Note 22 Post-employment benefits

All amounts in SEKm unless otherwise stated

Post-employment benefits

The Group sponsors pension plans in many of the countries in which it has significant activities. Pension plans can be defined contribution or defined benefit plans or a combination of both. Under defined benefit pension plans, the company enters into a commitment to provide post-employment benefits based upon one or several parameters for which the outcome is not known at present. For example, benefits can be based on final salary, on career average salary, or on a fixed amount of money per year of employment. Under defined contribution plans, the company’s commitment is to make periodic payments to independent authorities or investment plans, and the level of benefits depends on the actual return on those investments. Some plans combine the promise to make periodic payments with a promise of a guaranteed minimum return on the investments. These plans are also defined benefit plans.

In some countries, Electrolux makes provisions for compulsory severance payments. These provisions cover the Group’s commitment to pay employees a lump sum upon reaching retirement age, or upon the employees’ dismissal or resignation.

In addition to providing pension benefits and compulsory severance payments, the Group provides healthcare benefits for some of its employees in certain countries, mainly in the US.

The cost for pension is disaggregated into three components; service cost, financing cost or income and remeasurement effects. Service cost is reported within Operating income and classified as Cost of goods sold, Selling expenses or Administrative expenses depending on the function of the employee. Financing cost or income is recognized in the Financial items and the remeasurement effects in Other comprehensive income. The Projected Unit Credit Method is used to measure the present value of the obligations and costs.

Net provisions for post-employment benefits in the balance sheet represent the present value of the Group’s obligations less market value of plan assets. The remeasurements of the obligations are made using actuarial assumptions determined at the balance-sheet date. Changes in the present value of the obligations due to revised actuarial assumptions and experience adjustments on the obligation are recorded in Other comprehensive income as remeasurements. The actual return less calculated interest income on plan assets is also recorded in other comprehensive income as remeasurements. Past-­service costs are recognized immediately in income for the period.

Some features of the defined benefit plans in the main countries are described below.

USA

The number of pension plans in the US has been significantly reduced over the years through plan consolidation. The major plan covers 90% of the total obligation in the US. This plan is based on final salary and closed for new entrants. Pensions in payment are not generally subject to indexation. Funding position is reassessed every year with a target to restore the funding level over seven years. Surplus in the fund can be used to take a contribution holiday and refunds are taxed at 50%. Post-retirement healthcare benefits are also provided for in the US. Benefits are mainly paid from the plan assets.

United Kingdom

The defined benefit plan is closed for future accruals and employees are offered defined contribution. The funding position is reassessed every three years and a schedule of contributions is agreed between the Trustee and the company. The Trustee decides the investment strategy and consults with the company. Benefits are paid from the plan assets.

Sweden

The main defined benefit plan in Sweden is the collectively agreed pension plan for white collar employees, the ITP 2 plan, and it is based on final salary. Benefits in payment are indexed according to the decisions of the Alecta insurance company, typically those follow inflation. The plan is semi-closed, meaning that only new employees born before 1979 are covered by the ITP 2 solution. A defined contribution solution is offered to employees born after 1978. Electrolux has chosen to fund the pension obligation by a pension foundation. The foundation’s Board of Directors consists of an equal number of members from Group staff functions and representatives from the company. There is no funding requirement for an ITP pension foundation. Benefits are paid directly by the company and, in case of surplus, the company can reimburse itself for the current and the previous year’s pension cost and/or take a contribution holiday.

Germany

There are several defined benefit plans based on final salary in Germany. Benefits in payment are indexed every three years according to inflation levels. All plans are closed for new participants. Electrolux has arranged a Contractual Trust Arrangement (CTA) and the funds are held by a local bank who acts as the trustee for the scheme. Electrolux controls the assets via an investment committee with members both from Group staff functions and the local German company. No minimum funding requirements or regular funding obligations apply to CTAs. If there is a surplus under both German GAAP and IFRS rules, Electrolux can take a refund up to the German GAAP surplus. Benefits are paid directly by the company and Electrolux can refund itself for pension pay-outs. Over time, Electrolux will have access to any residual funds after the last beneficiary has died.

Switzerland

There are three pension plans in Switzerland. Benefits are career average in nature, with indexation of benefits following decisions of the foundation board, subject to legal minima. Contributions are paid to the pension foundation and a recovery plan has to be set up if the plans are underfunded on the local funding basis. Swiss laws do not state any specific way of calculating an employer´s additional contribution and because of that there is normally no minimum funding requirement. The assets in the foundation is to a large extent handled by local banks and they are working with both asset allocation and selection within a framework decided by the Swiss foundation board. Benefits are paid from the plan assets.

Other countries

There is a variety of smaller plans in other countries and the most important of those are in France, Italy, Canada and Norway. The pension plans in France and Italy are mainly unfunded. The Norwegian pension plans are funded and in Canada there are both funded and unfunded pension plans. A mix of final salary and career average exists in these countries. Some plans are open for new entrants.

Explanation of amounts in the financial statements relating to defined benefit obligations.

Information by country December, 31, 2016

	USA	USA Medical	UK	Sweden	Germany	Switzer– land	Other	Total
Amounts included in the balance sheet
Present value of funded and unfunded obligations	9,466	2,126	6,579	3,342	3,730	3,341	1,150	29,734
Fair value of plan assets (after change in asset ceiling)	–8,321	–1,878	–6,247	–2,699	–3,067	–3,017	–336	–25,565
Total (surplus)/deficit	1,145	248	332	643	663	324	814	4,169
Whereof reported as
Pension plan assets	—	—	—	—	—	—	—	345
Provisions for post-employment benefit plans	—	—	—	—	—	—	—	4,514
Total funding level for all pension plans, %	88	88	95	81	82	90	29	86
Average duration of the obligation, years	10.7	10.5	16.0	16.3	14.5	13.6	—	13.4
Amounts included in the income statement
Service cost1)	58	—	–66	126	21	54	11	204
Net interest cost	42	12	11	14	24	1	12	116
Remeasurements (gain)/loss	–15	–67	48	104	61	63	42	236
Total expense (gain) for defined benefit plans	85	–55	–7	244	106	118	65	556
Expenses for defined contribution plans								507
Amounts included in the cash-flow statement
Contributions by the employer	—	–38	–58	—	–568	–35	–14	–713
Reimbursement	—	—	—	—	—	—	—	—
Benefits paid by the employer	–18	—	—	–112	–147	—	–37	–314
Major assumptions for the valuation of the liability
Longevity, years2)
Male	21.3	21.3	22	23.0	19.8	22.3	—	21.9
Female	23.4	23.4	24.4	24.8	23.5	24.3	—	24.2
Inflation, %3)	3	7	3.25	1.5	1.8	1	—	2.42
Discount rate, %	3.9	3.9	2.8	2.6	1.8	0.6	—	2.79

 

Information by country December, 31, 2015

	USA	USA Medical	UK	Sweden	Germany	Switzer– land	Other	Total
Amounts included in the balance sheet
Present value of funded and unfunded obligations	9,075	2,087	6,644	3,110	3,573	3,112	1,068	28,669
Fair value of plan assets (after change in asset ceiling)	–8,078	–1,787	–6,204	–2,565	–2,342	–2,884	–300	–24,160
Total (surplus)/deficit	997	300	440	545	1,231	228	768	4,509
Whereof reported as
Pension plan assets	—	—	—	—	—	—	—	397
Provisions for post-employment benefit plans	—	—	—	—	—	—	—	4,906
Total funding level for all pension plans, %	89	86	93	82	66	93	28	84
Average duration of the obligation, years	10.5	10.6	16.4	15.8	14.6	12.7	—	13.3
Amounts included in the income statement
Service cost4)	66	—	–48	168	20	54	12	272
Net interest cost	35	14	14	20	26	1	13	123
Remeasurements (gain)/loss	–24	–31	128	–572	109	59	–12	–343
Total expense (gain) for defined benefit plans	77	–17	94	–384	155	114	13	52
Expenses for defined contribution plans								496
Amounts included in the cash-flow statement
Contributions by the employer	—	–37	–24	—	–1	–39	–13	–114
Reimbursement	—	—	—	81	—	—	—	81
Benefits paid by the employer	–15	—	—	–115	–145	—	–48	–323
Major assumptions for the valuation of the liability
Longevity, years2)
Male	21.2	21.2	22.3	23.0	19.8	21.6	—	21.5
Female	23.4	23.4	24.6	24.8	23.5	24.1	—	24
Inflation, %3)	3.0	7.0	3.0	1.5	1.8	1.0	—	2.38
Discount rate, %	4.1	4.1	3.6	2.9	2.0	0.6	—	3.13

¹⁾ Includes special events amounting to a gain of SEK 75m in the UK.

²⁾ Expressed as the average life expectancy of a 65 years old person in number of years.

³⁾ General inflation impacting salary and pensions increase. For USA Medical, the number refers to the inflation of healthcare benefits.

⁴⁾ Includes special events amounting to a gain of SEK 78m in various countries.

 

Reconciliation of change in present value of funded and unfunded obligations

	2016	2015
Opening balance, January 1	28,669	28,541
Current service cost	278	346
Special events	–75	–74
Interest expense	852	888
Remeasurement arising from changes in financial assumptions	1,296	–143
Remeasurement from changes in demographic assumptions	–218	–56
Remeasurement from experience	–15	–231
Contributions by plan participants	46	50
Benefits paid	–1,564	–1,563
Exchange differences	483	1,092
Settlements and other	–18	–181
Closing balance, December 31	29,734	28,669

Reconciliation of change in the fair value of plan assets

	2016	2015
Opening balance, January 1	24,160	23,778
Interest income1)	736	765
Return on plan assets, excluding amounts included in interest1)	824	–71
Effect of asset ceiling	3	–16
Net contribution by employer	1,027	356
Contribution by plan participants	46	50
Benefits paid	–1,564	–1,563
Exchange differences	343	1,041
Settlements and other	–10	–180
Closing balance, December 31	25,565	24,160

¹⁾ The actual return on plan assets amounts to a gain of SEK 1,560m (694).

Risks

There are mainly three categories of risks related to defined benefit obligations and pension plans. The first category relates to risks affecting the actual pension payments. Increased longevity and inflation of salary and pensions are the principle risks that may increase the future pension payments and, hence, increase the pension obligation. The second category relates to investment return. Pension plan assets are invested in a variety of financial instruments and are exposed to market fluctuations. Poor investment return may reduce the value of investments and render them insufficient to cover future pension payments. The final category relates to measurement and affects the accounting for pensions. The discount rate used for measuring the present value of the obligation may fluctuate which impacts the valuation of the Defined Benefit Obligation (DBO). The discount rate also impacts the size of the interest income and expense that is reported in the Financial items and the service cost. When determining the discount rate, the Group uses AA rated corporate bond indexes which match the duration of the pension obligations. In Sweden and Norway, mortgage-backed bonds are used for determining the discount rate. Expected inflation and mortality assumptions are based on local conditions in each country and changes in those assumptions may also affect the measured obligation and, therefore, the accounting entries.

Investment strategy and risk management

The Group manages the allocation and investment of pension plan assets with the aim of decreasing the total pension cost over time. This means that certain risks are accepted in order to increase the return. The investment horizon is long-term and the allocation ensures that the investment portfolios are well diversified. In some countries, a so called trigger-points scheme is in place, whereby the investment in fixed income assets increases as the funding level improves. The Board of Electrolux annually approves the limits for asset allocation. The final investment decision often resides with the local trustee that consults with Electrolux. The risks related to pension obligations, e.g., mortality exposure and inflation, are monitored on an ongoing basis. Buy-out premiums are also monitored and other potential liability management actions are also considered to limit the exposure to the Group.

Below is the sensitivity analysis for the main financial assumptions and the potential impact on the present value of the defined pension obligation. Note that the sensitivities are not meant to express any view by Electrolux on the probability of a change.

Sensitivity analysis on defined benefit obligation

	USA	USA Medical	UK	Sweden	Germany	Switzer– land	Other	Total
Longevity +1 year	318	123	281	110	132	127	9	1,100
Inflation +0.5%1)	44	118	167	295	252	36	42	954
Discount rate +1%	–919	–205	–947	–482	–492	–420	–103	–3,568
Discount rate –1%	1,072	236	1,223	624	625	485	121	4,386

¹⁾ The inflation change feeds through to other inflation-dependant assumptions, i.e., pension increases and salary growth.

In 2017, the Group expects to pay a total of SEK 365m in contributions to the pension funds and as payments of benefits directly to the employees.

 

Market value of plan assets by category

	December 31,
Market value of plan assets without quoted prices	2016	2015
Fixed income	83	93
Real estate	1,998	1,840
Infrastructure	340	346
Private equity	81	90

The Swedish pension foundation carries plan assets at a fair value of SEK 200m related to property used by Electrolux.