Tesco plc Annual Report and Financial Statements 2008

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Notes to the Group financial statements continued Note 23 Share-based payments continued Share options were exercised on a regular basis throughout the year. The average share price during the year to 23 February 2008 was 443.59p (2007 – 369.70p). The fair value of share options is estimated at the date of grant using the Black-Scholes option pricing model. The following table gives the assumptions applied to the options granted in the respective periods shown. No assumption has been made to incorporate the effects of expected early exercise. 2008 2007 Savings- Savingsrelated Executive related Executive share share Nil cost share share Nil cost option option option option option option schemes schemes schemes schemes schemes schemes Expected dividend yield (%) 2.4% 2.4% 0.0% 2.7% 3.0% 2.7% Expected volatility (%) 20-21% 24% 24-27% 28% 28% 28% Risk-free interest rate (%) 4.8% 5.0-5.3% 4.7-4.9% 4.8% 4.7% 4.6% Expected life of option (years) 3 or 5 6 6-9 3 or 5 6 6 Weighted average fair value of options granted (pence) 116.35 119.96 469.17 122.02 81.63 282.97 Probability of forfeiture (%) 20-25% 10% 0% 20-25% 10% 0% Share price (pence) 470.00 471.12 469.17 383.80 318.60 332.74 Weighted average exercise price (pence) 410.00 471.12 0.00 307.00 318.60 0.0 Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in Tesco PLC option pricing models is the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. In estimating the future volatility of the Company’s share price, the Board consider the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option, taking into account the remaining contractual life of the option. b) Share bonus schemes Eligible UK employees are able to participate in Shares in Success, an all-employee profit-sharing scheme. Each year, shares are awarded as a percentage of earnings up to a statutory maximum of £3,000. Senior management also participate in performance-related bonus schemes. The amount paid to employees is based on a percentage of salary and is paid partly in cash and partly in shares. Bonuses are awarded to eligible employees who have completed a required service period and depend on the achievement of corporate targets. The accrued cash element of the bonus at the Balance Sheet date is £26m (2007 – £17m). Selected senior management participate in the senior management Performance Share Plan. Awards made under this plan will normally vest three years after the date of the award for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets related to the return on capital employed over a three year performance period. Senior management in the US business also participate in the US Long-Term Incentive Plan (2007) which was adopted on 29 June 2007. The awards made under this Plan will normally vest in four tranches: four, five, six and seven years after the date of award, for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets related to the return on capital employed in the US business over the seven-year plan. The Executive Directors participate in short-term and long-term bonus schemes designed to align their interests with those of shareholders. Full details of these schemes can be found in the Directors’ Remuneration Report. The fair value of shares awarded under these schemes is their market value on the date of award. Expected dividends are not incorporated into the fair value except for awards under the US Long-Term Incentive Plan. The number and weighted average fair value (WAFV) of share bonuses awarded during the period were: 2008 2007 Shares WAFV Shares WAFV number pence number pence Shares in Success 18,019,768 470.45 24,062,964 319.65 Executive Incentive Scheme 10,012,950 456.11 11,878,791 316.88 Performance Share Plan 1,292,172 466.21 1,885,288 346.25 US Long-Term Incentive Plan 4,817,720 471.10 – – 82 Tesco PLC Annual Report and Financial Statements 2008 www.tesco.com/annualreport08
Note 24 Post-employment benefits Pensions The Group operates a variety of post-employment benefit arrangements, covering both funded defined contribution and funded and unfunded defined benefit schemes. The most significant of these are the funded defined benefit pension schemes for the Group’s employees in the UK and the Republic of Ireland. Defined contribution plans The contributions payable for defined contribution schemes of £8m (2007 – £7m) have been fully expensed against profits in the current year. Defined benefit plans United Kingdom The principal plan within the Group is the Tesco PLC Pension Scheme, which is a funded defined benefit pension scheme in the UK, the assets of which are held as a segregated fund and administered by trustees. Watson Wyatt Limited, an independent actuary, carried out the latest triennial actuarial assessment of the scheme as at 31 March 2005, using the projected unit method. At the date of the last actuarial valuation the actuarial deficit was £153m. The market value of the schemes’ assets was £2,632m and these assets represented 95% of the benefits that had accrued to members, after allowing for expected increases in earnings and pensions in payment. The One Stop Senior Executive Pension Scheme is a funded defined benefit scheme open to senior executives and certain other employees at the invitation of the Company. An independent actuary, using the projected unit method, carried out the latest actuarial assessment of the scheme as at 5 April 2004. Overseas The most significant overseas scheme is the funded defined benefit pension scheme which operates in the Republic of Ireland. An independent actuary, using the projected unit method, carried out the latest actuarial assessment of the scheme as at 1 April 2007. The valuations used for IAS 19 have been based on the most recent actuarial valuations and updated by Watson Wyatt Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 23 February 2008. The schemes’ assets are stated at their market values as at 23 February 2008. Watson Wyatt Limited have updated the most recent Republic of Ireland valuation. The liabilities relating to retirement healthcare benefits have also been determined in accordance with IAS 19, and are incorporated in the following tables. Principal assumptions The valuations used have been based on the most recent actuarial valuations and updated by Watson Wyatt Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 23 February 2008. The major assumptions, on a weighted average basis, used by the actuaries were as follows: 2008 2007 2006 % % % Rate of increase in salaries 5.0 4.5 4.0 Rate of increase in pensions in payment* 3.5 3.0 2.7 Rate of increase in deferred pensions* 3.5 3.0 2.7 Rate of increase in career average benefits 3.5 3.0 2.7 Discount rate 6.4 5.2 4.8 Price inflation 3.5 3.0 2.7 * In excess of any Guaranteed Minimum Pension (GMP) element. The main financial assumption is the real discount rate i.e. the excess of the discount rate over the rate of price inflation. If this assumption increased/ decreased by 0.1%, the UK defined benefit obligation would decrease/increase by approximately £115m and the annual UK current service cost would decrease/increase by approximately £13m. UK mortality assumptions The Company conducts analysis of mortality trends under the Tesco PLC Pension Scheme in the UK as part of the triennial actuarial valuation of the Scheme. At the latest triennial actuarial valuation as at 31 March 2005, the following assumptions were adopted for funding purposes: Base tables: PMA92C00 for male members with cohort improvements to 2000 and members taken to be two years older than actual age. PFA92C00 for female members with cohort improvements to 2000 and members taken to be half a year older than actual age. Additionally, at the 31 March 2005 valuation an allowance was built in for future mortality improvements via a 0.2% reduction to the discount rate. These assumptions were used for the calculation of the pension liabilities as at 25 February 2006 and 24 February 2007 for the main UK scheme. At 23 February 2008, the mortality assumptions have been strengthened. The base mortality tables detailed above have been updated in line with medium cohort improvements from 31 March 2005 to 23 February 2008. In addition, the allowance for future mortality improvements has been changed to incorporate medium cohort improvements in the future. Tesco PLC Annual Report and Financial Statements 2008 83
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Tesco PLC Annual Report and Financi
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Financial highlights Growth on 2007
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Report of the Directors The Directo
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International contributed £701m to
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Current trading We have seen a stro
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2008 2007 Total shareholder return
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Our business in Poland had a good y
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Tesco Personal Finance (TPF) TPF is
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and put the community at the heart
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Joint venture governance and partne
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Political and charitable donations
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Members’ attendance during the ye
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Internal controls Accountability fo
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Directors’ remuneration report ye
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The Committee considers TSR perform
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Share options Options over shares w
Page 33 and 34: Non-executive Directors Non-executi
Page 35 and 36: Table 4 Share options held by Direc
Page 37 and 38: Table 6 Long-Term Performance Share
Page 39 and 40: Table 10 Directors’ interests in
Page 41 and 42: Go online! Every year, more and mor
Page 43 and 44: Independent auditors’ report to t
Page 45 and 46: Group statement of recognised incom
Page 47 and 48: Group cash flow statement year ende
Page 49 and 50: Note 1 Accounting policies continue
Page 55 and 56: Note 2 Segmental reporting The Boar
Page 57 and 58: Note 2 Segmental reporting continue
Page 59 and 60: Note 5 Finance income and costs 200
Page 61 and 62: Note 6 Taxation continued Deferred
Page 63 and 64: Note 7 Discontinued operation and a
Page 65 and 66: Note 10 Goodwill and other intangib
Page 67 and 68: Note 11 Property, plant and equipme
Page 69 and 70: Note 11 Property, plant and equipme
Page 71 and 72: Note 13 Group entities continued (a
Page 73 and 74: Note 14 Other investments continued
Page 75 and 76: Note 19 Borrowings Current Maturity
Page 77 and 78: Note 20 Financial instruments conti
Page 79 and 80: Note 21 Financial risk factors cont
Page 81 and 82: Note 21 Financial risk factors cont
Page 83: Note 23 Share-based payments contin
Page 87 and 88: Note 24 Post-employment benefits co
Page 89 and 90: Note 25 Called up share capital 200
Page 91 and 92: Note 26 Statement of changes in equ
Page 93 and 94: Note 27 Business combinations conti
Page 95 and 96: Note 30 Analysis of changes in net
Page 97 and 98: Note 32 Leasing commitments continu
Page 99 and 100: UK GAAP IFRS 2004 2005 2005 20061 5
Page 101 and 102: Notes to the Parent Company financi
Page 103 and 104: Note 2 Auditor remuneration 2008 20
Page 105 and 106: Note 9 Borrowings Maturity 2008 200
Page 107 and 108: Note 11 Share-based payments contin
Page 109 and 110: Note 14 Reserves Restated* 2008 200
Page 111 and 112: Cover: Kana and son Tesco Express,
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