Review of performance.

Other financial information.

Pensions and post-employment obligations

GKN operates a number of defined benefit and defined contribution pension schemes together with historic retiree medical arrangements across the Group. The net amount included within trading profit of £33 million (2010: £26 million) includes the current service cost of £38 million (2010: £35 million) partly offset by credits arising from initiatives taken to reduce the Group’s post-employment liabilities. Other net financing charges of £17 million (2010: £31 million) have reduced partly due to the full year impact of the pension partnership arrangement and partly as a result of lower interest on liabilities due to the 30 basis point reduction in the discount rate between 31 December 2010 and 31 December 2009.

  Current service cost   Net amount included
within Trading Profit
  Other net
financing charges
  2011
£m
2010
£m
  2011
£m
2010
£m
  2011
£m
2010
£m
UK pensions (24) (22)   (21) (20)   5 (7)
Overseas pension (13) (12)   (12) (6)   (19) (21)
Retiree medical and life insurance (1) (1)     (3) (3)
  (38) (35)   (33) (26)   (17) (31)

UK pensions

The UK defined benefit scheme is a funded plan with all future benefits accrued on a career average basis. A hybrid pension plan providing benefits from an element of both defined benefit and defined contribution arrangements is open to new members. Members currently in employment with the Company represent approximately 18% of total liabilities of £2,650 million (2010: £2,435 million).

The charge relating to the UK defined benefit scheme reflected in trading profit included a settlement credit of £2 million, net of expenses, relating to an enhanced transfer value exercise for deferred members of the UK scheme.

The accounting deficit at 31 December 2011 of £259 million was £188 million higher than the deficit at the end of 2010. December 2011 asset values were above those of end December 2010 but the valuations of liabilities at 31 December 2011 were £215 million higher. This increase largely reflected the 70 basis point reduction in discount rate to 4.7% (£274 million) partially offset by the £109 million positive impact from a 35 basis point reduction in the assumption for long-term inflation to 3%.

Overseas pensions

Overseas pension obligations arise mainly in the US, Germany and Japan.

Trading profit benefited from the one-time curtailment/past service credit in Japan of £1 million.

The deficit increased by £71 million to £539 million, £54 million of which was as a result of discount rate reductions in the US and Europe by 100 and 10 basis points, respectively.

Retiree medical and life insurance

GKN operates retiree medical and life insurance arrangements in North America and has a scheme, closed to new members, in the UK.

The obligation in respect of all schemes at the end of the year was £70 million compared with £61 million at the end of 2010. The 100 basis point reduction in the US discount rate accounted for £7 million of the £9 million increase.

Summary

At 31 December 2011, the total deficit on post-employment obligations of the Group totalled £868 million (2010: £600 million), comprising the deficit on funded obligations of £465 million (2010: £193 million) and unfunded obligations of £403 million (2010: £407 million).

Net assets

Net assets of £1,624 million were £63 million lower than the December 2010 year end figure of £1,687 million. The decrease includes actuarial losses on post-employment obligations net of tax of £223 million, adverse currency movements net of tax of £32 million and dividends paid to equity shareholders of £85 million offset by retained profit of £306 million.

Financing

The following section describes the way in which the Group manages and controls its treasury function and ensures it is financed in an appropriate and cost-effective manner.

Treasury management

All treasury activities are co-ordinated through a central function (Group Treasury), the purpose of which is to manage the financial risks of the Group and to secure short and long-term funding at the minimum cost to the Group. It operates within a framework of clearly defined Board-approved policies and procedures, including permissible funding and hedging instruments, exposure limits and a system of authorities for the approval and execution of transactions. It operates on a cost centre basis and is not permitted to make use of financial instruments or other derivatives other than to hedge identified exposures of the Group. Speculative use of such instruments or derivatives is not permitted. Group Treasury prepares reports at least annually to the Board, and on a monthly basis to the Finance Director and other senior executives of the Group. In addition, liquidity, interest rate, currency and other financial risk exposures are monitored weekly. The overall indebtedness of the Group is reported on a weekly basis to the Chief Executive and the Finance Director. The Group Treasury function is subject to an annual internal and external review of controls.

Funding and liquidity

At 31 December 2011, UK committed bank facilities were £755 million. Within this, there are committed revolving credit facilities of £675 million that include £445 million of new five year facilities put in place in the second half of the year. The balance of UK committed facilities of £80 million is an eight-year amortising facility from the European Investment Bank (EIB). At 31 December 2011, drawings against the revolving credit facilities were £33 million and the Group drew down in full its £80 million facility from the EIB. The EIB loan is repayable in five £16 million instalments from 2015 and bears a fixed interest rate of 4.1%. Capital market borrowings were £526 million at 31 December 2011 and include unsecured issues of £176 million 7% bonds maturing in May 2012 and £350 million 6.75% bonds maturing in October 2019. The weighted average maturity profile of the Group’s committed borrowing facilities was 4.7 years. This leaves the Group well placed in the short term to manage sudden changes in liquidity in the financial markets.

All of the Group’s committed credit facilities have a financial covenant requiring EBITDA of subsidiaries to be at least 3.5 times net financing costs. In addition, the new five-year revolving credit facilities put in place in 2011 contains a financial covenant requiring net debt to be no greater than 3 times EBITDA of subsidiaries. The covenants are tested every six months using the previous 12 months results. For the 12 months to 31 December 2011 EBITDA was 12.9 times greater than net interest, whilst net debt was 0.9 times EBITDA.

Financial resources and going concern

At 31 December 2011, the Group had net borrowings of £538 million. In addition, it had available, but undrawn, committed UK borrowing facilities totalling £642 million. The next maturities of the Group’s committed UK borrowing facilities are £176 million unsecured bond in May 2012 and £160 million revolving bank credit facilities in July 2013.

The Directors have assessed the future funding requirements of the Group and the Company and compared them to the level of committed available borrowing facilities. The assessment included a review of both divisional and Group financial forecasts, financial instruments and hedging arrangements for the 19 months from the balance sheet date. Major assumptions have been compared to external reference points such as global light vehicle volumes, build schedules from aircraft assemblers and market forecasts from major manufacturers of agricultural and construction machinery.

The forecasts show that the Group will have a sufficient level of headroom in the foreseeable future and an assessment of the likelihood of breaching covenants in this period is considered to be remote.

Having undertaken this work, the Directors are of the opinion that the Group has adequate committed resources to fund its operations for the foreseeable future and so determine that it is appropriate for the financial statements to be prepared on a going concern basis.