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for a lump sum payment of €384 million.
This amount was financed by a €228
million transfer from external funds set
up in prior years and a cash payment
covering the balance. The effect of this
transaction on the Group’s results of
operations and balance sheet is presented
in detail in note 46 to the consolidated
financial statements.
Along with this major change in pension
benefit arrangements in France, the
defined benefit plans set up by the Group
for the employees of its UK subsidiaries
have been closed to new entrants effective
from May 2002. Employees recruited after
the plans were closed are covered by a
new defined contribution plan whereby
the employer will add to contributions
paid by each employee. Other employees
continue to be covered by the former
defined benefit plans. In 2002, employee
contributions to these plans were increased
to 4% of salary from 3% previously.
The present value of the Group’s benefit
obligations under the remaining defined
benefit plans is calculated in accordance
with Statement of Financial Accounting
Standards (SFAS) 87.
The obligations are funded by contributions
to external institutions responsible for
managing the funds set up to finance future
benefit payments. The type of institution
depends on the applicable legislation in each
country concerned. The level of funding is
adjusted at regular intervals to take account
of changes in the amount of related benefit
obligations, in line with the Group’s policy
of externally funding its obligation except in
cases where this is not possible or desirable
from a legal, financial or tax standpoint. In
these cases, reserves have been booked in
the consolidated balance sheet to cover any
shortfall in funds.
The total benefit obligation is calculated at
the end of each year as explained above.
The periodic pension cost, determined
after taking into account funds managed
by external institutions, corresponds to:
- the service cost, representing the
additional rights acquired by employees
during the year, generally based on their
period of service with the Group;
- interest cost, corresponding to
adjustments to the present value of the
opening vested rights of employees to
take account of the fact that the period to
the future benefit payment date has been
reduced by one year;
- amortization of the transition obligation
resulting from changes in certain
assumptions underlying each threeyearly
actuarial valuation, and the
difference between the actual return on
external funds and the standard return
on long-term investments;
- less the estimated yield on the external
funds for the following year.
In 2002, the Group reviewed the
assumptions used to calculate benefit
obligations and periodic pension cost, in
the light of the major changes in the
economy and financial markets during the
year. The discount rate applied to future
benefit obligations under French plans
was lowered by 0.5 points to 5.25% and
was maintained at 6% for UK plans. The
inflation rate applied for UK plans was
raised by 0.25 points to 2.25% and the
rate for French plans was maintained at
1.75%. Lastly, the expected yield on
external funds was lowered from 7.50% to
6.50% for French plans and kept at 7.25%
for UK plans, for the calculation of 2003
periodic pension costs. The reduction in
expected yields was based on an analysis
of historical yields over a long period. In
France, external funds generated negative
actual yields of 2.6% in 2002 and 0.9%
in 2001, and a positive yield of 3.3%
in 2000. The average yield over the last
12 years was a positive 7.6%. In the
United Kingdom, external funds generated
negative actual yields of 13% in 2002,
9.9% in 2001 and 4.6% in 2000. The
average yield over the last 12 years was a
positive 8.3%. In both countries, the
period of 12 years corresponds to the
average duration of benefit obligations.
As of December 31, 2002, the discounted
present value of future benefit obligations
stood at €2,725 million versus €2,879
million at end-2001. The decrease
primarily reflects benefit payments of
€105 million and the €384 million
curtailment impact resulting from the
transfer to an insurance company of the
total benefit obligation towards
employees less than 59 years of age under
the French defined benefit plan. These
reductions were partly offset by the 2002
service cost, which is now essentially
limited to benefit entitlements acquired
under UK plans, and the adjustment to
opening benefit obligations. Together,
these two items totalled €235 million.
Changes in actuarial assumptions – mainly
discount rates and inflation rates, as
explained above – had the effect of
increasing the benefit obligation
by €199 million.
As of December 31, 2002, deferred items
amortized over the average remaining
service lives of employees, amounted to
€980 million, compared with €638 million
at end 2001. The increase includes
€199 million in actuarial differences
arising from the change in actuarial
assumptions at the end of 2002, and the
€300 million difference between standard
and actual yields on the external funds
used to finance benefit payments. The
impact of these items was partly offset by
PSA PEUGEOT CITROËN - MANAGING BOARD REPORT 113