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.
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 asset.
The plan in the UK has both final salary and career average elements and it is closed for new entrants. The funding position is reassessed every three years and a schedule of contributions is agreed between the Trustee and company. The Trustee decides the investment strategy and consults with the company. Surplus may be used by making a contribution holiday; any refunds would be taxed at 35%. Benefits are paid from the plan assets.
The main defined benefit plan in Sweden is the collectively agreed pension plan for white collar employees, 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. In 2014, the inflation assumption was revised down from 2.0% to 1.5% due to several years of low actual inflation in Sweden.
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.
In Switzerland, there are three pension plans which are all open for new employees. Benefits are career average in nature, with indexation of benefits following decisions of the foundation boards, subject to legal minima. Contributions are paid to pension foundations 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 schemes are to 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.
There are 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.
| USA | USA Medical |
UK | Sweden | Germany | Switzerland | Other | Total | |
|---|---|---|---|---|---|---|---|---|
| Amounts included in the balance sheet | ||||||||
| Present value of funded and unfunded obligations | 6,662 | 1,736 | 5,183 | 2,803 | 2,990 | 2,437 | 1,074 | 22,885 |
| Fair value of plan assets (after change in asset ceiling) | –6,534 | –1,462 | –5,029 | –2,292 | –1,940 | –2,356 | –292 | –19,905 |
| Total (surplus)/deficit | 128 | 274 | 154 | 511 | 1,050 | 81 | 782 | 2,980 |
| Whereof reported as | ||||||||
| Pension plan assets | — | — | — | — | — | — | — | 445 |
| Provisions for post-employment benefits | — | — | — | — | — | — | — | 3,425 |
| Total funding level for all pension plans, % | 98 | 84 | 97 | 82 | 65 | 97 | 27 | 87 |
| Average duration of the obligation, years | 10.4 | 10.5 | 15.5 | 15.7 | 13.7 | 9.6 | — | 12.5 |
| Amounts included in the income statement | ||||||||
| Service cost1) | –89 | 4 | 20 | 130 | 17 | 55 | 13 | 150 |
| Net interest cost | 32 | 20 | 5 | 24 | 23 | 3 | 20 | 127 |
| Remeasurements (gain)/loss | –787 | –449 | 10 | –599 | –24 | –2 | — | –1,851 |
| Total expense (gain) for defined benefits | –844 | –425 | 35 | –445 | 16 | 56 | 33 | –1,574 |
| Expenses for defined contribution plans | 450 | |||||||
| Amounts included in the cash-flow statement | ||||||||
| Contributions by the employer | — | –84 | –21 | — | — | –38 | –9 | –152 |
| Reimbursement | — | 19 | — | 67 | 368 | — | — | 454 |
| Benefits paid by the employer | –7 | — | — | –108 | –129 | — | –49 | –293 |
| Major assumptions for the valuation of the liability | ||||||||
| Longevity, years2): | ||||||||
| Male | 19.3 | 19.3 | 22.1 | 23.0 | 19.5 | 21.4 | — | 20.8 |
| Female | 21.1 | 21.1 | 24.3 | 24.8 | 23.3 | 23.9 | — | 23.1 |
| Inflation, %3) | 3.0 | 7.5 | 3.25 | 2.0 | 2.0 | 1.5 | — | 2.6 |
| Discount rate, % | 4.4 | 4.4 | 4.4 | 3.7 | 3.3 | 2.1 | — | 3.87 |
| USA | USA Medical |
UK | Sweden | Germany | Switzerland | Other | Total | |
|---|---|---|---|---|---|---|---|---|
| Amounts included in the balance sheet | ||||||||
| Present value of funded and unfunded obligations | 8,971 | 2,093 | 6,485 | 3,452 | 3,548 | 2,837 | 1,155 | 28,541 |
| Fair value of plan assets (after change in asset ceiling) | –8,104 | –1,764 | –6,123 | –2,482 | –2,288 | –2,694 | –323 | –23,778 |
| Total (surplus)/deficit | 867 | 329 | 362 | 970 | 1,260 | 143 | 832 | 4,763 |
| Whereof reported as | ||||||||
| Pension plan assets | — | — | — | — | — | — | — | 399 |
| Provisions for post-employment benefits | — | — | — | — | — | — | — | 5,162 |
| Total funding level for all pension plans, % | 91 | 84 | 94 | 72 | 64 | 95 | 27 | 83 |
| Average duration of the obligation, years | 11.2 | 11.1 | 16.2 | 16.7 | 14.6 | 12.0 | — | 13.5 |
| Amounts included in the income statement | ||||||||
| Service cost4) | 48 | –16 | 17 | 122 | 17 | 17 | 1 | 206 |
| Net interest cost | 6 | 13 | 7 | 18 | 33 | 1 | 18 | 96 |
| Remeasurements (gain)/loss | 589 | 22 | 173 | 369 | 227 | 71 | 82 | 1,533 |
| Total expense (gain) for defined benefits | 643 | 19 | 197 | 509 | 277 | 89 | 101 | 1,835 |
| Expenses for defined contribution plans | 452 | |||||||
| Amounts included in the cash-flow statement | ||||||||
| Contributions by the employer | — | –28 | –22 | — | –1 | –37 | –12 | –100 |
| Reimbursement | — | 8 | — | 74 | — | — | — | 82 |
| Benefits paid by the employer | –14 | — | — | –115 | –138 | — | –52 | –319 |
| Major assumptions for the valuation of the liability | ||||||||
| Longevity, years2): | ||||||||
| Male | 21.6 | 21.6 | 22.1 | 23.0 | 19.6 | 21.4 | — | 21.6 |
| Female | 23.7 | 23.7 | 24.4 | 24.8 | 23.4 | 23.9 | — | 24.1 |
| Inflation, %3) | 3 | 7 | 3 | 1.5 | 1.7 | 1.5 | — | 2.41 |
| Discount rate, % | 3.8 | 3.8 | 3.7 | 2.4 | 2.2 | 1.2 | — | 3.08 |
1) 2013 includes settlement gains of SEK 143m in the US and special events amounting to SEK 19m in various countries.
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 health–care benefits.
4) Includes special events amounting to a gain of SEK 69m in various countries.
| 2013 | 2014 | |
|---|---|---|
| Opening balance, January 1 | 24,882 | 22,885 |
| Current service cost | 274 | 267 |
| Special events | 19 | –62 |
| Interest expense | 814 | 887 |
| Remeasurement arising from changes in financial assumptions | –1,132 | 2,193 |
| Remeasurement from changes in demographic assumptions | 359 | 679 |
| Remeasurement from experience | –369 | 4 |
| Contributions by plan participants | 58 | 46 |
| Benefits paid | –1,220 | –1,389 |
| Exchange differences | 211 | 2,982 |
| Settlements and other | –1,011 | 49 |
| Closing balance, December 31 | 22,885 | 28,541 |
| 2013 | 2014 | |
|---|---|---|
| Opening balance, January 1 | 20,403 | 19,905 |
| Interest income1) | 687 | 791 |
| Return on plan assets, excluding amounts included in interest1) | 736 | 1,316 |
| Effect of asset ceiling | –27 | 21 |
| Net contribution by employer | –9 | 337 |
| Contribution by plan participants | 58 | 46 |
| Benefits paid | –1,220 | –1,389 |
| Exchange differences | 148 | 2,660 |
| Settlements and other | –871 | 91 |
| Closing balance, December 31 | 19,905 | 23,778 |
1) The actual return on plan assets amounts to a gain of SEK 2,107m (1,423).
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.
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.
| USA | USA Medical |
UK | Sweden | Germany | Switzerland | Other | Total | |
|---|---|---|---|---|---|---|---|---|
| Longevity +1 year | 283 | 119 | 217 | 114 | 120 | 87 | 7 | 947 |
| Inflation +0.5%1) | 41 | 125 | 219 | 305 | 215 | 31 | 40 | 976 |
| Discount rate +1% | –880 | –211 | –935 | –500 | –469 | –315 | –108 | –3,418 |
| Discount rate –1% | 1,070 | 254 | 1,156 | 646 | 597 | 395 | 125 | 4,243 |
1) The inflation change feeds through to other inflation-dependant assumptions, i.e., pension increases and salary growth.
In 2015, the Group expects to pay a total of SEK 330m in contributions to the pension funds and as payments of benefits directly to the employees.
| 2013 | |
| Fixed income, SEK 8,293m | 8293 |
| Equity, SEK 7,037m | 7037 |
| Hedge funds, SEK 2,134m | 2134 |
| Real estate, SEK 1,316m | 1316 |
| Infrastructure, SEK 381m | 381 |
| Private equity, SEK 89m | 89 |
| Cash, SEK 681m | 681 |
| 2014 | |
| Fixed income, SEK 10,474m | 10474 |
| Equity, SEK 8,161m | 8161 |
| Hedge funds, SEK 2,563m | 2563 |
| Real estate, SEK 1,492m | 1492 |
| Infrastructure, SEK 347m | 347 |
| Private equity, SEK 92m | 92 |
| Cash, SEK 655m | 655 |
| December 31, | ||
|---|---|---|
| 2013 | 2014 | |
| Fixed income | 33 | 57 |
| Real estate | 1.316 | 1.492 |
| Infrastructure | 381 | 347 |
| Private equity | 89 | 92 |
The Swedish pension foundation carries plan assets at a fair value of SEK 200m related to property used by Electrolux.
Defined benefit pensions and pension plan assets are governed by the Electrolux Pension Board, which resumes 3–4 times per year and has the following responsibilities:
According to Swedish accounting principles adopted by the Parent Company, defined benefit liabilities are calculated based upon officially provided assumptions, which differ from the assumptions used in the Group under IFRS. The pension benefits are secured by contributions to a separate fund or recorded as a liability in the balance sheet. The accounting principles used in the Parent Company’s separate financial statements differ from the IFRS principles, mainly in the following:
| Funded | Unfunded | Total | |
|---|---|---|---|
| Opening balance, January 1, 2013 | 1,430 | 414 | 1,844 |
| Current service cost | 39 | 26 | 65 |
| Interest cost | 59 | 17 | 76 |
| Benefits paid | –61 | –30 | –91 |
| Closing balance, December 31, 2013 | 1,467 | 427 | 1,894 |
| Current service cost | 41 | 8 | 49 |
| Interest cost | 87 | 25 | 112 |
| Benefits paid | –68 | –31 | –99 |
| Closing balance, December 31, 2014 | 1,527 | 429 | 1,956 |
| Funded | |
|---|---|
| Opening balance, January 1, 2013 | 1,845 |
| Actual return on plan assets | 146 |
| Contributions and compensation to/from the fund | –56 |
| Closing balance, December 31, 2013 | 1,935 |
| Actual return on plan assets | 255 |
| Contributions and compensation to/from the fund | –62 |
| Closing balance, December 31, 2014 | 2,128 |
| December 31, | ||
|---|---|---|
| 2013 | 2014 | |
| Present value of pension obligations | –1,894 | –1,956 |
| Fair value of plan assets | 1,935 | 2,128 |
| Surplus/deficit | 41 | 172 |
| Limitation on assets in accordance with Swedish accounting principles | –468 | –601 |
| Net provisions for pension obligations | –427 | –429 |
| Whereof reported as provisions for pensions | –427 | –429 |
| 2013 | 2014 | |
|---|---|---|
| Current service cost | 65 | 49 |
| Interest cost | 76 | 112 |
| Total expenses for defined benefit pension plans | 141 | 161 |
| Insurance premiums | 79 | 79 |
| Total expenses for defined contribution plans | 79 | 79 |
| Special employer’s contribution tax | 30 | 29 |
| Cost for credit insurance FPG | 2 | 2 |
| Total pension expenses | 252 | 271 |
| Compensation from the pension fund | –56 | –61 |
| Total recognized pension expenses | 196 | 210 |
The pension liabilities of the Group’s Swedish defined benefit pension plan (PRI pensions) are funded through a pension foundation established in 1998. The market value of the assets of the foundation amounted at December 31, 2014, to SEK2,518m (2,290m) and the pension commitments to SEK 1,807m (1,739). The Swedish Group companies recorded a liability to the pension fund as per December 31, 2014, in the amount of SEK 0m (0). Contributions to the pension foundation during 2014 amounted to SEK 0m (0). Contributions from the pension foundation during 2014 amounted to SEK 74m (67).