Unilever 2006 Annual Report Download - page 106

Unilever Annual Report and Accounts 2006 103
Financial Statements (continued)
Notes to the consolidated accounts Unilever Group
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 medical
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 €17 278 million and €20 358 million respectively are held on the Group’s balance sheet as at
31 December 2006. 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 and on page 104.
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 company 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 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 solution to implement their strategic asset allocation models initially for equities. The aim is to provide a high
quality,well diversified risk-controlled solution.
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 weretaken to reduce the cost of healthcarebenefits, 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.
Assumptions
With the objective of presenting the assets and liabilities of the pensions and other post-employment benefitplans at their fair value on the
balance sheet, assumptions under IAS 19 areset by reference to market conditions at the valuation date. The actuarial assumptions used to
calculate the benefitobligations 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 benefitpension plans (covering approximately 96% of pension liabilities – the
‘principal pension plans’) and plans providing other post-employment benefits, and in addition the expected long-term rates of returnon assets,
weighted by asset value.
31 December 2006 31 December 2005 31 December 2004
Principal Other Principal Other Principal Other
defined post- defined post- defined post-
benefit employment benefit employment benefit employment
pension benefit pension benefit pension benefit
plans plans plans plans plans plans
Discount rate 5.1% 5.9% 4.6% 5.5% 5.0% 5.7%
Inflation 2.5% n/a 2.4% n/a 2.4% n/a
Rate of increase in salaries 3.7% 4.0% 3.5% 4.0% 3.6% 4.5%
Rate of increase for pensions in payment 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 2.5% n/a 2.6% n/a
Long-term medical cost inflation n/a 5.0% n/a 4.8% n/a 4.8%
Expected long-term rates of return:
Equities 7.8% 7.4% 7.9%
Bonds 4.9% 4.2% 4.5%
Property 6.3% 5.8% 6.3%
Others 6.3% 6.1% 6.1%
Weighted average asset return 6.9% 6.4% 6.8%