Note 28

28. Employee Benefits

28a Share-based Payments

Group employees participate in a number of employee incentive schemes including a Sharesave Plan, an Unapproved Share Option Plan, a Long Term Incentive Plan and a Deferred Bonus Plan. The recognition and measurement principles in IFRS2 have not been applied to awards granted before 7 November 2002 in accordance with the transitional provisions in IFRS1 and IFRS2.

Share option plans

The share option plans operated by the group are:

2002 Sharesave Scheme and International Sharesave Plan (SAYE)

This is a share option plan. Employees elect on application to save a fixed amount each month in return for which they receive an option over a number of shares that is related to the amount of such savings. The savings period is three, five or seven years. At the maturity date, the participants have the choice to use their savings to purchase shares at a discount to the share price (the discount being determined at the date of grant) or to obtain a refund of savings. The option expires six months after maturity. Awards are settled with shares.

2002 Unapproved Share Option Plan (USOP)

The USOP is a share option plan. Exercise of an option is subject to growth in the Company’s earnings per share, excluding exceptional or extraordinary items, exceeding by not less than 2% per annum the growth in the retail prices index over a 3-year performance period. Options are exercisable between the third and the tenth anniversaries of their dates of grant. Awards are settled with shares.

If the percentage growth in the earnings per share of the Company, after adjustments for exceptional or extraordinary items, exceeds the percentage growth in the retail prices index over the three year performance period by 2% per annum (the base target threshold), an option will become exercisable in respect of one-third of the shares over which it is held. Full vesting takes place when such growth over the performance period is 4% per annum or greater. A sliding scale operates for performance between the lower and upper thresholds. Options lapse if the base target threshold is not achieved. There is no re-testing of performance. Awards are settled with shares.

Options outstanding under the 2002 Sharesave Scheme and International Sharesave Plan and the 2002 Unapproved Share Option Plan as at 31 December 2005, together with their weighted average exercise prices and weighted average remaining contractual life, are as follows:

Range of
exercise prices
£		 Number
outstanding		 Weighted
average
exercise price
£		 Weighted
average
remaining
contractual life
(years)
2.21 to 2.40 126,813 2.31 2.1
2.41 to 2.60 177,217 2.58 7.2
2.61 to 2.80 297,224 2.69 2.0
2.81 to 3.00 456,339 2.98 8.5
3.41 to 3.60 414,857 3.55 7.7
4.01 to 4.20 45,017 4.12 0.4
4.81 to 5.00 596 4.92 0.9
5.01 to 5.20 140,138 5.10 5.3
5.21 to 5.40 16,796 5.40 2.7
5.41 to 5.60 238,249 5.49 4.8
5.61 to 5.80 19,100 5.76 3.4
5.81 to 6.00 2,227 5.95 -
6.21 to 6.40 11,000 6.25 1.4
6.41 to 6.60 4,594 6.53 2.3
Total 1,950,167 3.54 5.8

Options granted, exercised and lapsed during the years ended 31 December 2005 and 2004 under these share option plans were as follows:

SAYE Weighted
average
exercise price
£		 USOP Weighted
average
exercise price
£
Awards at 31 December 2003 603,346 2.99 1,448,675 4.73
Exercised 12,072 2.64 - -
Lapsed 106,329 3.25 459,281 5.14
Expired - - - -
Granted 67,646 2.83 333,000 3.51
Awards at 31 December 2004 552,591 2.92 1,322,394 4.28
Exercised 5,614 2.51 - -
Lapsed 52,007 3.06 264,443 4.43
Expired 35,696 4.92 - -
Granted 74,303 2.73 358,639 3.00
Awards at 31 December 2005 533,577 2.75 1,416,590 3.84

The weighted average share price at the date of exercise for share options exercised during the year was £3.31 (2004: £3.44).

Share award plans

Long Term Incentive Plan (LTIP)

Under this plan, executive directors and other senior employees are selected to receive awards over shares that vest in whole or in part depending on the satisfaction of a performance condition related to the growth in earnings per share compared to the retail prices index over a performance period.

The performance condition attaching to awards under the plan relates to increase in earnings per share. For an award to vest in its entirety, the increase in earnings per share over the performance period of three years must be not less than the increase in the retail prices index plus 36%. For an award to vest at its lowest level of 25%, the growth in earnings per share over the performance period must be equal to the increase in the retail prices index plus 9%. Awards lapse if the performance is below this level. Where growth is between 9% and 36% above RPI awards are realisable on a straight-line basis. Awards are settled with shares.

2005 Long Term Incentive Plan (2005 LTIP)

Under this plan, executive directors and other senior employees are selected to receive awards over shares that vest in whole or in part depending on the satisfaction of a performance condition related to Vitec’s total shareholder return (TSR) over a period of three years, relative to a comparator group of other companies.

If Vitec’s TSR performance is at the median of the comparator group, 35% of an award may vest. The full award may vest if Vitec’s TSR performance is in the top 20% of the comparator group. There is pro-rata straight line vesting between these two points. The Remuneration Committee will also consider the underlying financial performance of the Company before it confirms vesting. Awards are settled with shares.

Deferred Bonus Plan (DBP)

Under the plan, an eligible executive may defer between 10% and 50% of his or her cash bonus in exchange for receiving a basic award over shares in the Company with a value equivalent, at the date of award, to the amount of the deferred bonus. A basic award may, in normal circumstances, be exercised by a participant after two years. However, if exercise is deferred until after three years and the executive remains employed by the Group, the participant is entitled to receive a matching award of additional shares equal in number to those comprised in the basic award. Shares comprising basic awards are purchased in the market and held in trust by Mourant & Co Trustees Limited until exercise. Dividends are not paid on shares held in trust.

Bonuses received by participants, and which may be deferred under the plan, are themselves subject to demanding performance conditions linked to Company and/or individual performance. The awards under the plan are not subject to any further performance targets. The matching award can be settled by cash with the consent of the Remuneration Committee although there has been no past practice of settling the awards in cash and the company does not intend to do so in the future. Therefore it is assumed that all awards will be settled with shares.

For share options and share awards granted during the year the following information is provided:

Arrangement 2002 UK and
International
Sharesave
Plan 3 Year		 2002 UK and
International
Sharesave
Plan 5 Year		 2002 UK and
International
Sharesave
Plan 7 Year		 2002
Unapproved
Share Option
Plan		 2005 Long
Term Incentive
Plan		 Deferred
Bonus Plan
Nature of Arrangement SAYE SAYE SAYE USOP Share award plan Share award plan
Date of Grant (2005) 29 April 29 April 29 April 2 June 2 June 30 June
Number of instruments granted 23,603 49,391 1,309 358,639 557,090 35,100
Basic
58,341
Matching
Exercise Price £2.73 £2.73 £3.31 £3.00 n/a n/a
Share price at date of grant £3.31 £3.31 £3.31 £3.00 £3.00 £3.00
Contractual Life (years) 3.5 5.5 7.5 10 3 3
Vesting conditions Three year
service period
and savings
requirement		 Five year
service period
and savings
requirement		 Seven year
service period
and savings
requirement		 EPS growth
relative to
RPI and
three year
service period		 Relative TSR
performance
against
comparator
group and
three year
service period		 Exchange of
cash bonus
for shares
and three
year service
period
Settlement Shares Shares Shares Shares Shares Shares
Expected volatility(1)  25.6% 26.3% 24.8% 25.3% 25.2% n/a
Expected option life at grant date (years) 3.25 5.25 7.25 3.5 n/a n/a
Risk free interest rate 4.2% 4.2% 4.2% 4.2% 4.2% n/a
Expected dividend (dividend yield) 5.17% 5.17% 5.17% 5.17% 5.17% 5.17%
Expected departures (per annum from grant date) 5% 5% 5% 5% 5% 0%
Expected outcome of meeting non market-related performance criteria (at the grant date) n/a n/a n/a 100% n/a n/a
Fair value per granted instrument determined at the grant date £0.73 £0.76 £0.73 £0.44 £1.50 £2.75
Valuation model Black Scholes Black Scholes Black Scholes Black Scholes Monte Carlo(2)  Black Scholes

(1) The expected volatility is based on historical volatility determined by the analysis of daily share price over a period commensurate with the expected lifetime of the award and ending on the date of grant of the award.

(2) For the LTIP 2005, a Monte Carlo valuation methodology has been used. Under this valuation method, the share price for Vitec is projected to the end of the performance period as is the Total Shareholder Return for Vitec and the companies in the comparator group. Based on these projections, the number of awards that will vest is determined and then we can calculate the present value of this outcome. Thousands of simulations are run and the fair value of the award is calculated as the average present value of these outcomes.

The amounts recognised in the income statement for share-based payment transactions with employees for the year ended 31 December 2005 was £328,000 (2004: £93,000), of this £300,000 (2004: £141,000) related to equity-settled share-based payment transactions.

The liability recognised in the balance sheet for cash-settled awards as at 31 December 2005 was £29,000.

The total intrinsic value as at 31 December 2005 for cash-settled awards which had vested by this date was £37,000.

28b Post-employment Obligations

Defined benefit plans - pensions and other post-retirement plan disclosures

Amounts recognised on the Group balance sheet

2005
£m		 2004
£m
Plan assets     
Equities 27.3 21.3
Bonds 9.2 7.4
Other 2.4 2.0
Total fair value of plan assets  38.9 30.7
Present value of defined benefit obligation  (46.4) (40.4)
Net (deficit) recognised in the Group balance sheet  (7.5) (9.7)
     
Analysis of net recognised deficit     
UK pension fund (3.1) (5.8)
Total funded plans (3.1) (5.8)
Italian pension scheme (3.2) (2.9)
Other unfunded plans (1.2) (1.0)
Total unfunded plans (4.4) (3.9)
     
Liability recognised in the Group balance sheet  (7.5) (9.7)

Amounts recognised in the Group income statement

2005
£m		 2004
£m
Amounts in net operating costs    
Current service costs - defined benefit schemes 2.2 2.1
Employers' pension costs - defined contribution schemes 0.4 0.3
  2.6 2.4
     
Amounts in net finance expense     
Expected return on plan assets (2.2) (1.4)
Interest cost 2.0 1.1
  (0.2) (0.3)
     
Total amounts charged to the income statement 2.4 2.1

UK Pension Scheme

The nature of the scheme is a funded final salary scheme, closed to new entrants.

i) Assumptions used to determine defined benefit obligation  31 December
2005
% pa		 31 December
2004
% pa		 31 December
2003
% pa
Inflation rate 2.8 2.8 2.75
Expected rate of salary increases(1)  4.8 4.8 4.75
Rate of increase of pensions in payment(2)  2.8 2.8 2.75
Rate of increase for deferred pensions 2.8 2.8 2.75
Discount rate 4.8 5.3 5.40

(1) These exclude an age-related allowance for promotional and merit awards.

(2) In addition, an allowance has been made for the special pension increase guarantees applying to certain executive members of the scheme.


The assumptions relating to longevity underlying the pension liabilities at the balance sheet date are based on standard actuarial mortality tables, and include an allowance for future improvements in longevity. The assumptions are equivalent to expected longevity at age 65 for members in normal health approximately as follows:
- pensioners currently aged 65: ranging from 19 years to 22 years
- non-pensioners currently aged 45: ranging from 21 years to 24 years

ii) Scheme assets and expected rate of return

A summary of the assets of the scheme, classified into the major asset classes, is shown below, together with the expected return on each major asset class.

  Fair value at 31
December 2005
£m		 Expected longterm
rate of
return at 31
December 2005
% pa		 Fair value at 31
December 2004
£m		 Expected longterm
rate of
return at 31
December 2004
% pa		 Fair value at 31
December 2003
£m		 Expected longterm
rate of
return at 31
December 2003
% pa
Equities 27.3 7.8 21.3 7.9 19.1 8.2
Bonds 9.2 4.3 7.4 4.8 6.5 5.0
Property 1.2 6.3 1.4 6.8 1.2 7.1
Cash/net current assets 0.6 3.8 - 3.8 0.3 3.8
Insurance policies 0.6 4.8 0.6 5.3 0.5 5.4
Total value of assets 38.9   30.7   27.6  

The asset values shown are, where relevant, estimated bid values of market securities.

iii) Reconciliation of funded status at 31 December 2005

  31 December
2005
£m		 31 December
2004
£m
Present value of defined benefit obligation (42.0) (36.5)
Assets at fair value 38.9 30.7
Funded status (3.1) (5.8)
Unrecognised past service cost - -
Unrecognised net gain (loss) - -
Effect of asset ceiling - -
Defined benefit liability (3.1) (5.8)

iv) Pension expense for year to 31 December 2005

a) Components of pension expense Year ending
31 December
2005
£m		 Year ending
31 December
2004
£m
Group service cost 1.5 1.7
Interest cost 1.9 1.7
Expected return on assets (2.2) (2.1)
Total pension expense 1.2  1.3 

b) Statement of Recognised Income and Expense (SORIE)

Year ending
31 December
2005
£m		 Year ending
31 December
2004
£m
Actuarial gain/(loss) recognised in SORIE during the period 0.5 (0.3)

v) Return on assets for year to 31 December 2005

  Year ending
31 December
2005
£m		 Year ending
31 December
2004
£m
Expected return on assets 2.2 2.1
Actuarial gain on assets 4.0 1.0
Actual return on assets  6.2  3.1 

vi) Reconciliation of present value of defined benefit obligation (DBO) for the year to 31 December 2005

  Year ending
31 December
2005
£m		 Year ending
31 December
2004
£m
Present value of DBO at start of year 36.5 32.8
Group service cost 1.5 1.7
Interest cost 1.9 1.7
Employee contributions 0.4 0.3
Actuarial gain on change of assumptions 3.6 2.3
Experience loss (0.1) (1.0)
Actual benefit payments and expenses (1.8) (1.3)
Present value of DBO at end of year  42.0  36.5 

vii) Reconciliation of the fair value of assets for the year to 31 December 2005

  31 December
2005
£m		 31 December
2004
£m
Fair value of assets at start of year 30.7 27.6
Expected return on assets 2.2 2.1
Actuarial gain on plan assets 4.0 1.0
Group contributions 3.4 1.0
Employee contributions 0.4 0.3
Actual benefit payments (1.5) (1.1)
Administration expenses paid (0.3) (0.2)
Fair value of assets at end of year  38.9 30.7

viii) Reconciliation of change in funded status for the year to 31 December 2005

  Year to
31 December
2005
£m		 Year to
31 December
2004
£m
Defined benefit liability at start of year (5.8) (5.2)
Total pension expense (1.2) (1.3)
Employer contributions actually paid 3.4 1.0
Gain (loss) recognised in SORIE 0.5 (0.3)
Defined benefit liability at end of year  (3.1)  (5.8) 

ix) Expected 2006 contributions

  Year
commencing
1 January
2006
£m
Group contributions 1.0
Employee contributions 0.4

Italian pension scheme

In accordance with Italian law, Italian employees are entitled to a lump sum payment (TFR) from their employers when they resign or retire.

The TFR is accrued over the years in which the employee is in service. In each year, the accrued amount is increased by 6.91% of the employee’s gross annual salary. At the end of each year, the employee’s TFR’s are revalued by 1.5% plus 75% of the national increase in the consumer price index (as published by the Italian National Statistical Institute ISTAT).

After eight years of service, an employee can ask his employer to advance up to 70% of his total TFR. Once the employee has left the company and received the balance of his TSR, the company is not liable for any further pension obligations in respect of that employee.

The International Financial Reporting Interpretations Committee (IFRIC) of IASB (International Accounting Standard Bureau) has established that, in accordance with IAS 19, TFR’s must be accounted for as defined benefit pension schemes and the present value of the TFR’s must be computed using actuarial assumptions.

Assumptions used to determine defined benefit obligation

  31 December
2005
%pa		 31 December
2004
%pa
Inflation rate 2% 2%
Expected rate of salary increases 2% 2%
Expected rate of salary increase on promotion to a higher level 10.54% 10.54%
Discount rate (25 years) 4.33% 4.33%

Pension expense for the year to 31 December 2005

  Year ending
31 December
2005
£m		 Year ending
31 December
2004
£m
Group service cost 0.5 0.2
Interest cost 0.1 0.1
Total pension expense  0.6 0.3

Statement of Recognised Income and Expense (SORIE)

  Year ending
31 December
2005
£m		 Year ending
31 December
2004
£m
Actuarial gain/(loss) recognised in SORIE during the period - (0.2)

Reconciliation of present value of defined benefit obligation (DBO) for the year to 31 December 2005

  Year ending
31 December
2005
£m		 Year ending
31 December
2004
£m
Present value of DBO at start of year (2.9) (2.8)
Group service cost (0.5) (0.2)
Interest cost (0.1) (0.1)
Actuarial loss - (0.2)
Contributions paid 0.3 0.4
Present value of DBO at end of year  (3.2) (2.9)

Information correct at 03/05/2006