Post-employment benefits

Employee post-employment plans have been established in many countries in accordance with the legal requirements, customs and the local practice in the countries involved.

The Company sponsors a number of defined-benefit pension plans. The benefits provided by these plans are based on employees’ years of service and compensation levels. The Company also sponsors a limited number of defined-benefit retiree medical plans. The benefits provided by these plans are typically covering a part of the healthcare insurance costs after retirement. Most employees that take part in a Company pension plan however are covered by defined-contribution (DC) pension plans.

The largest defined-benefit pension plans are in;

  • The Netherlands,
  • The United Kingdom (UK) and
  • The United States (US).

Together these plans account for more than 90% of the total defined-benefit obligation and plan assets.

The Netherlands

The pension plan in the Netherlands is of a defined-benefit nature. The annual accrual rate in this career average pay plan that covers all employees covered under the Collective Labour Agreement is 1.85% of the pension salary. Executives are in a ‘hybrid plan’ with an accrual rate of 1.25% per service year next to a DC contribution, the level of which depends on the executive grade. Both plans are executed by the Company Pension Fund.

Indexation of benefits is conditional and depends among others on the statutory and regulatory funding ratio of the Fund. The Company is required to fund the annual service cost plus surcharges for solvency requirements, costs and a contribution for indexation. The Company is required to pay additional surcharges in case the funded status of the Company Pension Fund drops below an agreed level. The Company is entitled to discounts and refunds if the funded status of the Company Pension Fund exceeds an agreed surplus level.

Following the new Collective Labour Agreement with the respective trade unions in 2013 a new funding agreement has been agreed with the Trustees of the Company Pension Fund. Under the new funding agreement, which becomes effective January 1, 2014, the Company has no further financial obligation to the Pension Fund other than to pay an agreed fixed contribution for the annual accrual of active members. Although the new funding agreement will de-risk the plan, the annual premium can be subject to variability after five years due to potential discounts and as a result, the plan continues to be accounted for as a defined benefit plan. The other changes in the plan are a new pensionable age of 67 (was 65) and the introduction of an employee contribution. These changes had practically no impact on the existing defined benefit obligation. For further details we refer to note (36) Subsequent events.

United Kingdom

The UK plan is executed by a Company Pension Fund. In the UK plan the accrual of new benefits ceased in 2011. A legally mandatory indexation for accrued benefits still applies. The Company does not pay regular contributions, other than an agreed portion of the administration costs.

The UK plan assets until September 2013 contained a high concentration of NXP shares. The NXP shares were transferred to the Fund by the Company in 2010 as part of a recovery plan and have by now all been sold by the UK Fund. In 2013 the Trustee of the UK Fund entered into a bulk insurance contract - a buy-in - which provides for payment in respect of a part of the Fund’s pensioners. The asset value related to this buy-in included in the UK plan assets equals the defined-benefit obligation of the related pensioners and is EUR 508 million per December 31, 2013.

United States

The US defined-benefit plan covers certain hourly workers and salaried workers hired before January 1, 2005.

The accrual for salaried workers in the US plan will end per December 31, 2015. The announcement in 2013 of this delayed freeze in the US plan triggered a past service cost gain of EUR 78 million. In the same US plan in 2013 a large group of terminated vested employees accepted a lump-sum offering thus lowering the plan assets and liabilities. The related settlement result was a loss of EUR 31 million.

Indexation of benefits is not mandatory. The Company pays contributions for the annual service costs as well as additional contributions to cover a deficit. The assets of the US plan are in a Trust governed by Trustees.

Risks related to defined-benefit plans

These defined-benefit plans expose the Company to various demographic and economic risks such as longevity risk, investment risks, currency and interest rate risk and in some cases inflation risk. The latter plays a role in the assumed wage increase and in the UK plan where indexation is mandatory. Pension fund Trustees are responsible for and have full discretion over the investment strategy of the plan assets. In general Trustees manage pension fund risks by diversifying the investments of plan assets and by (partially) matching interest rate risk of liabilities.

The Company has an active derisking strategy in which it constantly looks for opportunities to reduce the risks associated with its defined benefit plans. Liability driven investment strategies, lump sum cash-out options, buy-ins, buy-outs and the above mentioned change in the funding of the Dutch plan are examples of that strategy. The larger plans are either governed by independent Boards or by Trustees who have a legal obligation to evenly balance the interests of all stakeholders and operate under the local regulatory framework.

Balance sheet positions

The net balance sheet position presented in this note can be explained as follows:

  • The surpluses in our plans in The Netherlands, UK as well some other countries are not recognized as a net defined benefit asset because in The Netherlands the current surplus will not bring sufficient future economic benefits to the Company (asset ceiling restrictions) whereas the regulatory framework in the other countries involved explicitly prohibits refunds to the employer.
  • The deficit of the US defined-benefit plan presented under other liabilities and the provisions of the unfunded plans therefore count for the largest part of the net balance sheet position.

The measurement date for all defined-benefit plans is December 31.

Summary of pre-tax costs for post-employment benefits

The below table contains the total of current- and past service costs, admin costs and settlement results as included in operating cost and the interest cost as included in financial income and expense.

 
 
2011
2012
2013
 
 
 
 
Defined-benefit plans
253
290
297
included in operating cost
155
205
223
included in financial expense
93
85
71
included in discontinued operations
5
3
Defined-contribution plans including multi-employer plans
123
144
142
included in operating cost
117
139
139
included in discontinued operations
6
5
3

Defined-benefit plans: Pensions

Movements in the net liabilities and - assets for defined benefit pension plans:

 
 
 
 
2012
 
 
2013
 
Netherlands
other
total
Netherlands
other
total
 
 
 
 
 
 
 
Defined-benefit obligation at the beginning of year
13,294
8,920
22,214
14,433
9,021
23,454
Service cost
170
81
251
183
77
260
Interest cost
502
388
890
467
351
818
Employee contributions
4
4
4
4
Actuarial (gains) / losses
 
 
 
 
 
 
– demographic assumptions
133
64
197
205
17
222
– financial assumptions
1,151
358
1,509
(214)
(385)
(599)
– experience adjustment
(76)
8
(68)
(75)
(32)
(107)
(Negative) past service cost
(25)
(6)
(31)
(1)
(80)
(81)
Divestments
(13)
(13)
(3)
(3)
Settlements
(294)
(294)
(279)
(279)
Benefits paid
(716)
(465)
(1,181)
(704)
(462)
(1,166)
Exchange rate differences
(36)
(36)
(318)
(318)
Miscellaneous
12
12
Defined-benefit obligation at end of year
14,433
9,021
23,454
14,294
7,911
22,205
 
 
 
 
 
 
 
Present value of funded obligations at end of year
14,426
8,168
22,594
14,288
7,112
21,400
Present value of unfunded obligations at end of year
7
853
860
6
799
805

 
 
 
 
2012
 
 
2013
 
Netherlands
other
total
Netherlands
other
total
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
13,946
7,303
21,249
15,203
7,588
22,791
Interest income on plan assets
531
337
868
496
317
813
Admin expenses paid
(4)
(5)
(9)
(9)
(5)
(14)
Return on plan assets excluding interest income
1,237
460
1,697
(426)
(338)
(764)
Employee contributions
4
4
4
4
Employer contributions
209
216
425
283
187
470
Divestments
(1)
(1)
(1)
(1)
Settlements
(294)
(294)
(311)
(311)
Benefits paid
(716)
(407)
(1,123)
(704)
(407)
(1,111)
Exchange rate differences
(25)
(25)
(306)
(306)
Fair value of plan assets at end of year
15,203
7,588
22,791
14,843
6,728
21,571
 
 
 
 
 
 
 
Funded status
770
(1,433)
(663)
549
(1,183)
(634)
Unrecognized net assets
(777)
(586)
(1,363)
(555)
(428)
(983)
Net balance sheet position
(7)
(2,019)
(2,026)
(6)
(1,611)
(1,617)

The classification of the net balance is as follows:

 
 
 
 
2012
 
 
2013
 
Netherlands
other
total
Netherlands
other
total
 
 
 
 
 
 
 
Prepaid pension costs under other non-current assets
7
7
5
5
Accrued pension costs under other liabilities
(1,173)
(1,173)
(817)
(817)
Provision for pensions under provisions
(7)
(853)
(860)
(6)
(799)
(805)
 
(7)
(2,019)
(2,026)
(6)
(1,611)
(1,617)

Changes in the effect of the asset ceiling
 
 
 
2012
 
 
2013
 
Netherlands
other
total
Netherlands
other
total
 
 
 
 
 
 
 
Unrecognized assets at the beginning of year
660
399
1,059
777
586
1,363
Interest on unrecognized assets
26
25
51
25
31
56
Remeasurements
91
173
264
(247)
(155)
(402)
Exchange rate differences
(11)
(11)
(34)
(34)
Unrecognized assets at the end of year
777
586
1,363
555
428
983

Plan assets allocation

The asset allocation in the Company’s pension plans at December 31 was as follows:

 
 
 
2012
 
2013
 
Netherlands
other
Netherlands
other
 
 
 
 
 
Matching portfolio:
 
 
 
 
- Debt securities
11,734
6,106
11,238
4,282
Return portfolio:
 
 
 
 
- Equity securities
2,366
1,083
2,524
910
- Real estate
683
19
790
9
- Other
420
380
291
1,527
 
15,203
7,588
14,843
6,728

The assets in 2013 contain 14% (2012: 11%) unquoted assets, the increase compared to 2012 mainly related to the buy-in value in the UK plan. Plan assets in 2013 do not include property occupied by or financial instruments issued by the Company

Assumptions

The mortality tables used for the Company’s major schemes are:

  • Netherlands: Prognosis table 2012-2062 including experience rating TW2012.
  • United Kingdom retirees: SAPS 2002- Core CMI 2011 projection
  • United States: RP2000 CH Fully Generational

The weighted averages of the assumptions used to calculate the defined-benefit obligations as of December 31 were as follows:

 
 
 
2012
 
2013
 
Netherlands
other
Netherlands
other
 
 
 
 
 
Discount rate
3.3%
4.1%
3.4%
4.5%
Rate of compensation increase
*
3.3%
*
3.2%

* The rate of compensation increase for the Netherlands consists of a general compensation increase and an individual salary increase based on merit, seniority and promotion. In 2013 the Company determined new turnover- and disability rates and individual salary rates for all active participants based on the period 2010-2012. The individual increase at the average age of 45 is 1.75% (2012 0.75% for CLA A). The indexation assumption used to calculate the defined benefit obligations for the Netherlands is 1.0% (2012: 1.0%).

The (average) duration of the DBO of the pension plans is 15 years for the Netherlands (2012: 14 years) and 11 years for other countries (2012: 11 years).

Defined-benefit plans: retiree medical plans

Movements in the net liability for retiree medical plans:

 
 
2012
2013
 
 
 
Defined-benefit obligation at the beginning of year
269
250
Service cost
1
1
Interest cost
12
10
Actuarial (gains) or losses arising from:
 
 
– financial assumptions
1
(17)
Past service cost
(25)
Benefits paid
(17)
(15)
Exchange rate differences
(6)
(16)
Miscellaneous
15
Defined-benefit obligation at end of year
250
213
 
 
 
Present value of funded obligations at end of year
Present value of unfunded obligations at end of year
250
213
 
 
 
Funded status
(250)
(213)
Net balances
(250)
(213)
 
 
 
Classification of the net balance is as follows:
 
 
Provision for other postretirement benefits
(250)
(213)

The weighted average assumptions used to calculate the defined benefit obligations for retiree medical plans as of December 31 were as follows:

 
 
2012
2013
 
 
 
Discount rate
4.5%
4.8%
Compensation increase (where applicable)

Assumed healthcare cost trend rates at December 31:

 
 
2012
2013
 
 
 
Healthcare cost trend rate assumed for next year
7.5%
7.5%
Rate that the cost trend rate will gradually reach
5.2%
5.2%
Year of reaching the rate at which it is assumed to remain
2019
2019

The average duration of the DBO of the retiree medical plans is 9 years (2012: 8 years).

Investment policy in our largest pension plans

It must be acknowledged that trustees of the Philips pension plans are responsible for and have full discretion over the investment strategy of the plan assets.

The objective of the liability hedging portfolio of the Philips pension plan in the Netherlands is to match part of the interest rate sensitivity of the plan’s inflation-linked pension liabilities (based on a 2% inflation assumption). The liability hedging portfolio is mainly invested in euro-denominated government bonds, investment grade debt securities and long-duration interest rate swaps. The size of the liability hedging portfolio is targeted to be at least 64% of the fair value of the plan’s inflation-linked pension liabilities. The objective of the return portfolio is to maximize investment returns within well-specified risk constraints.
­
The Philips pension plan in the United Kingdom operates a fixed income portfolio that aims to fully hedge the interest rate and inflation rate sensitivities of the fair value of the plan’s pension liabilities. Part of the portfolio is invested in a buy-in policy, in which an insurance company guarantees all future benefit payments to the plan, thereby matching the investment and longevity risks of the pension liabilities covered in the buy-in policy.
­
The plan assets of the Philips pension plan in the United States are invested in a well diversified portfolio. The interest rate sensitivity of the fixed income portfolio is closely aligned to that of the plan’s pension liabilities. Any contributions from the sponsoring company are used to further increase the fixed income part of the assets. As part of the investment strategy, any additional investment returns of the return portfolio are used to further decrease the interest rate mismatch between the plan assets and the pension liabilities. 

Cash flows and costs in 2014

Philips expects considerable cash outflows in relation to employee benefits which are estimated to amount to EUR 626 million in 2014, consisting of EUR 417 million employer contributions to defined benefit pension plans, EUR 140 million employer contributions to defined contribution pension plans, EUR 52 million expected cash outflows in relation to unfunded pension plans and EUR 17 million in relation to unfunded retiree medical plans. The employer contributions to defined benefit pension plans are expected to amount to EUR 223 million for the Netherlands and EUR 194 million for other countries. The Company continues to fund a part of the existing deficit in the US pension plan in 2014, which amount is included in the amounts aforementioned. For the funding of the deficit in the US plan the Group adheres to the minimum funding requirements of the US Pension Protection Act. The UK plan is currently in a surplus on a regulatory basis and does not require any funding in 2014 other than the agreed administration cost.
The funding of the pension fund in the Netherlands for 2014 consists of a fixed percentage of payroll which applies for a period of 5 years. The additional contribution to the pension fund for the Netherlands is not included in the above figures. For further details we refer to note (36) Subsequent events. It is noted that the (majority of the) contribution will need to be written off through Other comprehensive income due to the asset ceiling restrictions in the pension plan in the Netherlands.

The service and administration cost for 2014 is expected to amount to EUR 256 million, consisting of EUR 255 million for defined-benefit pension plans and EUR 1 million for defined-benefit retiree medical plans. The net interest expense for 2014 is expected to amount to EUR 54 million, consisting of EUR 43 million for defined-benefit pension plans and EUR 11 million for defined-benefit retiree medical plans. The cost for defined-contribution pension plans in 2014 is expected to amount to EUR 140 million.

Sensitivity analysis

The table below illustrates the approximate impact on the defined-benefit obligation if the Company were to change key assumptions. The DBO was recalculated using a change in the assumptions of 1% which overall is considered a reasonably possible change. The impact on the DBO because of changes in discount rate is normally accompanied by offsetting movements in plan assets, especially when using matching strategies.

 
 
Defined benefit obligation
 
 
 
2013
 
Pension Netherlands
Pension other
Retiree medical
Increase
 
 
 
Discount rate (1% movement)
(1,708)
(822)
(12)
Wage increase (1% movement)
165
28
Inflation (1% movement)
979
461
Longevity (see explanation)
355
232
7
Medical benefit level (1% price increase)
12
Decrease
 
 
 
Discount rate (1% movement)
2,158
962
16
Wage increase (1% movement)
(147)
(26)
Inflation (1% movement)
(876)
(418)

Longevity also impacts post-employment benefit liabilities. The above sensitivity table illustrates the impact on the defined-benefit obligation of a further 10% decrease in the assumed rates of mortality for the Company’s major schemes. A 10% decrease in assumed mortality rates equals improvement of life expectancy by 0.5 - 1 year.

Changes in assumed health care cost trend rates can have a significant effect on the amounts reported for the retiree medical plans. A one percentage-point increase in medical benefit level is therefore included in above table as a likely scenario.

Philips Pension Fund in the Netherlands

In relation to the fraud in the Dutch real estate sector uncovered in 2007, Philips and the Philips Pension Fund in the Netherlands have jointly and amicably assessed any residual damages in 2013. In view of the new pension agreement, which includes a new funding structure, effective as of January 1, 2014, Philips decided to make a special cash contribution in 2013 to ensure that any potential financial issues from the past, including this real estate fraud, were cleared. As a result of this special contribution the real estate case has been closed.

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This is an interactive electronic version of the Philips Annual Report 2013 and also contains certain information in summarized form. The contents of this version are qualified in their entirety by reference to the printed version of the full Philips Annual Report 2013. This printed version is available as a PDF file on this website. Information about: forward-looking statements, third-party market share data, fair value information, IFRS basis of presentation, use of non-GAAP information, statutory financial statements and management report, reclassifications and analysis of 2013 compared to 2012.