Philips 2008 Annual Report Download - page 235

The objective of the Matching portfolio is to match the interest rate
sensitivity of the plan’s real pension liabilities. The Matching portfolio
is mainly invested in euro-denominated government bonds and
investment grade debt securities and derivatives. Leverage or gearing
is not permitted. The size of the Matching portfolio is supposed to be
at least 70% of the fair value of the plan’s real pension obligations (on
the assumption of 2% inflation). The objective of the Return portfolio
is to maximize returns within well-specified risk constraints. The
long-term rate of return on total plan assets is expected to be 5.95%
per annum, based on expected long-term returns on equity securities,
debt securities, real estate and other investments of 8.3%, 4.0%, 6.5%
and 5.0%, respectively.
Philips Pension Fund in the Netherlands
On November 13, 2007, various officials, on behalf of the Public
Prosecutor’s office in The Netherlands, visited a number of offices of
the Philips Pension Fund and the Company in relation to a widespread
investigation into potential fraud in the real estate sector. The
Company was notified that one former employee and one employee
of an affiliate of the Company had been detained. This affiliate, Philips
Real Estate Investment Management BV, managed the real estate
portfolio of the Philips Pension Fund between 2002 and 2007. The
investigation by the public prosecutor is concerned with the potential
involvement of (former) employees of a number of Dutch companies
with respect to fraud in the context of certain real estate transactions.
Neither the Philips Pension Fund nor any Philips entity is a suspect in
this investigation. The Philips Pension Fund and Philips are cooperating
with the authorities and have also started their own investigation.
The investigators expect to finalize their report in early 2009.
Formal notifications of suspected fraud have been filed with the public
prosecutor against the (former) employees concerned and with our
insurers. If any losses have been suffered, action will be taken to recover
such losses from the responsible individuals or legal entities. At this
time it is not possible to assess the outcome of this matter nor the
potential consequences. At present, it is management’s assessment
that this matter will not cause a decline in plan assets or an increase
in pension costs in any material respect.
Plan assets in other countries
The Company’s pension plan asset allocation in other countries at
December 31, 2007 and December 31,2008 is shown in the table
below. This table also shows the target allocation for 2009:
2007 2008 2009
actual actual target
%%%
Equity securities 24 18 20
Debt securities 73 73 74
Real estate 2 3 2
Other 1 6 4
100 100 100
Plan assets include property occupied by the Philips Group with a fair
value of EUR 12 million (2007: EUR 12 million).
Pension expense of defined-benefit plans recognized in the income
statement:
2006 2007 2008
Service cost 327 265 219
Interest cost on the projected benefit
obligation 942 920 922
Expected return on plan assets (1,214) (1,216) (1,161)
Prior-service cost 6 9 2
Settlement loss 3 (12) −
Curtailment benefit (25) 2 −
Other (4) (6) (3)
35 (38) (21)
of which discontinued operations 45 −−
Amounts recognized in the Statement of recognized income and
expenses (Sorie):
2006 2007 2008
Actuarial (gains) and losses 71 (182) 623
Change in the effect of the cap
on prepaids 43 47 748
Total recognized in Sorie 114 (135) 1,371
Total recognized in net periodic
pension cost and Sorie 149 (173) 1,350
Actual return on plan assets 1,050 645 (794)
The pension expense of defined-benefit plans is recognized in
the following line items:
2006 2007 2008
Cost of sales (9) 5 (23)
Selling expenses 32 31 24
General and administrative expenses (10) (75) (23)
Research and development expenses (23) 1 1
(10) (38) (21)
The Company also sponsors defined-contribution and similar types of
plans for a significant number of salaried employees. The total cost of
these plans amounted to EUR 96 million (2007: EUR 84 million, 2006:
EUR 80 million). In 2008, the defined-contribution cost includes
contributions to multi-employer plans of EUR 4 million (2007: EUR 4
million; 2006: EUR 4 million).
Cash flows
Philips expects considerable cash outflows in relation to employee
benefits which are estimated to amount to EUR 414 million in 2009,
consisting of EUR 248 million employer contributions to defined-
benefit pension plans, EUR 100 million employer contributions to
defined-contribution pension plans, and EUR 66 million expected
cash outflows in relation to unfunded pension plans. The employer
contributions to defined-benefit pension plans are expected to
amount to EUR 180 million for the Netherlands and EUR 68 million
for other countries.
Expected returns per asset class are based on the assumption that
asset valuations tend to return to their respective long-term equilibria.
The Expected Return on Assets for any funded plan equals the average
of the expected returns per asset class weighted by their portfolio
weights in accordance with the fund’s strategic asset allocation.
The weighted averages of the assumptions used to calculate the
projected benefit obligations as of December 31 were as follows:
2007 2008
Nether-
lands other
Nether-
lands other
Discount rate 4.8% 5.6% 5.3% 6.0%
Rate of
compensation
increase * 3.9% * 3.4%
Philips Annual Report 2008 235
254
Corporate governance
250
Reconciliation of
non-US GAAP information
262
Ten-year overview
266
Investor information