Pensions

Pension costs charged to profit from operations in 2007 for defined benefit plans were £4.0 million (2006: £7.4 million) for continuing operations.

The Group operates retirement plans covering most employees. A proportion of these are defined benefit plans funded by contributions from both employers and employees, at rates determined by independent actuaries through regular valuations, except where legislation prevents pre-funding. The remainder are money purchase plans funded by contributions from both employers and employees. The funds are held independently of the Group’s finances and are administered by trustees.

Defined pension plan liabilities





Risk management

Management of the Group’s defined benefit pension risks is the responsibility of our Group treasury function.

A primary objective is to identify and manage the risk of both the assets and liabilities of the defined benefit pension plans and we continue to work with the trustees of our pension plans to improve the management of our defined benefit pension risks.

As part of this risk management process, we continue to hedge the interest rate risk inherent in £269.7 million of the total US dollar projected benefit obligation of £310.0 million of our US defined benefit pension plans. This is achieved by investing £91.1 million in fixed income assets and through the use of US dollar denominated interest rate swaps with a combined average duration of 12.7 years. During the year, the hedging arrangement was effective.

As at 29 December 2007, the value of the Group’s defined benefit pension liabilities was £600.4 million (2006: £648.9 million). The graph above shows the attribution of the decrease in the liabilities during the year of £48.5 million.

Funding policy

The Group remains committed to funding pensions responsibly. In the UK, this means satisfying the funding agreements made with the trustees of the schemes in order to eliminate deficits over a reasonable period of time. In the US, the funding objective has previously been to remain above the ERISA required minimum funding levels. Accordingly, most of the US plans have been funded on the basis of reaching or exceeding a 90% funded level on a current liability basis.

The Pension Protection Act of 2007 will impact the rate at which the deficit of the US plans is eliminated, with deficits generally required to be eliminated over a period of seven years from the 2008 plan year. In future, Tomkins will adapt its funding policy to meet the requirements of the Pension Protection Act.

Tomkins recognises its responsibility to fund defined benefit pension plan deficits and views these deficits as being debt-like in nature. Accordingly, where beneficial, Tomkins plc issues guarantees in respect of certain UK defined benefit pension plan deficits in order to improve the credit standing of these plans. This also has the effect of minimising the cost of the Pension Protection Fund’s risk-based levy.

Cash contributions to the defined benefit pension plans in 2007 were £34.0 million (2006: £33.3 million). In 2008, the cash contributions to the defined benefit pension plans are expected to be significantly lower than in 2007 due to the higher funding levels that currently exist in our US plans. The market value of the related assets was £564.5 million (2006: £532.3 million), resulting in net defined benefit pension liabilities before the effect of the asset ceiling and before tax of £35.9 million (2006: £116.6 million).

The graph below shows the attribution of the increase in the market value of assets during the year of £32.2 million.

Fair value of plan assets

Actuarial assumptions

Actuarial assumptions are reviewed on a regular basis and updated where appropriate. Tomkins believes that all defined benefit pension plans reflect appropriate mortality assumptions.

Of our total defined benefit pension plan liabilities of £600.4 million, £469.7 million relates to benefits that are deferred or currently being drawn, £8.2 million relates to benefits for active participants that have been frozen in respect of future service or pay-related accruals, and a further £12.9 million relates to plans with benefits based on length of service rather than changes in salary scale. Therefore, £490.8 million of liabilities are not sensitive to changes in salary scale. The majority of defined benefit pension plans are closed to new entrants and therefore the impact of changes in salary scale is limited. £109.6 million, or 18.3%, of the total defined benefit pension plans liabilities are sensitive to salary scale. The table below shows the estimated sensitivity of the liabilities of the defined benefit pension plans to changes in the mortality and salary scale. The impact of changes in the discount rate and expected return on assets is shown in note 33 to the Group financial statements.

Investment policy

Investment of assets within the defined benefit pension plans is the responsibility of independent trustee boards over which Tomkins has varying degrees of influence based on national regulations. In order to clarify its preferences regarding the investment of assets by the trustee boards, Tomkins plc has set out a statement of its investment preferences. This has been communicated to the North American Retirement Board, which oversees our largest defined benefit pension plans, and to the Retirement Board of our Canadian defined benefit pension plans.

The statement of investment preferences is based on an underlying philosophy that assets should first be used to hedge risks implicit in the associated pension liabilities and, to the extent that assets are not invested for this purpose, it is the preference of Tomkins plc that the assets are invested in investment grade bonds and/or a broad-based local equity index.

The performance of assets and liabilities in defined benefit pension plans is measured and reported to Tomkins’ Board and used as the basis for dialogue between Tomkins and trustee boards.

 
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