GLAXOSMITHKLINE PLC (ifrs-full:DisclosureOfEmployeeBenefitsExplanatory)

28. Pensions and other post-employment benefits


	2017		2016		2015
Pension and other post-employment costs	£m		£m		£m
UK pension schemes		198		205		177
US pension schemes		113		106		96
Other overseas pension schemes		218		140		135
Unfunded post-retirement healthcare schemes		87		90		59

		616		541		467

Analysed as:
Funded defined benefit/hybrid pension schemes		335		304		291
Unfunded defined benefit pension schemes		55		43		36
Unfunded post-retirement healthcare schemes		87		90		59

Defined benefit schemes		477		437		386
Defined contribution pension schemes		139		104		81

		616		541		467

The costs of the defined benefit pension and post-retirement healthcare schemes are charged in the income statement as follows:


	2017		2016		2015
	£m		£m		£m
Cost of sales		162		135		127
Selling, general and administration		238		221		194
Research and development		77		81		65

		477		437		386

GSK entities operate pension arrangements which cover the Group’s material obligations to provide pensions to retired employees. These arrangements have been developed in accordance with local practices in the countries concerned. Pension benefits can be provided by state schemes; by defined contribution schemes, whereby retirement benefits are determined by the value of funds arising from contributions paid in respect of each employee; or by defined benefit schemes, whereby retirement benefits are based on employee pensionable remuneration and length of service.

Pension costs of defined benefit schemes for accounting purposes have been calculated using the projected unit method. In certain countries pension benefits are provided on an unfunded basis, some administered by trustee companies. Formal, independent, actuarial valuations of the Group’s main plans are undertaken regularly, normally at least every three years.

Actuarial movements in the year are recognised through the statement of comprehensive income. Discount rates are derived from AA rated corporate bond yields except in countries where there is no deep market in corporate bonds where government bond yields are used. Discount rates are selected to reflect the term of the expected benefit payments. Projected inflation rate and pension increases are long-term predictions based on the yield gap between long-term index-linked and fixed interest Gilts. In the UK, mortality rates are determined by adjusting the SAPS S2 standard mortality tables to reflect recent scheme experience. These rates are then projected to reflect improvements in life expectancy in line with the CMI 2016 projections with a long-term rate of improvement of 1.25% per year for both males and females. In the US, mortality rates are calculated using the RP2014 white collar table adjusted to reflect recent experience. These rates are projected using MP-2017 to allow for future improvements in life expectancy.

The average life expectancy assumed now for an individual at the age of 60 and projected to apply in 2037 for an individual then at the age of 60 is as follows:


	UK				US
	Male Years		Female Years		Male Years		Female Years
Current		27.5		29.5		26.9		28.6
Projected for 2037		29.1		31.1		28.6		30.3

The assets of funded schemes are generally held in separately administered trusts, either as specific assets or as a proportion of a general fund, or are insurance contracts. Assets are invested in different classes in order to maintain a balance between risk and return. Investments are diversified to limit the financial effect of the failure of any individual investment. The Group reviewed the investment strategy of the UK plans in 2011 and the asset allocation for the UK plans has been adjusted to approximately 55% return seeking assets and 45% liability matching assets. In 2013, the target asset allocation of the US plans was also updated to 55% return seeking assets and 45% liability matching assets.

The Pension Plans are exposed to risk that arises because the estimated market value of the Plans’ assets might decline, the investment returns might reduce, or the estimated value of the Plans’ liabilities might increase.

In line with the agreed mix of return seeking assets to generate future returns and liability matching assets to better match future pension obligations, the Group has defined an overall long-term investment strategy for the Plans, with investments across a broad range of assets. The main market risks within the asset and hedging portfolio are against credit risk, interest rates, long-term inflation, equities, property, and bank counterparty risk.

The Plan liabilities are a series of future cash flows with relatively long duration. On an IAS 19R basis, these cash flows are sensitive to changes in the expected long-term inflation rate and the discount rate (AA corporate bond yield curve) where an increase in long-term inflation corresponds with an increase in the liabilities, and an increase in the discount rate corresponds with a decrease in the liabilities.

In the UK the defined benefit pension schemes operated for the benefit of former Glaxo Wellcome employees and former SmithKline Beecham employees remain separate. These schemes were closed to new entrants in 2001 and subsequent UK employees are entitled to join a defined contribution scheme. In the US the former Glaxo Wellcome and SmithKline Beecham defined benefit schemes were merged during 2001. In addition, the Group operates a number of post-retirement healthcare schemes, the principal one of which is in the US.

The Group has applied the following financial assumptions in assessing the defined benefit liabilities:


	UK						US						Rest of World
	2017 % pa		2016 % pa		2015 % pa		2017 % pa		2016 % pa		2015 % pa		2017 % pa		2016 % pa		2015 % pa
Rate of increase of future earnings		2.00		2.00		2.00		4.00		4.00		4.00		2.80		2.70		2.70
Discount rate		2.50		2.70		3.80		3.60		3.90		4.20		1.60		1.60		2.20
Expected pension increases		3.20		3.20		3.10		n/a		n/a		n/a		2.20		2.10		2.00
Cash balance credit/conversion rate		n/a		n/a		n/a		2.90		3.20		3.20		0.30		0.30		0.60
Inflation rate		3.20		3.20		3.10		2.25		2.25		2.25		1.70		1.50		1.40

The amounts recorded in the income statement and statement of comprehensive income for the three years ended 31 December 2017 in relation to the defined benefit pension and post-retirement healthcare schemes were as follows:


	Pensions												Post-retirement benefits
2017	UK £m			US £m			Rest of World £m			Group £m			Group £m
Amounts charged to operating profit
Current service cost		79			70			131			280			30
Past service cost		37			—			—			37			(2	)
Net interest cost		7			31			16			54			59
Expenses		7			12			—			19			—

		130			113			147			390			87

Remeasurement gains/(losses) recorded in the statement of comprehensive income		259			240			(14	)		485			64


	Pensions												Post-retirement benefits
2016	UK £m			US £m			Rest of World £m			Group £m			Group £m
Amounts charged to operating profit
Current service cost		70			66			110			246			31
Past service cost		52			1			1			54			3
Net interest cost		9			27			20			56			56
Gains from settlements		—			—			(28	)		(28	)		—
Expenses		7			12			—			19			—

		138			106			103			347			90

Remeasurement losses recorded in the statement of comprehensive income		(165	)		(27	)		(224	)		(416	)		(59	)


	Pensions												Post-retirement benefits
2015	UK £m			US £m			Rest of World £m			Group £m			Group £m
Amounts charged to operating profit
Current service cost		77			67			110			254			22
Past service cost/(credit)		25			2			(10	)		17			(8	)
Net interest cost		14			22			13			49			52
Losses/(gains) from settlements		—			1			(9	)		(8	)		(7	)
Expenses		7			4			4			15			—

		123			96			108			327			59

Remeasurement gains/(losses) recorded in the statement of comprehensive income		82			(30	)		147			199			62

The amounts included within past service costs include £37 million (2016 – £52 million; 2015 – £25 million) of augmentation costs of which £18 million is arising from major restructuring programmes (see Note 29, ‘Other provisions’).

A summarised balance sheet presentation of the Group defined benefit pension schemes and other post-retirement benefits is set out in the table below:


	2017			2016			2015
	£m			£m			£m
Recognised in Other non-current assets:
Pension schemes in surplus		538			313			258

Recognised in Pensions and other post-employment benefits:
Pension schemes in deficit		(2,043	)		(2,397	)		(1,842	)
Post-retirement benefits		(1,496	)		(1,693	)		(1,387	)

		(3,539	)		(4,090	)		(3,229	)

The fair values of the assets and liabilities of the UK and US defined benefit pension schemes, together with aggregated data for other defined benefit pension schemes in the Group are as follows:


		UK			US			Rest of World			Group
At 31 December 2017		£m			£m			£m			£m
Equities:	– listed		4,902			1,448			544			6,894
	– unlisted		—			—			13			13
Multi-asset funds			2,517			—			—			2,517
Property:	– unlisted		352			209			32			593
Corporate bonds:	– listed		297			820			103			1,220
	– unlisted		326			—			20			346
Government bonds:	– listed		5,127			239			762			6,128
Insurance contracts			849			—			707			1,556
Other assets			(1,216	)		158			71			(987	)

Fair value of assets			13,154			2,874			2,252			18,280
Present value of scheme obligations			(13,101	)		(3,445	)		(3,239	)		(19,785	)

Net surplus/(obligation)			53			(571	)		(987	)		(1,505	)

Included in Other non-current assets			470			—			68			538
Included in Pensions and other post-employment benefits			(417	)		(571	)		(1,055	)		(2,043	)

			53			(571	)		(987	)		(1,505	)

Actual return on plan assets			893			394			82			1,369

The multi-asset funds comprise investments in pooled investment vehicles that are invested across a range of asset classes, increasing diversification within the growth portfolio.

The index-linked gilts held as part of the UK repo programme are included in government bonds. The related loan is included within ‘Other assets’ at a value of £(773) million (2016 – £(1,698) million; 2015 – £(2,215) million).


		UK			US			Rest of World			Group
At 31 December 2016		£m			£m			£m			£m
Equities:	– listed		5,357			1,358			486			7,201
	– unlisted		—			—			14			14
Multi-asset funds			1,545			—			—			1,545
Property:	– unlisted		314			216			28			558
Corporate bonds:	– listed		292			213			96			601
	– unlisted		321			—			24			345
Government bonds:	– listed		6,165			815			739			7,719
Insurance contracts			856			—			637			1,493
Other assets			(2,267	)		288			73			(1,906	)

Fair value of assets			12,583			2,890			2,097			17,570
Present value of scheme obligations			(12,884	)		(3,752	)		(3,018	)		(19,654	)

Net obligation			(301	)		(862	)		(921	)		(2,084	)

Included in Other non-current assets			276			—			37			313
Included in Pensions and other post-employment benefits			(577	)		(862	)		(958	)		(2,397	)

			(301	)		(862	)		(921	)		(2,084	)

Actual return on plan assets			2,473			153			99			2,725


At 31 December 2015		UK £m			US £m			Rest of World £m			Group £m
Equities:	– listed		5,187			1,235			355			6,777
	– unlisted		—			—			1			1
Multi-asset funds			481			—			—			481
Property:	– unlisted		302			175			8			485
Corporate bonds:	– listed		251			727			76			1,054
	– unlisted		232			—			2			234
Government bonds:	– listed		5,687			184			664			6,535
Insurance contracts			755			—			439			1,194
Other assets			(2,611	)		180			205			(2,226	)

Fair value of assets			10,284			2,501			1,750			14,535
Present value of scheme obligations			(10,601	)		(3,134	)		(2,384	)		(16,119	)

Net obligation			(317	)		(633	)		(634	)		(1,584	)

Included in Other non-current assets			232			—			26			258
Included in Pensions and other post-employment benefits			(549	)		(633	)		(660	)		(1,842	)

			(317	)		(633	)		(634	)		(1,584	)

Actual return on plan assets			(17	)		(30	)		23			(24	)


													Post-retirement
	Pensions												benefits
	UK			US			Rest of World			Group			Group
Movements in fair values of assets	£m			£m			£m			£m			£m
Assets at 1 January 2015		10,551			2,531			1,529			14,611			—
Exchange adjustments		—			147			(52	)		95			—
Additions through business combinations		—			—			233			233			—
Interest income		374			95			33			502			—
Expenses		(7	)		(4	)		(4	)		(15	)		—
Settlements and curtailments		—			—			(16	)		(16	)		—
Remeasurement		(391	)		(125	)		(10	)		(526	)		—
Employer contributions		164			132			112			408			82
Scheme participants’ contributions		4			—			14			18			14
Benefits paid		(411	)		(275	)		(89	)		(775	)		(96	)

Assets at 31 December 2015		10,284			2,501			1,750			14,535			—
Exchange adjustments		—			459			305			764			—
Interest income		385			108			37			530			—
Expenses		(7	)		(12	)		—			(19	)		—
Settlements and curtailments		—			—			(110	)		(110	)		—
Remeasurement		2,088			45			62			2,195			—
Employer contributions		319			31			131			481			91
Scheme participants’ contributions		4			—			14			18			17
Benefits paid		(490	)		(242	)		(92	)		(824	)		(108	)

Assets at 31 December 2016		12,583			2,890			2,097			17,570			—
Exchange adjustments		—			(244	)		24			(220	)		—
Interest income		333			104			33			470			—
Expenses		(7	)		(12	)		—			(19	)		—
Settlements and curtailments		—			—			(4	)		(4	)		—
Remeasurement		560			290			49			899			—
Employer contributions		225			103			116			444			101
Scheme participants’ contributions		4			—			17			21			17
Benefits paid		(544	)		(257	)		(80	)		(881	)		(118	)

Assets at 31 December 2017		13,154			2,874			2,252			18,280			—

During 2017, the Group made special funding contributions to the UK pension schemes totalling £136 million (2016 – £191 million; 2015 – £85 million) and £78 million (2016 – £nil; 2015 – £111 million) to the US scheme. In 2016, GSK reached an agreement with the trustees of the UK pension schemes to make additional contributions to eliminate the pension deficit identified at the 31 December 2014 actuarial funding valuation. Based on the funding agreements following the 2014 valuation, the additional contributions to eliminate the pension deficit are expected to be £123 million in 2018. The contributions were based on a government bond yield curve approach to selecting the discount rate; the rate chosen included an allowance for expected investment returns which reflected the asset mix of the schemes.

Employer contributions for 2018, including special funding contributions, are estimated to be approximately £360 million in respect of defined benefit pension schemes and £90 million in respect of post-retirement benefits.


													Post-retirement
	Pensions												benefits
	UK			US			Rest of World			Group			Group
Movements in defined benefit obligations	£m			£m			£m			£m			£m
Obligations at 1 January 2015		(10,991	)		(3,133	)		(2,176	)		(16,300	)		(1,397	)
Exchange adjustments		—			(184	)		78			(106	)		(64	)
Additions through business combinations		—			—			(397	)		(397	)		(11	)
Service cost		(77	)		(67	)		(110	)		(254	)		(22	)
Past service cost		(25	)		(2	)		10			(17	)		8
Interest cost		(388	)		(117	)		(46	)		(551	)		(52	)
Settlements and curtailments		—			(1	)		25			24			7
Remeasurement		473			95			157			725			62
Scheme participants’ contributions		(4	)		—			(14	)		(18	)		(14	)
Benefits paid		411			275			89			775			96

Obligations at 31 December 2015		(10,601	)		(3,134	)		(2,384	)		(16,119	)		(1,387	)
Exchange adjustments		—			(586	)		(396	)		(982	)		(248	)
Service cost		(70	)		(66	)		(110	)		(246	)		(31	)
Past service cost		(52	)		(1	)		(1	)		(54	)		(3	)
Interest cost		(394	)		(135	)		(57	)		(586	)		(56	)
Settlements and curtailments		—			—			138			138			—
Remeasurement		(2,253	)		(72	)		(286	)		(2,611	)		(59	)
Scheme participants’ contributions		(4	)		—			(14	)		(18	)		(17	)
Benefits paid		490			242			92			824			108

Obligations at 31 December 2016		(12,884	)		(3,752	)		(3,018	)		(19,654	)		(1,693	)
Exchange adjustments		—			305			(45	)		260			119
Service cost		(79	)		(70	)		(131	)		(280	)		(30	)
Past service cost		(37	)		—			—			(37	)		2
Interest cost		(340	)		(135	)		(49	)		(524	)		(59	)
Settlements and curtailments		—			—			4			4			—
Remeasurement		(301	)		(50	)		(63	)		(414	)		64
Scheme participants’ contributions		(4	)		—			(17	)		(21	)		(17	)
Benefits paid		544			257			80			881			118

Obligations at 31 December 2017		(13,101	)		(3,445	)		(3,239	)		(19,785	)		(1,496	)

The defined benefit pension obligation is analysed as follows:


	2017			2016			2015
	£m			£m			£m
Funded		(19,052	)		(18,974	)		(15,552	)
Unfunded		(733	)		(680	)		(567	)

		(19,785	)		(19,654	)		(16,119	)

The liability for the US post-retirement healthcare scheme has been assessed using the same assumptions as for the US pension scheme, together with the assumption for future medical inflation of 6.75% (2016 – 7%), grading down to 5.0% in 2025 and thereafter. At 31 December 2017, the US post-retirement healthcare scheme obligation was £1,254 million (2016 – £1,463 million; 2015 – £1,208 million). Post-retirement benefits are unfunded.

The movement in the net defined benefit liability is as follows:


	2017			2016			2015
	£m			£m			£m
At 1 January		(2,084	)		(1,584	)		(1,689	)
Exchange adjustments		40			(218	)		(11	)
Additions through business combinations		—			—			(164	)
Service cost		(280	)		(246	)		(254	)
Past service cost		(37	)		(54	)		(17	)
Interest cost		(54	)		(56	)		(49	)
Settlements and curtailments		—			28			8
Remeasurements:
Return on plan assets, excluding amounts included in interest		899			2,195			(526	)
Gain from change in demographic assumptions		209			85			120
(Loss)/gain from change in financial assumptions		(555	)		(2,770	)		362
Experience (losses)/gains		(68	)		74			243
Employer contributions		444			481			408
Expenses/other movements		(19	)		(19	)		(15	)

At 31 December		(1,505	)		(2,084	)		(1,584	)


The remeasurements included within post-retirement benefits are detailed below:

	2017			2016			2015
	£m			£m			£m
Gain from change in demographic assumptions		47			—			15
(Loss)/gain from change in financial assumptions		(1	)		(81	)		59
Experience gains/(losses)		18			22			(12	)

		64			(59	)		62

The defined benefit pension obligation analysed by membership category is as follows:


	2017 £m		2016 £m		2015 £m
Active		4,611		4,576		5,510
Retired		9,805		9,574		7,969
Deferred		5,369		5,504		4,231

		19,785		19,654		17,710


The post-retirement benefit obligation analysed by membership category is as follows:

	2017 £m		2016 £m		2015 £m
Active		514		594		499
Retired		981		1,099		887
Deferred		1		—		1

		1,496		1,693		1,387


The weighted average duration of the defined benefit obligation is as follows:

	2017 years		2016 years		2015 years
Pension benefits		16		16		16

Post-retirement benefits		11		12		12

Sensitivity analysis

Effect of changes in assumptions used on the benefit obligations and on the 2018 annual defined benefit pension and post retirement costs.


	£m
A 0.25% decrease in discount rate would have the following approximate effect:

Increase in annual pension cost		29
Decrease in annual post-retirement benefits cost		(1	)
Increase in pension obligation		800
Increase in post-retirement benefits obligation		41

A one year increase in life expectancy would have the following approximate effect:

Increase in annual pension cost		20
Increase in annual post-retirement benefits cost		2
Increase in pension obligation		608
Increase in post-retirement benefits obligation		39

A 1% increase in the rate of future healthcare inflation would have the following approximate effect:

Increase in annual post-retirement benefits cost		2
Increase in post-retirement benefits obligation		68

A 0.25% increase in inflation would have the following approximate effect:

Increase in annual pension cost		19
Increase in pension obligation		502

GLAXOSMITHKLINE PLC | CIK:0001131399 |

ifrs-full:DisclosureOfEmployeeBenefitsExplanatory