Notes 18 - 28

Download Retirement Benefit Schemes for the year ended 30 September 2011Excel (54KB)

The Group operates a number of retirement benefit schemes for its employees, including both defined benefit and defined contribution schemes. The Group’s two principal schemes are final salary defined benefit schemes and are operated by Imperial Tobacco Limited in the UK and Reemtsma Cigarettenfabriken GmbH in Germany. The UK scheme’s assets are held in trustee administered funds while the German scheme is unfunded. The UK defined benefit scheme was closed to new members with effect from 1 October 2010 and new employees are now offered a defined contribution scheme instead.

The results of the most recent actuarial valuation for the principal UK scheme have been updated to 30 September 2011 by Towers Watson Limited, actuaries and consultants, in order to determine the amounts to be included in the balance sheet and income statement. Actuarial valuations of the pension liabilities of other schemes of the Group were made as at or updated to 30 September 2011 by the various actuaries to those schemes.

Amounts recognised in the income statement

Retirement benefit scheme costs charged to operating profit

Which is split as follows in the income statement:

Defined benefit schemes – amounts recognised in the balance sheet

Recognised in the balance sheet as:

Defined benefit scheme obligations – changes in present value

Defined benefit scheme assets – changes in fair value

The actual return on defined benefit scheme assets was a gain of £20 million (2010: £327 million).

Amounts recognised in other comprehensive income

Defined benefit scheme – principal actuarial assumptions used in scheme valuations

2011

2010

Other represents the weighted averages of the rates used for schemes outside the UK and Germany.

Assumptions regarding future mortality experience are set based on advice that uses published statistics and experience in each territory, and are provided in the table below for the defined benefit schemes in the UK and Germany, which in aggregate represent 84 per cent (2010: 83 per cent) of the Group’s total defined benefit scheme obligations at the year end. The average life expectancy, in years, of a pensioner retiring at age 65 is as follows:

2011

2010

Categories of scheme assets and their expected rates of return

2011

2010

The derivation of the overall expected return on assets reflects the actual asset allocation at the measurement date combined with an expected return for each asset class. The bond return is based on current market yields. The corporate bond yield has been reduced to allow for an element of default risk. The return on equities and property is based on a number of factors including the income yield at the measurement date, the long-term growth prospects for the economy in general, the long-term relationship between each asset class and bond returns, and the movement in market indices since the previous measurement date.

Excluding any self-investment through pooled fund holdings, the Imperial Tobacco Pension Fund investments in financial instruments of Imperial Tobacco Group PLC amounted to £3 million (2010: nil).

History of the plans

UK scheme triennial valuation and contribution levels

Following completion this year of the triennial valuation of the Imperial Tobacco Pension Fund (ITPF – the main UK Group scheme) as at 31 March 2010 the level of employer’s contributions to this scheme has been increased from nil to £31 million per year as set by the ITPF actuary. This level of contribution will be reviewed again at the next triennial valuation in 2013 at which time future payments may be increased or decreased.

In relation to the triennial valuation, the assumptions which had the most significant effect when valuing the ITPF’s liabilities were those relating to the rate of investment return on the ITPF’s existing assets, the rates of increase in pay and pensions and estimated mortality rates. On the basis that the ITPF is continuing, it was assumed that the future investment returns relative to market values at the valuation date would be 5.5 per cent per annum and that pay and pension increases would average 5.0 per cent and 3.5 per cent respectively. The assets were brought into account at their market value.

At 31 March 2010 the market value of the invested assets of the ITPF was £2,622 million. The total assets were sufficient to cover 100 per cent of the benefits that had accrued to members for past service, after allowing for expected future pay increases. The total assets were sufficient to cover 88 per cent of the total benefits that had accrued to members for past service and future service benefits for current members.

Analysed as:

Restructuring provisions relate primarily to European Integration projects announced in June 2008 as part of the integration of Imperial Tobacco and Altadis. They affect sales and marketing, manufacturing and central support functions in a number of markets and have largely been implemented. The remaining provisions are expected to be used over a number of years.

Other provisions principally relate to commercial legal claims and disputes. The majority of other provisions represent the fair value at acquisition of current and potential Altadis commercial disputes, litigation and duty claims arising in the normal course of business. These liabilities are expected to crystallise within the next five years.

The Group operates three types of share-based incentive programmes, designed to incentivise staff and to encourage them to build a stake in the Group.

Share Matching Scheme

Awards are made to eligible employees who are invited to invest a proportion of their gross bonus in Imperial Tobacco Group PLC shares for a period of three years, after which additional shares are awarded on a 1:1 ratio.

Long Term Incentive Plan (LTIP)

Awards of shares under the LTIP are made to the Executive Directors and senior executives at the discretion of the Remuneration Committee. They vest three years after grant and are subject to performance criteria based on adjusted EPS growth and total shareholder returns compared to the FTSE 100 and a comparator group.

Sharesave Plan

Options are granted to eligible employees who participate in a designated savings scheme for a three or five year period.

Further details of the schemes including additional criteria applying to directors and some senior executives are set out in the Directors’ Remuneration Report.

Analysis of charge to the consolidated income statement

The awards are predominantly equity settled. The balance sheet liability in respect of cash settled schemes at 30 September 2011 was £1.6 million (2010: £0.9 million).

Reconciliation of movements in awards/options

2011

2010

The weighted average Imperial Tobacco Group PLC share price at the date of exercise of awards and options was £19.77 (2010: £19.36). The weighted average fair value of sharesave options granted during the year was £4.77 (2010: £4.18).

Summary of awards/options outstanding at 30 September 2011

The vesting period is the period between the grant of awards or options and the earliest date on which they are exercisable. The vesting period remaining and the exercise price of options outstanding are weighted averages. Participants in the Sharesave Plan have six months from the maturity date to exercise their option. Participants in the LTIP have seven years from the end of the vesting period to exercise their option. The exercise price of the options is fixed over the life of each option, except that following the rights issue in 2008, adjustments were made to the share plans outstanding at that time. In respect of the Share Matching Scheme, the Trustees sold sufficient rights ‘nil paid’ to enable the balance of the rights to be taken up. In the case of the Sharesave Plan and LTIP, the number of shares under option or subject to awards were adjusted by the relevant bonus factor. In the case of the Sharesave Plan the option price was also adjusted by the relevant bonus factor.

Pricing

For the purposes of valuing options to calculate the share-based payment charge, the Black-Scholes option pricing model has been used for the Share Matching Scheme and Sharesave Plan. A summary of the assumptions used in the Black-Scholes model for 2010 and 2011 is as follows.

Market conditions were incorporated into the Monte Carlo method used in determining the fair value of LTIP awards at grant date. Assumptions in 2011 and 2010 are given in the following table.

Employee Share Ownership Trusts

The Imperial Tobacco Group PLC Employee and Executive Benefit Trust and the Imperial Tobacco Group PLC 2001 Employee Benefit Trust (the Trusts) have been established to acquire ordinary shares in the Company to satisfy rights to shares arising on the exercise and vesting of options and awards. The purchase of shares by the Trusts has been financed by a gift of £19.2 million and an interest free loan of £181.9 million. In addition the Group has gifted treasury shares to the Trusts. None of the Trusts’ shares has been allocated to employees or Executive Directors as at 30 September 2011. All finance costs and administration expenses connected with the Trusts are charged to the income statement as they accrue. The Trusts have waived their rights to dividends and the shares held by the Trusts are excluded from the calculation of basic earnings per share.

Shares held by Employee Share Ownership Trusts

The shares in the Trusts are accounted for on a first in first out basis and comprise 1.5 million (2010: 1.6 million) shares acquired in the open market at a cost of £28.2 million (2010: £33.1 million) and 3.3 million (2010: 2.1 million) treasury shares gifted to the Trusts by the Group, of which 1.2 million were gifted in the financial year 2011 (2010: 1.9 million).

Shares purchased under the Group’s buy back programme are not cancelled but are retained in issue and represent a deduction from equity attributable to owners of the parent (see Consolidated Statement of Changes in Equity). During the year the Group purchased 8,673,000 shares (2010: nil) at a cost of £182 million (2010: nil).

Capital commitments

Operating lease commitments

Total future minimum lease payments under non-cancellable operating leases consist of leases where payments fall due:

The Group is currently involved in a number of legal cases in which claimants are seeking damages for alleged smoking and health-related effects. In the opinion of the Group’s lawyers, the Group has meritorious defences to these actions, all of which are being vigorously contested. Although it is not possible to predict the outcome of the pending litigation, the Directors believe that the pending actions will not have a material adverse effect upon the results of the operations, cash flow or financial condition of the Group. Consequently, the Group has not provided for any amounts in respect of these cases in the consolidated financial statements.

In 2003 the Office of Fair Trading (OFT) commenced an investigation under the Competition Act 1998 into the operation of the UK tobacco supply industry in the period from 2000 to 2003. In a decision dated 15 April 2010, the OFT concluded that certain of the Group’s promotional arrangements with tobacco retailers had the object of restricting competition and imposed a fine of £112.3 million on the Group. At the same time it confirmed that two other allegations included in its 2008 statement of objections had been dropped.

The Group takes compliance with competition law very seriously and continues to reject any suggestion that it acted in breach of the Competition Act or in any way contrary to the interests of consumers. On 15 June 2010 the Group submitted an appeal to the Competition Appeal Tribunal against the OFT’s findings of infringement and the level of the fine. Five tobacco retailers also submitted appeals against the OFT’s decision. The appeal is currently being heard by the Competition Appeal Tribunal which may uphold, quash or vary the OFT’s decision or the fine that has been imposed. As part of its appeal the Group has asked for the fine to be quashed in its entirety. Consequently, the Group has not provided for any amount in the consolidated financial statements.

The movements in cash and cash equivalents, borrowings, derivative financial instruments and finance lease liabilities in the year were as follows:

Adjusted net debt

Management monitors the Group’s borrowing levels using adjusted net debt which excludes interest accruals, the fair value of derivative financial instruments providing commercial cash flow hedges and finance lease liabilities.

2011

There were no significant acquisitions during the year ending 30 September 2011.

2010

During 2010, agreement was reached with the sellers of Reemtsma regarding the reimbursement and settlement of costs incurred by the Group as a consequence of investigations into alleged foreign trading violations prior to our acquisition of Reemtsma in 2002. Reimbursement of £27 million received in cash and £14 million of costs settled directly by the sellers on behalf of the Group have been treated as an adjustment to the cost of the Reemtsma acquisition and so are reflected as a reduction to goodwill of £41 million in note 9. To the extent that costs were settled directly by the sellers they have been shown as a non-cash movement of £14 million to arrive at operating cash flow before movement in working capital in note 25. Costs of £24 million incurred in 2010 have been recognised in the 2010 consolidated income statement in administrative and other expenses, and have been excluded from our adjusted performance measures since the costs did not relate to the trading performance of the Group.