31. Employee benefits

31.1 Accounting policy

The net surplus or net liability recognised in the Group balance sheet for the Group's defined benefit plans is the present value of the defined benefit obligation at the balance sheet date as adjusted for unrecognised past service costs, less the fair value of the plan assets. The defined benefit obligation is calculated by independent actuaries using the projected unit credit method and by discounting the estimated future cash flows using interest rates on high quality corporate bonds that have terms to maturity approximating the terms of the related pension liability. Any asset recognised in respect of a surplus arising from this calculation is limited to the sum of unrecognised past service costs plus the present value of available refunds and reductions in future contributions to the plan.

The expense for the Group's defined benefit plans is recognised in the Group income statement as shown in note 31.7. Actuarial gains and losses arising on the assets and liabilities of the plans are reported within the Group statement of comprehensive income; and gains and losses arising on settlements and curtailments are recognised in the Group income statement in the same line as the item that gave rise to the settlement or curtailment or, if material, separately reported as a component of profit from operations.

31.2 Group post-retirement plans

The Group operates a number of pension plans around the world, both of the defined benefit and defined contribution type, and accounts for them in accordance with IAS19.

The Group's principal defined benefit pension plans are in the UK and the US, the benefits of which are based upon the final pensionable salaries of plan members. The assets of these plans are held separately from the Group in trustee-administered funds. The trustees are required to act in the best interests of the plans' beneficiaries. The Group also has defined benefits pension plans in other territories but, with the exception of those in Germany, these are not individually material in relation to the Group as a whole.

(a) Defined benefit pension plans — UK

The Group's main defined benefit pension plan in the UK ("the UK Plan") is closed to new members and to future benefit accrual. Following the demerger of Cookson Group plc, the UK Plan remains with Vesuvius and the Alent employees who participated in the UK Plan ceased to participate with effect from the demerger. In order to ensure there was a "clean break" for Alent companies, the pension liabilities held in respect of their employees in the UK Plan were discharged in full by apportioning the pension liabilities of the Alent participating employers to Vesuvius, combined with a mitigation payment into the UK Plan to compensate for the loss of support from the Alent participating employers, which reduced the financial covenant of the employers supporting the UK Plan. The mitigation payment agreed with the UK Plan Trustee was equal to approximately 25% of the UK Plan's Section 75 deficit calculated as at completion of the demerger and amounted to £38.0m, of which £34.0m was paid in December 2012 and £4.0m in January 2013.

A full actuarial valuation of the UK Plan is carried out every three years by an independent actuary for the UK Plan Trustee and the last full valuation was carried out as at 31 December 2009. At that date, the market value of plan assets was £401.9m and this represented a funding level of 88% of the accrued plan benefits at the time of £456.4m. Calculated on a "buy-out" basis (using an estimation of the cost of buying out the UK Plan benefits with an insurance company), the liabilities at that date were £589.0m, representing a funding level of 68%. Under the rules of the UK Plan, the Trustee has the power to set the funding contributions, having consulted with the Company. The Company and Trustee have agreed a schedule of contributions under which the Company is making "top-up" payments of £7.0m per annum until February 2016, targeted at eliminating the 2009 full actuarial valuation deficit in the UK Plan by that date. The level of "top-up" payments will be reviewed based on the UK Plan's next triennial valuation as at 31 December 2012, which should be available in mid-2013. The Directors expect that the valuation will show further improvement to the funding position of the UK Plan. As at 31 December 2012, the funding ratio calculated on an IAS19 basis was 105%, (i.e. a funding surplus).

During 2011, the deferred members of the UK Plan were offered the opportunity to transfer their benefits out of the UK Plan to another arrangement of their choice at an enhanced value. The offer of enhanced transfer values closed during the first half of 2012. In total some 550 members took up the offer and this has eliminated the inflation, interest rate, investment and longevity risk for Vesuvius in respect of the £50m of liabilities transferred out of the UK Plan (representing around 10% of total UK Plan liabilities). The impact on the IAS19 valuation of UK pension liabilities of the transfers agreed up to 31 December 2011, were reflected in the results for 2011 as an exceptional charge of £5.9m. The impact of transfers agreed after 1 January 2012 was a charge of £0.5m and, not being material, has been reported in 2012 in arriving at trading profit.

On 19 July 2012, the UK Plan Trustee announced that it had entered into a pension insurance buy-in agreement with Pension Insurance Corporation ("PIC") to insure approximately 60% of the UK Plan's total liabilities. Under this arrangement, the UK Plan Trustee paid an insurance premium of £318.8m to PIC, wholly from the assets of the UK Plan, which will secure a stream of income exactly matching future ongoing pension payments. The insured liabilities cover the UK Plan's pensioner members as at 30 June 2012, who comprise some 3,350 members out of a total UK Plan membership of 5,900. This arrangement eliminates the inflation, interest rate, investment and longevity risk for Vesuvius in respect of these liabilities.

For plan funding purposes, the UK Plan's pensioner liabilities are valued using more prudent assumptions than those required under IAS19 for accounting purposes. On a funding basis — sometimes called the 'economic' or 'ongoing' basis — the insurance premium paid to PIC represented some £10m less than the amount reserved in the UK Plan against these liabilities. This means that the funding level of the UK Plan — the measure which determines the level of additional contributions required to be made by Vesuvius — improved by some £10m as a result of the buy-in. On an accounting basis, the pensioner liabilities are valued using a higher discount rate (as required by IAS19), which produces a much lower valuation of those liabilities. As a consequence, the accounting valuation of the insurance contract compared with the actual premium paid to PIC results in a reduction in the asset portfolio valuation of some £50m. IAS19 requires this loss to be reported in the Group statement of comprehensive income, not the income statement. Post buy-in, the UK Plan now carries an asset in the form of the insurance contract, which is valued (in both the funding and IAS19 valuations) at an amount which matches exactly that of the liabilities which it covers — thereby removing any funding or balance sheet volatility relating to this part of the UK Plan's liabilities. Therefore, the only risks remaining in the UK Plan relate to deferred members. The Group continues to fund the UK Plan on the basis of the funding valuation.

In December 2012, an extension to the PIC buy-in agreement was signed, under which the UK Plan Trustee agrees to transfer to PIC all new pensioner liabilities arising from July 2012 to December 2015 for a premium payment by the UK Plan which is calculated to be consistent with the pricing terms of the original buy-in agreement, but reflecting changes in market conditions and differences in the duration of the liabilities transferred. The agreement covers up to £30m of liabilities, with the future premium payments to be met from the existing assets of the UK Plan.

(b) Defined benefit pension plans — US

The Group has a number of defined benefit pension plans in the US, providing retirement benefits based on final salary or a fixed benefit. The Group's principal US defined benefit pension plans are closed to new members and also to future benefit accrual for existing members. Actuarial valuations of the US defined benefit pension plans are carried out every year and the last full valuation was carried out as at 31 December 2011. At that date the market value of the plan assets was £81.3m, representing a funding level of 71% of funded accrued plan benefits at that date (using the projected unit method of valuation) of £114.5m. Funding levels for the Group's US defined benefit pension plans are normally based upon annual valuations carried out by independent qualified actuaries and are governed by US government regulations.

Following an offer to Vesuvius' US deferred members which closed in August 2012, 1,070 members (67%) accepted a lump sum payment in full and final settlement of the Group's pension liability to them. This has therefore eliminated the inflation, interest rate, investment and longevity risk for Vesuvius in respect of the $36m (£22m) of liabilities involved, for a payment out of the pension plan assets of $28m (£17m).

(c) Defined benefit pension plans — Germany

The Group has a number of defined benefit pension arrangements in Germany which are unfunded, as is common practice in that country.

(d) Defined contribution pension plans

The total expense for the Group's defined contribution plans in the Group income statement amounted to £17.0m (2011: £17.7m) and represents the contributions payable for the year by the Group to the plans.

31.3 Post-retirement liability valuation

The assumptions used in calculating the costs and obligations of the Group's defined benefit pension plans, as detailed below, are set by the Directors after consultation with independent professionally qualified actuaries.

(a) Mortality assumptions

The mortality assumptions used in the actuarial valuations of the Group's UK, US and German defined benefit pension liabilities are summarised in the table below and have been selected to reflect the characteristics and experience of the membership of those plans.

For the UK Plan, the assumptions used have been derived from the Self-Administered Pension Schemes ("SAPS") All table, with future longevity improvements in line with the "core" mortality improvement tables published in 2011 by the Continuous Mortality Investigation ("CMI"), with a long-term rate of improvement of 1.25% per annum. The latter CMI tables are expected to replace the use of the "Cohort" improvement factors widely used since 2002. For the Group's US plans, the assumptions used have been based on the standard RP2000CH mortality tables, projected 64 years for non-pensioners and 33 years for pensioners using projection scale AA. The Group's major plans in Germany have been valued using the Heubeck-Richttafein 2005G mortality tables.

20122011
Life expectancy of pension plan membersUK
years
US
years
Germany
years
UK
years
US
years
Germany
years
Age to which current pensioners are expected to live— Men87.584.684.687.384.684.4
— Women89.786.988.789.686.988.5
Age to which future pensioners are expected to live— Men89.286.687.389.186.687.1
— Women91.689.191.291.589.191.1

(b) Other principal actuarial valuation assumptions

20122011
UK
% p.a.
US
% p.a.
Germany
% p.a.
UK
% p.a.
US
% p.a.
Germany
% p.a.
Discount rate4.353.753.304.804.254.50
Price inflation— using RPI for UK3.202.502.003.302.502.00
— using CPI for UK2.50n/an/a2.40n/an/a
Rate of increase in pensionable salariesn/an/a2.75n/an/a2.75
Rate of increase to pensions in payment3.00n/a1.903.10n/a1.90
Expected asset return— equities7.757.50n/a7.757.80n/a
— bonds/swaps3.003.75n/a3.404.00n/a
— insured annuities4.05n/an/an/an/an/a

The discount rate used to determine the liabilities of the UK Plan for IAS19 accounting purposes is required to be determined by reference to market yields on high quality corporate bonds. The UK discount rate in the above table is based on the Aon Hewitt AA-rated corporate bond yield in conjunction with the most recent projected cash flow data relating to the UK Plan liabilities; the US discount rate is based on the Citigroup pension discount curve; and the German discount rate is based on the yield on the iBoxx over 10 year euro corporates AA index.

The assumptions for price inflation are set by reference to the difference between yields on longer-term conventional government bonds and index-linked bonds, except for CPI, for which no appropriate bonds exist, which is assumed to be 0.7pts lower than RPI-based inflation.

The expected asset return is the Company's expectation at the valuation date of long-term asset returns: based on the "risk-free" yield available by following a buy-and-hold investment strategy in government bonds; with returns for other bonds and equities estimated based on observed historic long-term strategic risk premia. These assumptions do not take account of the relative valuation of markets or of market momentum.

(c) Sensitivity analysis of the impact of changes in key IAS19 actuarial assumptions

The following table analyses, for the Group's main UK, US and German pension plans, the theoretical estimated impact on plan liabilities resulting from changes to key actuarial assumptions used for IAS19 valuation purposes, whilst holding all other assumptions constant.

As stated above, during 2012 the UK Plan entered into a pension insurance buy-in agreement which eliminates the inflation, interest rate, investment and longevity risk in respect of the pensioner liabilities covered by the agreement. Therefore, for the liabilities covered by this buy-in agreement, which represent some 60% of the total liabilities of the UK Plan, any changes in the valuation assumptions which impact the value of those liabilities, also impacts on the associated annuity assets in an equal and opposite way, thereby fully mitigating the valuation risk. This is also reflected in the following table.

Impact on plan liabilities
AssumptionChange in assumptionUKUS Germany
Discount rateIncrease/decrease by 0.1%
— impact on plan liabilitiesDecrease/increase by 1.5%Decrease/increase by 1.3%Decrease/increase by 1.7%
— impact on plan assetsDecrease/increase by 1.1%n/an/a
Price inflationIncrease/decrease by 0.1%
— impact on plan liabilitiesIncrease/decrease by 1.2%n/aIncrease/decrease by 0.7%
— impact on plan assetsIncrease/decrease by 0.9%n/an/a
MortalityIncrease by one year
— impact on plan liabilitiesIncrease/decrease by 4.0%Increase by 3.8%Increase by 3.1%
— impact on plan assetsIncrease/decrease by 4.9%n/an/a

31.4 Defined benefit obligation

The liabilities of the Group's defined benefit pension and other post-retirement plans for IAS19 accounting purposes are measured by discounting the best estimate of the future cash flows to be paid out by the plans using the projected unit method, in which the calculation of plan liabilities makes allowance, where appropriate, for projected increases in benefit-related earnings.

The average duration of the obligations to which the liabilities of the Group's principal pension plans relate is 17 years for the UK and Germany and 13 years for the US.

Defined benefit pension plansOther post-
retirement
benefit
plans
£m
Total
£m
UK
£m
US
£m
Germany
£m
ROW
£m
Total
£m
Present value as at 1 January 2012422.7188.935.342.6689.58.9698.4
Exchange differences(8.1)(1.0)(1.7)(10.8)(0.3)(11.1)
Current service cost0.30.40.82.23.70.64.3
Interest cost19.77.41.51.530.10.330.4
Transferred to payables(2.4)(2.4)(2.4)
Transferred to held for sale(4.5)(4.5)(4.5)
Business disposals(55.9)(4.3)(3.7)(63.9)(1.6)(65.5)
Settlements(15.7)(31.4)(3.9)(51.0)(51.0)
Actuarial losses41.812.76.75.867.00.667.6
Contributions from members0.10.10.1
Benefits paid(20.1)(9.4)(1.5)(2.6)(33.6)(1.2)(34.8)
Present value as at 31 December 2012446.3104.633.040.3624.27.3631.5
Defined benefit pension plansOther post-
retirement
benefit
plans
£m
Total
£m
UK
£m
US
£m
Germany
£m
ROW
£m
Total
£m
Present value as at 1 January 2011439.7167.335.052.5694.59.7704.2
Exchange differences1.6(1.0)(0.8)(0.2)(0.9)(1.1)
Current service cost0.30.83.04.10.64.7
Interest cost22.18.21.62.134.00.334.3
Settlements(56.4)(14.5)(70.9)(70.9)
Actuarial losses34.319.60.52.256.60.356.9
Contributions from members0.10.10.1
Benefits paid(17.0)(8.1)(1.6)(2.0)(28.7)(1.1)(29.8)
Present value as at 31 December 2011422.7188.935.342.6689.58.9698.4

31.5 Fair value of plan assets

20122011
UK
£m
US
£m
ROW
£m
Total
£m
UK
£m
US
£m
ROW
£m
Total
£m
As at 1 January487.5124.128.1639.7443.2109.437.8590.4
Exchange differences(5.4)(1.4)(6.8)1.00.21.2
Expected return21.66.51.029.123.76.71.632.0
Business disposals(39.1)(2.0)(41.1)
Settlements(16.2)(24.2)(4.3)(44.7)(43.2)(12.5)(55.7)
Actuarial (losses)/gains(45.5)4.60.9(40.0)73.65.0(0.5)78.1
Contributions from:
— employer41.011.34.256.57.09.23.319.5
— members0.10.10.10.1
Benefits paid(20.0)(8.4)(1.7)(30.1)(16.8)(7.2)(1.9)(25.9)
As at 31 December468.469.424.9562.7487.5124.128.1639.7

The Group's pension plans in Germany are unfunded, as is common practice in that country, and accordingly there are no assets associated with these plans. In addition to the assets reported above, £3.7m (2011: £4.1m) of assets were held as at 31 December 2012 to fund certain non-qualified US pension plan obligations. These assets are not included within pension plan assets as they are available to satisfy creditors in the event of the winding-up of the Group company in which they are held and are reported as investments in the Group balance sheet. The actual return on all Group pension plan assets was a loss of £10.9m (2011: £110.1m).

31.6 Balance sheet recognition

The amount recognised in the Group balance sheet in respect of the Group's defined benefit pension plans and other post-retirement benefit plans is analysed in the following tables, which all relate to continuing operations.

Defined benefit pension plansOther post-
retirement
benefit
plans
£m
2012
Total
£m
UK
£m
US
£m
Germany
£m
ROW
£m
Total
£m
Equities85.626.01.8113.4113.4
Bonds42.01.543.543.5
Risk-mitigation derivatives(13.0)(13.0)(13.0)
Insurance contracts273.318.5291.8291.8
Other assets122.51.43.1127.0127.0
Fair value of plan assets468.469.424.9562.7562.7
Present value of funded obligations(445.1)(93.7)(38.3)(577.1)(577.1)
23.3(24.3)(13.4)(14.4)(14.4)
Present value of unfunded obligations(1.2)(10.9)(33.0)(2.0)(47.1)(7.3)(54.4)
Total net surpluses/(liabilities)22.1(35.2)(33.0)(15.4)(61.5)(7.3)(68.8)
Recognised in the Group balance sheet as:
Net surpluses23.323.323.3
Net liabilities(1.2)(35.2)(33.0)(15.4)(84.8)(7.3)(92.1)
Total net surpluses/(liabilities)22.1(35.2)(33.0)(15.4)(61.5)(7.3)(68.8)

 

Defined benefit pension plansOther post-
retirement
benefit
plans
£m
2011
Total
£m
UK
£m
US
£m
Germany
£m
ROW
£m
Total
£m
Equities84.623.03.3110.9110.9
Bonds237.180.69.6327.3327.3
Risk-mitigation derivatives78.478.478.4
Other assets87.420.515.2123.1123.1
Fair value of plan assets487.5124.128.1639.7639.7
Present value of funded obligations(421.9)(173.4)(40.1)(635.4)(635.4)
65.6(49.3)(12.0)4.34.3
Present value of unfunded obligations(0.8)(15.5)(35.3)(2.5)(54.1)(8.9)(63.0)
Total net surpluses/(liabilities)64.8(64.8)(35.3)(14.5)(49.8)(8.9)(58.7)
Recognised in the Group balance sheet as:
Net surpluses65.665.665.6
Net liabilities(0.8)(64.8)(35.3)(14.5)(115.4)(8.9)(124.3)
Total net surpluses/(liabilities)64.8(64.8)(35.3)(14.5)(49.8)(8.9)(58.7)

(a) UK Plan asset allocation

As at 31 December 2012 of the UK Plan's total assets, excluding risk-mitigation derivatives, 57% were represented by the bulk annuity insurance contracts covering the Plan's pension liabilities; 18% were allocated to equities; 8% to infrastructure investments; 8% to cash; and 9% to other assets. In addition, the UK Plan holds a liability driven investment portfolio of financial derivative contracts which reduces the risk that the UK Plan's assets would fall materially relative to the value of its economic liabilities.

(b) Defined benefit contributions in 2013

In 2013, the Group is expected to make aggregate contributions into its defined benefit pension and other post-retirement benefits plans of around £18m.

31.7 Income statement recognition

The expense recognised in the Group income statement in respect of the Group's defined benefit retirement plans and other post-retirement benefit plans is shown below.

20122011
Defined
benefit
pension
plans
£m
Other
post-
retirement
benefit
plans
£m
Total
£m
Defined
benefit
pension
plans
£m
Other
post-
retirement
benefit
plans
£m
Total
£m
Current service cost3.80.64.44.10.64.7
Interest on obligation30.10.330.434.00.334.3
Expected return on plan assets(29.1)(29.1)(32.0)(32.0)
Gains relating to employee benefits plans(6.3)(6.3)(15.2)(15.2)
Total net (credit)/charge(1.5)0.9(0.6)(9.1)0.9(8.2)

The total net credit of £0.6m (2011: £8.2m) recognised in the Group income statement in respect of the Group's defined benefit pension plans and other post-retirement benefits plans is recognised in the following lines:

2012
£m
2011
£m
In arriving at trading profit
— within other manufacturing costs
1.81.8
— within administration, selling and distribution costs1.42.3
In arriving at profit from operations
— restructuring charges
0.1
— gains relating to employee benefits plans(13.2)
In arriving at profit before tax
— within ordinary finance costs
27.530.7
— within finance income(26.9)(29.0)
Continuing operations — charge/(credit)3.9(7.4)
Discontinued operations(4.5)(0.8)
Total net credit(0.6)(8.2)

The net gain relating to employee benefits plans of £13.2m in 2011 represents: (i) a £21.5m reduction in liabilities of the UK Plan arising from the use of the Consumer Price Index instead of the Retail Prices Index to value deferred pension benefits and (ii) the impact in 2011 on the UK Plan of £8.3m relating to the enhanced value exercise.

Administration costs charged within ordinary finance costs in 2012 were £1.6m. In accordance with IAS19 (Revised), which takes effect from 1 January 2013, these costs would have instead been charged within trading profit and the net finance charge relating to the Group's post-retirement benefit plans would have been increased by £1.2m, resulting in an overall reduction of the net finance charge by £0.4m. The implementation of the revised standard is expected to increase the net finance charge for pensions in 2013 by some £2m.

31.8 Historical information

The history of the fair value of the Group's plan assets, the present value of defined benefit obligations, the net deficit in the plans and the experience adjustments on plan assets and liabilities are shown below.

Defined benefit plans
2012
£m
2011
£m
2010
£m
2009
£m
2008
£m
Fair value of plan assets562.7639.7590.4531.9526.4
Present value of defined benefit obligations(631.5)(698.4)(704.2)(669.6)(621.7)
Net plan deficit(68.8)(58.7)(113.8)(137.7)(95.3)
Experience (losses)/gains on plan liabilities(16.6)(7.4)9.13.86.8
Experience (losses)/gains on plan assets(40.0)78.130.83.9(15.6)

The cumulative amount of actuarial losses recognised in the Group statement of comprehensive income is £173.5m (2011: £64.7m).