
| Unrecognised surplus | (2) | (2) |
| 70 | 7 | |
| Deferred tax thereon | (20) | (2) |
| Total amount recognised in the statement of recognised income and expense | 50 | 5 |
The cumulative amount of actuarial gains recognised in the statement of recognised income and expense was a gain of £73 million (2006: gain of £3 million).
The assets in the UK schemes and the expected rates of return were:
| 2007 UK |
2006 UK | |||
|---|---|---|---|---|
| Long-term rate of return expected at 31 July 2007 |
Value at 31 July 2007 £m |
Long-term rate of return expected at 31 July 2006 |
Value at 31 July 2006 £m |
|
| Equities | 7.9% | 410 | 7.4% | 344 |
| Bonds | 4.7% | 178 | 4.2% | 154 |
| Other | – | – | 5.0% | 3 |
| Total market value of assets | 7.0% | 588 | 6.5% | 501 |
The assets in the non-UK schemes and the expected rates of return were:
| 2007 Non-UK |
2006 Non-UK |
|||
|---|---|---|---|---|
| Long-term rate of return expected at 31 July 2007 |
Value at 31 July 2007 £m |
Long-term rate of return expected at 31 July 2006 |
Value at 31 July 2006 £m |
|
| Equities | 7.8% | 61 | 8.0% | 59 |
| Bonds | 5.5% | 48 | 5.1% | 39 |
| Property | 5.3% | 9 | 5.3% | 9 |
| Other | 3.0% | 5 | 3.0% | 5 |
| Total market value of assets | 6.6% | 123 | 6.6% | 112 |
| Fair value of plan assets | UK 2007 £m |
Non-UK 2007 £m |
Total 2007 £m |
UK 2006 £m |
Non-UK 2006 £m |
Total 2006 £m |
|---|---|---|---|---|---|---|
| At 1 August | 501 | 112 | 613 | 404 | 105 | 509 |
| Expected return on plan assets | 32 | 7 | 39 | 28 | 7 | 35 |
| Actuarial gain | 40 | 5 | 45 | 36 | – | 36 |
| Employer’s contributions | 27 | 18 | 45 | 24 | 6 | 30 |
| Participants’ contributions | 9 | 1 | 10 | 8 | 1 | 9 |
| Acquisition | – | 3 | 3 | 17 | – | 17 |
| Transfers | – | – | – | – | 1 | 1 |
| Benefits paid | (21) | (18) | (39) | (16) | (6) | (22) |
| Currency translation | – | (5) | (5) | – | (2) | (2) |
| At 31 July | 588 | 123 | 711 | 501 | 112 | 613 |
| Actual return on plan assets | 72 | 12 | 84 | 64 | 7 | 71 |
The expected long-term rates of return for equities have been determined by reference to government bond rates (minimum risk rates) in the countries in which the schemes are based. To reflect the additional risks associated with equities, expected long-term rates of return on equities include a risk premium. These risk premiums are long-term assumptions and were set after taking actuarial advice and considering the assumptions used by listed companies. The expected long-term rates of return for other assets are determined in a similar way, i.e. by using an appropriate risk premium relative to government bonds in the relevant country. For the principal UK scheme a premium of 3.0 per cent per year as at 31 July 2007 (2006: 3.0 per cent) was applied to the expected return from government bonds. For the principal overseas schemes in USA, Canada and Switzerland a similar approach was adopted with returns set by reference to long-term bond rates after taking actuarial advice.
The Group’s investment strategy for its funded post employment schemes is decided locally by the Group and, if relevant, the trustees of the schemes, and takes account of relevant statutory requirements. The Group’s objective for investment strategy is to achieve a target rate of return in excess of the increase in liabilities, while taking an acceptable amount of investment risk relative to liabilities.
This objective is implemented by using specific allocations to a variety of asset classes that are expected over the long-term to deliver the target rate of return. Most investment strategies have significant allocations to equities, with the intention being that this will result in the ongoing cost to the Group of the post employment schemes being lower over the long-term and be within acceptable boundaries of risk.
For the principal UK scheme the policy is to invest approximately 75 per cent of the assets in equities, and 25 per cent in other asset classes, principally bonds. The investment strategy is subject to regular review by the scheme trustees in consultation with the Group. For the overseas schemes the investment strategy involves the investment in defined levels of predominantly equities with the remainder of the assets being invested in cash and bonds.
| Present value of defined benefit obligation | UK 2007 £m |
Non-UK 2007 £m |
Total 2007 £m |
UK 2006 £m |
Non-UK 2006 £m |
Total 2006 £m |
|---|---|---|---|---|---|---|
| At 1 August | 619 | 182 | 801 | 527 | 180 | 707 |
| Current service cost | 18 | 5 | 23 | 14 | 5 | 19 |
| Past service cost | – | 2 | 2 | – | 1 | 1 |
| Curtailment and settlement | – | (5) | (5) | – | (6) | (6) |
| Interest cost | 32 | 9 | 41 | 26 | 10 | 36 |
| Participants’ contributions | 9 | 1 | 10 | 8 | 1 | 9 |
| Acquisitions | – | 19 | 19 | 28 | – | 28 |
| Benefits paid | (21) | (18) | (39) | ( 16) | (6) | (22) |
| Transfers | – | – | – | – | 5 | 5 |
| Actuarial (gain)/loss | (27) | – | (27) | 32 | (4) | 28 |
| Currency translation | – | (7) | (7) | – | (4) | (4) |
| At 31 July | 630 | 188 | 818 | 619 | 182 | 801 |
| Analysis of present value of defined benefit obligation | 2007 £m |
2006 £m |
|---|---|---|
| Amounts arising from wholly unfunded plans | 54 | 57 |
| Amounts arising from plans that are wholly or partly funded | 764 | 744 |
| 818 | 801 |
(iii) Valuation assumptions
The financial assumptions used to estimate defined benefit obligations are:
| 2007 | 2006 | |||
|---|---|---|---|---|
| UK | Non-UK | UK | Non-UK | |
| Discount rate | 5.7% | 5.2% | 5.1% | 5.1% |
| Inflation rate | 3.3% | 2.0% | 3.1% | 1.4% |
| Increase to deferred benefits during deferment | 3.3% | 2.4% | 3.1% | 2.2% |
| Increases to pensions in payment | 3.2% | 2.2% | 3.0% | 1.5% |
| Salary increases | 4.3% | 3.2% | 4.6% | 2.4% |
The life expectancy assumptions used to estimate defined benefit obligations at 31 July 2007 are:
| 2007 | 2006 | |||
|---|---|---|---|---|
| UK | Non-UK | UK | Non-UK | |
| Current pensioners (at age 65) – male | 20.1 | 20.6 | 19.0 | 18.3 |
| Current pensioners (at age 65) – female | 22.8 | 22.4 | 21.9 | 20.9 |
| Future pensioners (at age 65) – male | 20.8 | 19.3 | 19.8 | 17.9 |
| Future pensioners (at age 65) – female | 23.5 | 21.3 | 22.8 | 20.4 |
| History of experience gains and losses – UK schemes | 2007 £m |
2006 £m |
2005 £m |
|---|---|---|---|
| Fair value of plan assets | 588 | 501 | 404 |
| Present value of defined benefit obligation | (630) | (619) | (527) |
| Deficit in the plan | (42) | (118) | (123) |
| Experience adjustments to scheme assets | |||
| Amount | 40 | 36 | 46 |
| Percentage of scheme assets | 7% | 7% | 11% |
| Experience adjustments on scheme liabilities | |||
| Amount | (8) | – | – |
| Percentage of the present value of scheme liabilities | 1% | – | – |
| History of experience gains and losses – non-UK schemes | 2007 £m |
2006 £m |
2005 £m |
|---|---|---|---|
| Fair value of plan assets | 123 | 112 | 105 |
| Present value of defined benefit obligation | (188) | (182) | (180) |
| Deficit in the plan | (65) | (70) | (75) |
| Experience adjustments to scheme assets | |||
| Amount | (5) | – | 4 |
| Percentage of scheme assets | 4% | – | 4% |
| Experience adjustments on scheme liabilities | |||
| Amount | 3 | (2) | – |
| Percentage of the present value of scheme liabilities | 2% | 1% | – |