Philips 2004 Annual Report Download - page 140

Obligatory severance payments
The provision for obligatory severance payments covers the Company’s commitment to pay
employees a lump sum upon reaching retirement age, or upon the employee’s dismissal or
resignation. In the event that a former employee has passed away, the Company may have a
commitment to pay a lump sum to the deceased employee’s relatives.
Other provisions
Other provisions include provisions for employee jubilee funds totaling EUR 102 million
(2003: EUR 97 million) and expected losses on existing projects/orders totaling EUR 46 million
(2003: EUR 42 million).
O
20 Pensions
Employee pension plans have been established in many countries in accordance with the legal
requirements, customs and the local situation in the countries involved. The majority of
employees in Europe and North America are covered by defined-benefit plans. The benefits
provided by these plans are based on employees’ years of service and compensation levels.
The measurement date for all defined-benefit plans is December 31.
Contributions are made by the Company, as necessary, to provide assets sufficient to meet the
benefits payable to defined-benefit pension plan participants. These contributions are
determined based upon various factors, including funded status, legal and tax considerations as
well as local customs.
The Company funds certain defined-benefit pension plans as claims are incurred. The projected
benefit obligation, accumulated benefit obligation and fair value of plan assets for both funded
and unfunded defined-benefit pension plans with accumulated benefit obligations in excess of
plan assets are included in the table below:
2003 2004
Projected benefit obligation 5,658 6,047
Accumulated benefit obligation 5,375 5,776
Fair value of plan assets 4,187 4,380
Financial effect of changes to the Dutch pension plan
On January 30, 2004, Philips reached an agreement in principle with trade unions in the
Netherlands with respect to proposed changes to the Dutch pension plan. On March 31, 2004,
a final confirmation by the trade unions was obtained. The agreement was also confirmed by the
Trustees of the Philips Pension Fund.
The agreed change from a final-pay to an average-pay pension system in the Netherlands, which
incorporates a limitation of the indexation, resulted in a reduction of the Company’s projected
benefit obligation by EUR 766 million effective the end of March 2004. In addition, the transfer
of existing pension obligations into a pre-pension fund led to a further EUR 468 million
reduction of projected benefit obligations, with a corresponding EUR 480 million reduction of
pension plan assets. Due to this transfer, a settlement charge of EUR 34 million was recognized
in the first quarter of 2004.
139Philips Annual Report 2004