Philips 2014 Annual Report Download - page 156

Group nancial statements 12.9
156 Annual Report 2014
Dened-benet plans: retiree medical plans
Movements in the net liability for retiree medical plans:
Philips Group
Liability for retiree medical plans in millions of EUR
2013 - 2014
2013 2014
Balance as of January 1 250 213
Service cost 1 2
Interest cost 10 11
Actuarial (gains) or losses arising from:
- Demographic assumptions – 3
- Financial assumptions (17) 9
- Experience adjustment – (3)
Past service cost – –
Benets paid (15) (15)
Exchange rate dierences (16) 21
Balance as of December 31 213 241
Present value of funded obligations as of
December 31 – –
Present value of unfunded obligations as of
December 31 213 241
Funded status (213) (241)
Net balances (213) (241)
Classication of the net balance is as follows:
Provision for other postretirement benets (213) (241)
The weighted average assumptions used to calculate
the dened-benet obligations for retiree medical
plans as of December 31 were as follows:
Philips Group
Weighted average assumptions for retiree medical plans in %
2013 - 2014
2013 2014
Discount rate 4.8% 5.0%
Compensation increase (where applicable) 0.0% 0.0%
Assumed healthcare cost trend rates at December 31:
Philips Group
Assumed healthcare cost trend rates in %
2013 - 2014
2013 2014
Healthcare cost trend rate assumed for next
year 7.5% 7.0%
Rate that the cost trend rate will gradually reach 5.2% 5.3%
Year of reaching the rate at which it is assumed
to remain 2019 2024
The average duration of the dene-benet obligation
of the retiree medical plans is 8 years (2013: 9 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 investment strategy of the Philips
pension Plan in the Netherlands, is to achieve its agreed
ambition, i.e. an indexed retirement income for all
participants. The fund’s indexation policy is dependent
on the funding ratio and requires a sustainable
(regulatory required) basis before allowing any
indexation. To meet its ambitions, the fund has
strategically allocated 60% of its assets to xed income
and 40% to return assets. Within xed income circa 90%
is invested in so called liability-driven assets (euro and
global government bonds, investment grade credits,
interest rate and ination swaps and mortgages) and
the remaining part in high yield bonds and emerging
market debt. The return assets mainly consist of global
equities and real estate.
The Philips pension plan in the UK operates a xed
income portfolio that aims to fully hedge the interest
rate and ination rate sensitivities of the fair value of
the plan’s pension liabilities. Some 30% of the portfolio
is now invested in a buy-in policy, in which an insurance
company guarantees all future benet 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 US are
invested in a well diversied portfolio. The interest rate
sensitivity of the xed 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 xed 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 ows and costs in 2015
The Company expects considerable cash outows in
relation to post-employment benets which are
estimated to amount to EUR 1,032 million in 2015,
consisting of:
• EUR 819 million employer contributions to dened
benet pension plans
• EUR 140 million employer contributions to dened
contribution pension plans
• EUR 54 million expected cash outows in relation to
unfunded pension plans and
•EUR 19 million in relation to unfunded retiree medical
plans.
The employer contributions to dened benet pension
plans are expected to amount to EUR 196 million for the
Netherlands and EUR 623 million for other countries. The
Company continues to fund a part of the existing decit in
the US pension plan in 2015. For the funding of the decit
in the US plan the Group adheres to the minimum funding
requirements of the US Pension Protection Act and in 2015
plans to contribute an additional EUR 300 million which
amount is included in the amounts aforementioned. The
UK plan is currently in a surplus on a regulatory basis and
does not require any funding in 2015 other than the agreed
administration cost. A new regulatory valuation is
scheduled to be performed for the UK Fund during 2015.