Notes to the consolidated accounts
20 Pensions and similar obligations
Description of plans
In many countries the Group operates defined benefit pension plans based on employee pensionable remuneration and length of service. The majority of these plans are externally funded. The Group also provides other post-employment benefits, mainly post-employment healthcare plans in the United States. These plans are predominantly unfunded. The Group also operates a number of defined contribution plans, the assets of which are held in external funds.
The majority of the Group's externally funded plans are established as trusts, foundations or similar entities. The operation of these entities is governed by local regulations and practice in each country, as is the nature of the relationship between the Group and the trustees (or equivalent) and their composition.
Exposure to risks
Pension assets and liabilities (pre-tax) of €17 253 million and €18 342 million respectively are held on the Group's balance sheet as at 31 December 2007. Movements in equity markets, interest rates, inflation and life expectancy could materially affect the level of surpluses and deficits in these schemes, and could prompt the need for the Group to make additional pension contributions, or to reduce pension contributions, in the future. The key assumptions used to value our pension liabilities are set out below.
Investment strategy
The Group's investment strategy in respect of its funded pension plans is implemented within the framework of the various statutory requirements of the territories where the plans are based. The Group has developed policy guidelines for the allocation of assets to different classes with the objective of controlling risk and maintaining the right balance between risk and long-term returns in order to limit the cost to the Group of the benefits provided. To achieve this, investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. The plans invest the largest proportion of the assets in equities which the Group believes offer the best returns over the long term commensurate with an acceptable level of risk. The pension funds also have a proportion of assets invested in property, bonds, hedge funds and cash. The majority of assets are managed by a number of external fund managers with a small proportion managed in-house. Unilever has a pooled investment vehicle (Univest) which it believes offers its pension plans around the world a simplified externally managed investment vehicle to implement their strategic asset allocation models currently for equities and hedge funds. The aim is to provide a high quality, well diversified risk-controlled vehicle.
Assumptions
With the objective of presenting the assets and liabilities of the pensions and other post-employment benefit plans at their fair value on the balance sheet, assumptions under IAS 19 are set by reference to market conditions at the valuation date. The actuarial assumptions used to calculate the benefit obligations vary according to the country in which the plan is situated. The following table shows the assumptions, weighted by liabilities, used to value the principal defined benefit pension plans (which cover approximately 95% of total pension liabilities and plans providing other post-employment benefits) and in addition the expected long-term rates of return on assets, weighted by asset value.
| 31 December 2007 | 31 December 2006 | 31 December 2005 | 31 December 2004 | |||||
|---|---|---|---|---|---|---|---|---|
| Principal defined benefit pension plans |
Other post- employment benefit plans |
Principal defined benefit pension plans |
Other post- employment benefit plans |
Principal defined benefit pension plans |
Other post- employment benefit plans |
Principal defined benefit pension plans |
Other post- employment benefit plans |
|
| Discount rate | 5.8% | 6.1% | 5.1% | 5.9% | 4.6% | 5.5% | 5.0% | 5.7% |
| Inflation | 2.6% | n/a | 2.5% | n/a | 2.4% | n/a | 2.4% | n/a |
| Rate of increase in salaries | 3.8% | 4.0% | 3.7% | 4.0% | 3.5% | 4.0% | 3.6% | 4.5% |
| Rate of increase for pensions in payment | 2.5% | n/a | 2.3% | n/a | 2.1% | n/a | 2.2% | n/a |
| Rate of increase for pensions in deferment | ||||||||
| (where provided) | 2.7% | n/a | 2.7% | n/a | 2.5% | n/a | 2.6% | n/a |
| Long-term medical cost inflation | n/a | 5.0% | n/a | 5.0% | n/a | 4.8% | n/a | 4.8% |
| Expected long-term rates of return: | ||||||||
| Equities | 8.0% | 7.8% | 7.4% | 7.9% | ||||
| Bonds | 4.9% | 4.9% | 4.2% | 4.5% | ||||
| Property | 6.6% | 6.3% | 5.8% | 6.3% | ||||
| Others | 6.3% | 6.3% | 6.1% | 6.1% | ||||
| Weighted average asset return | 7.0% | 6.9% | 6.4% | 6.8% | ||||
The valuations of other post-employment benefit plans generally assume a higher initial level of medical cost inflation, which falls from 9.3% to the long-term rate within the next five years. Assumed healthcare cost trend rates have a significant effect on the amounts reported for healthcare plans. A one percentage point change in assumed healthcare cost trend rates would have the following effect:
| € million | € million | |
|---|---|---|
| 1% point increase |
1% point decrease |
|
| Effect on total of service and interest cost components | 3 | (3) |
| Effect on total benefit obligation | 29 | (26) |
The expected rates of return on plan assets were determined, based on actuarial advice, by a process that takes the long-term rates of return on government bonds available at the balance sheet date and applies to these rates suitable risk premiums that take account of historic market returns and current market long-term expectations for each asset class.
For the most important pension plans, representing approximately 80% of all defined benefit plans by liabilities, the assumptions used at 31 December 2007, 2006, 2005 and 2004 were:
| United Kingdom | Netherlands | |||||||
|---|---|---|---|---|---|---|---|---|
| Assumptions | 2007 | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 | 2004 |
| Discount rate | 5.8% | 5.1% | 4.7% | 5.3% | 5.5% | 4.6% | 4.0% | 4.5% |
| Inflation | 3.0% | 2.9% | 2.7% | 2.8% | 1.9% | 1.9% | 1.8% | 1.8% |
| Rate of increase in salaries | 4.5% | 4.4% | 4.2% | 4.3% | 2.4% | 2.4% | 2.3% | 2.3% |
| Rate of increase for pensions in payment | 3.0% | 2.9% | 2.7% | 2.9% | 1.9% | 1.9% | 1.8% | 1.8% |
| Rate of increase for pensions in deferment | ||||||||
| (where provided) | 3.0% | 2.9% | 2.7% | 2.9% | 1.9% | 1.9% | 1.8% | 1.8% |
| Expected long-term rates of return: | ||||||||
| Equities | 8.0% | 8.0% | 7.6% | 8.0% | 8.1% | 7.6% | 7.0% | 7.6% |
| Bonds | 5.0% | 5.2% | 4.5% | 5.0% | 4.7% | 4.4% | 3.7% | 4.1% |
| Property | 6.5% | 6.5% | 6.1% | 6.5% | 6.6% | 6.1% | 5.5% | 6.1% |
| Others | 6.3% | 7.2% | 6.7% | 7.2% | 4.1% | 4.0% | 3.7% | 3.5% |
| Weighted average asset return | 7.2% | 7.3% | 6.9% | 7.3% | 6.8% | 6.6% | 6.0% | 6.6% |
| United States | Germany | |||||||
|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 | 2004 | |
| Discount rate | 5.9% | 5.8% | 5.5% | 5.7% | 5.5% | 4.6% | 4.0% | 4.5% |
| Inflation | 2.3% | 2.5% | 2.4% | 2.5% | 1.9% | 1.9% | 1.8% | 1.8% |
| Rate of increase in salaries | 4.0% | 4.0% | 4.0% | 4.5% | 2.8% | 2.6% | 2.5% | 2.5% |
| Rate of increase for pensions in payment | 0.0% | 0.0% | 0.0% | 0.0% | 1.9% | 1.9% | 1.8% | 1.8% |
| Rate of increase for pensions in deferment | ||||||||
| (where provided) | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% |
| Expected long-term rates of return: | ||||||||
| Equities | 7.8% | 8.3% | 8.0% | 8.4% | 8.1% | 7.6% | 7.0% | 7.6% |
| Bonds | 4.5% | 5.2% | 4.8% | 4.7% | 4.7% | 4.4% | 3.7% | 4.1% |
| Property | 6.3% | 6.8% | 6.5% | 6.9% | 6.6% | 6.1% | 5.5% | 6.1% |
| Others | 3.7% | 4.8% | 4.2% | 2.1% | 5.8% | 3.0% | 3.7% | 3.7% |
| Weighted average asset return | 6.8% | 7.4% | 7.0% | 7.3% | 6.5% | 5.8% | 5.3% | 5.7% |
Demographic assumptions, such as mortality rates, are set having regard to the latest trends in life expectancy (including expectations for future improvements), plan experience and other relevant data. The assumptions are reviewed and updated as necessary as part of the periodic actuarial valuation of the pension plans.
Mortality assumptions for the most important countries are based on the following post-retirement mortality tables: (i) United Kingdom: PNMA 00 and PNFA 00 with medium cohort adjustment subject to a minimum annual improvement of 1% and scaling factors of 110% for current male pensioners, 125% for current female pensioners and 105% for future male and female pensioners; (ii) the Netherlands: GBMV (2000–2005) with age set back of four years for males and two years for females; (iii) United States: RP2000 with a projection period of 10–15 years; and (iv) Germany: Heubeck 1998 (Periodentafel) with a scaling factor of 85%.
These tables translate into the following years of life expectancy for current pensioners aged 65:
| United Kingdom | Netherlands | United States | Germany | |||||
|---|---|---|---|---|---|---|---|---|
| Males | 21 | 20 | 19 | 18 | ||||
| Females | 23 | 22 | 22 | 21 | ||||
With regard to future improvements in life expectancy, in the UK for example, males and females currently aged 45 are assumed to have a life expectancy of 24 years and 26 years respectively on retirement at age 65.
Assumptions for the remaining defined benefit plans vary considerably, depending on the economic conditions of the countries where they are situated.
Balance sheet
The assets, liabilities and surplus/(deficit) position of the pension and other post-employment benefit plans and the expected rates of return on the plan assets at the balance sheet date were:
| € million | € million | % | € million | € million | % | € million | € million | % | |
|---|---|---|---|---|---|---|---|---|---|
| 31 December 2007 | 31 December 2006 | 31 December 2005 | |||||||
| Pension plans |
Other post- employment benefit plans |
Long- term rates of return expected |
Pension plans |
Other post- employment benefit plans |
Long- term rates of return expected |
Pension plans |
Other post- employment benefit plans |
Long- term rates of return expected |
|
| Assets of principal plans: | |||||||||
| Equities | 9 957 | – | 8.0% | 10 274 | – | 7.8% | 9 670 | – | 7.4% |
| Bonds | 4 278 | – | 4.9% | 3 946 | – | 4.9% | 3 854 | – | 4.2% |
| Property | 1 381 | – | 6.6% | 1 421 | – | 6.3% | 1 326 | – | 5.8% |
| Other | 1 220 | – | 6.3% | 1 221 | – | 6.3% | 752 | – | 6.1% |
| Assets of other plans | 404 | 13 | 7.5% | 403 | 13 | 7.3% | 387 | 17 | 6.9% |
| 17 240 | 13 | 17 265 | 13 | 15 989 | 17 | ||||
| Present value of liabilities: | |||||||||
| Principal plans | (16 798) | – | (18 711) | – | (19 081) | – | |||
| Other plans | (748) | (796) | (722) | (925) | (1 059) | (1 306) | |||
| (17 546) | (796) | (19 433) | (925) | (20 140) | (1 306) | ||||
| Aggregate net deficit of the plans | (306) | (783) | (2 168) | (912) | (4 151) | (1 289) | |||
| Irrecoverable surplus(a) | – | – | – | - | (141) | – | |||
| Pension liability net of assets | (306) | (783) | (2 168) | (912) | (4 292) | (1 289) | |||
| Of which in respect of | |||||||||
| Funded plans in surplus: | |||||||||
| Liabilities | (12 396) | – | (5 200) | – | (4 728) | – | |||
| Assets | 14 404 | – | 6 897 | – | 5 905 | – | |||
| Aggregate surplus | 2 008 | – | 1 697 | – | 1 177 | – | |||
| Irrecoverable surplus(a) | – | – | – | – | (141) | – | |||
| Pension asset net of liabilities | 2 008 | – | 1 697 | – | 1 036 | – | |||
| Funded plans in deficit: | |||||||||
| Liabilities | (3 627) | (49) | (11 716) | (44) | (12 444) | (72) | |||
| Assets | 2 836 | 13 | 10 368 | 13 | 10 084 | 17 | |||
| Pension liability net of assets | (791) | (36) | (1 348) | (31) | (2 360) | (55) | |||
| Unfunded plans: | |||||||||
| Pension liability | (1 523) | (747) | (2 517) | (881) | (2 968) | (1 234) | |||
(a) A surplus is deemed recoverable to the extent that the Group is able to benefit economically from the surplus.
The constituents of the 'Principal plans' and 'Other plans' were reviewed in both 2006 and 2007, such that some 'Other plans' were moved into 'Principal plans' in 2006 and a smaller number of plans were moved out of 'Principal plans' into 'Other plans' in 2007.
During 2007, a contractual trust arrangement was established in Germany to partially fund previously unfunded pension liabilities. The initial funding was €300 million whilst the value of the previously unfunded liabilities at 1 January 2007 was approximately €850 million. As a consequence of this funding, the liabilities have been transferred from unfunded to funded in the table above.
Equity securities include Unilever securities amounting to €32 million (0.2% of total plan assets) and €32 million (0.2% of total plan assets) at 31 December 2007 and 2006 respectively. Property includes property occupied by Unilever amounting to €69 million and €75 million at 31 December 2007 and 2006 respectively.
The pension assets above exclude the assets in a Special Benefits Trust amounting to €162 million (2006: €181 million) to fund pension and similar obligations in the US (see also note 11).
The sensitivity of the overall pension liabilities to changes in the weighted key financial assumptions are:
| Change in assumption | Impact on overall liabilities | |
|---|---|---|
| Discount rate | Increase/decrease by 0.5% | Decrease/increase by 6.6% |
| Inflation rate | Increase/decrease by 0.5% | Increase/decrease by 5.3% |
Income statement
The charge to the income statement comprises:
| € million | € million | € million | |
|---|---|---|---|
| 2007 | 2006 | 2005 | |
| Charged to operating profit: | |||
| Defined benefit pension and other benefit plans | |||
| Current service cost | (329) | (369) | (349) |
| Employee contributions | 12 | 13 | 18 |
| Special termination benefits | (59) | (56) | (73) |
| Past service cost | 35 | 293 | (12) |
| Settlements/curtailments | 72 | 48 | 95 |
| Defined contribution plans | (52) | (61) | (63) |
| Total operating cost | (321) | (132) | (384) |
| Charged to other finance income/(cost): | |||
| Interest on retirement benefits | (1 013) | (977) | (984) |
| Expected return on assets | 1 171 | 1 018 | 931 |
| Total other finance income/(cost) | 158 | 41 | (53) |
| Net impact on the income statement (before tax) | (163) | (91) | (437) |
Significant Items on the face of the income statement
During 2006 we updated certain terms of the defined benefit plan in the UK which resulted in a one-off credit to the income statement in 2006 of €120 million. During 2006 a number of initiatives were taken to reduce the cost of post employment healthcare benefits, principally in the United States, through changes to the design of the plans. As a consequence, a reduction in liability of €146 million was recognised in the income statement for 2006.
Cash flow
Group cash flow in respect of pensions and similar post employment benefits comprises company contributions paid to funded plans and benefits paid by the company in respect of unfunded plans. In 2007, the benefits paid in respect of unfunded plans amounted to €280 million (2006: €333 million; 2005: €328 million). Company contributions to funded defined benefit plans are subject to periodic review, taking account of local legislation. In 2007, contributions to funded defined benefit plans including funding of previously unfunded benefits amounted to €878 million (2006: €758 million; 2005: €508 million). Contributions to defined contribution plans including 401k plans amounted to €52 million (2006: €61 million; 2005: €63 million). In 2007, a €50 million refund of assets was received out of recognised surplus from Finland (2005: €15 million from unrecognised surplus). Total contributions by the Group to funded plans, net of refunds, are currently expected to be about €235 million in 2008 (2007 Actual: €878 million). In addition, we may make further contributions in 2008 to fund currently unfunded obligations. Benefit payments by the Group in respect of unfunded plans are currently expected to be about €243 million in 2008 (2007 Actual: €280 million).
Statement of recognised income and expense
Amounts recognised in the statement of recognised income and expense:
| € million | € million | € million | € million | € million | |
|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2004 | Cumulative since 1 January 2004 |
|
| Actual return less expected return on pension and other benefit plan assets | (236) | 533 | 1 592 | 369 | 2 258 |
| Experience gains/(losses) arising on pension plan and other benefit plan liabilities | 103 | 51 | 27 | (47) | 134 |
| Changes in assumptions underlying the present value of the pension and other benefit plan liabilities | 946 | 474 | (1 706) | (1 047) | (1 333) |
| Actuarial gain/(loss) | 813 | 1 058 | (87) | (725) | 1 059 |
| Change in unrecognised surplus | – | 142 | (41) | 2 | 103 |
| Refund of unrecognised assets | – | – | 15 | – | 15 |
| Net actuarial gain/(loss) recognised in statement of recognised income and expense (before tax) | 813 | 1 200 | (113) | (723) | 1 177 |
Reconciliation of change in assets and liabilities
Movements in assets and liabilities during the year:
| € million | € million | € million | € million | € million | € million | |
|---|---|---|---|---|---|---|
| Assets | Assets | Assets | Liabilities | Liabilities | Liabilities | |
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |
| 1 January | 17 278 | 16 006 | 13 419 | (20 358) | (21 446) | (18 773) |
| Acquisitions/disposals | (3) | (63) | (3) | 5 | 123 | 18 |
| Current service cost | – | – | – | (329) | (384) | (367) |
| Employee contributions | 12 | 14 | 19 | – | – | – |
| Special termination benefits | – | – | – | (59) | (54) | (79) |
| Past service costs(b) | – | – | – | 35 | 293 | (13) |
| Settlements/curtailments | (4) | (17) | (10) | 76 | 76 | 105 |
| Expected returns on plan assets | 1 171 | 1 021 | 931 | – | – | – |
| Interest on pension liabilities | – | – | – | (1 013) | (982) | (986) |
| Actuarial gain/(loss) | (236) | 533 | 1 592 | 1 049 | 525 | (1 679) |
| Employer contributions | 1 158 | 1 091 | 836 | – | – | – |
| Benefit payments | (1 247) | (1 267) | (1 247) | 1 247 | 1 267 | 1 247 |
| Reclassification of benefits(c) | (7) | 38 | 39 | 7 | (32) | (140) |
| Currency retranslation | (869) | (78) | 430 | 998 | 256 | (779) |
| 31 December | 17 253 | 17 278 | 16 006 | (18 342) | (20 358) | (21 446) |
(b) The reduction in liabilities in 2006 includes the €266 million reported on the face of the income statement.
(c) Certain obligations have been reclassified as employee benefit obligations.
Funded status of plans at the year end
| € million | € million | € million | € million | |
|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2004 | |
| Total assets | 17 253 | 17 278 | 16 006 | 13 419 |
| Total pension liabilities | (18 342) | (20 358) | (21 446) | (18 773) |
| Net liabilities | (1 089) | (3 080) | (5 440) | (5 354) |
| Less unrecognised surplus | – | – | (141) | (100) |
| Pension liabilities net of assets | (1 089) | (3 080) | (5 581) | (5 454) |
History of experience gains and losses
| € million | € million | € million | € million | |
|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2004 | |
| Actual return less expected return on plan assets | (236) | 533 | 1 592 | 369 |
| As % of plan assets at beginning of year | (1.4)% | 3.3% | 11.9% | 2.9% |
| Experience gains/(losses) on plan liabilities | 103 | 51 | 27 | (47) |
| As % of present value of plan liabilities at beginning of year | 0.5% | 0.2% | 0.1% | (0.3)% |
| Change in actuarial assumptions underlying the present value of the pension benefit and other benefit plan liabilities | 946 | 474 | (1 706) | (1 047) |
| As % of present value of plan liabilities at beginning of year | 4.6% | 2.2% | (9.1)% | (5.9)% |
| Total actuarial gain/(loss) | 813 | 1 058 | (87) | (725) |
| As % of present value of plan liabilities at beginning of year | 4.0% | 4.9% | (0.5)% | (4.1)% |
