Unilever 2011 Annual Report Download - page 77

74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS UNILEVER GROUP continued
4B. Pensions and similar obligations continued
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.
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, alternative assets 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 bonds, equities and alternative assets. 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 plans (which cover approximately 95% of total pension
liabilities) and the plans providing other post-employment benefits, and in addition the expected long-term rates of return on assets,
weighted by asset value.
31 December 2011 31 December 2010
Principal
defined benefit
pension plans
Other
post-employment
benefit plans
Principal
defined benefit
pension plans
Other
post-employment
benefit plans
Discount rate 4.6% 4.3% 5.2% 5.5%
Inflation 2.5% n/a 2.5% n/a
Rate of increase in salaries 3.4% 3.5% 3.5% 4.0%
Rate of increase for pensions in payment (where provided) 2.4% n/a 2.5% n/a
Rate of increase for pensions in deferment (where provided) 2.6% n/a 2.7% n/a
Long-term medical cost inflation n/a 5.0% n/a 5.0%
Expected long-term rates of return:
Equities 7.2% 7.4%
Bonds 3.8% 4.6%
Property 4.7% 5.9%
Others 6.2% 6.3%
Weighted average asset return 5.6% 6.3%
The valuations of other post-employment benefit plans generally assume a higher initial level of medical cost inflation, which falls from
7.5% 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
1% point increase
€ million
1% point decrease
Effect on total of service and interest cost components 1 (1)
Effect on total benefit obligation 9 (11)
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.
Unilever Annual Report and Accounts 2011
Financial statements