24. EMPLOYEE BENEFIT OBLIGATIONS

This item includes:

(in thousands of euro)
 
12/31/2011 12/31/2010
Pension funds:    
- funded 266,404 216,762
- unfunded 85,014 85,819
Employees’ leaving indemnity (Italian companies) 40,484 44,470
Healthcare plans 21,270 19,768
Other benefits
68,564 114,905
 
481,736 481,724

 

Pension funds

The following table shows a breakdown of pension funds at December 31, 2011:

(in thousands of euro)
 
 
12/31/2011
Germany Total
unfunded
pension funds
USA UK Other countries
Total
funded
pension funds
Funded funds      
Present value of
funded liabilities
-
-
146,441 925,581 3,586 1,075,608
Fair value of plan
assets
-
-
(85,788) (720,465) (2,951) (809,204)
Unfunded funds
Present value of
unfunded liabilities
85,014 85,014 -
-
-
-
Net liabilities
recognised
85,014 85,014 60,653 205,116 635 266,404
of which:      
- Tyre 85,014 85,014 60,653 121,003 635 182,291
- Other -
-
-
84,113 -
84,113

 

The following table shows a breakdown of pension funds at December 31, 2010:

(in thousands of euro)
 
 
12/31/2010
Germany Total
unfunded
pension funds
USA UK Other countries
Total
funded
pension funds
Funded funds      
Present value of
funded liabilities
-
-
133,851 868,573 3,351 1,005,775
Fair value of plan
assets
-
-
(81,878) (704,434) (2,701) (789,013)
Unfunded funds     
Present value of
unfunded liabilities
85,819 85,819 -
-
-
-
Net liabilities
recognised
85,819 85,819 51,973 164,139 650 216,762
of which:      
- Tyre 85,819 85,819 51,973 90,641 650 143,264
- Other -
-
-
73,498 -
73,498

 

The characteristics of the principal pension funds existing at December 31, 2011 are described as follows:

  • Germany – Tyre Business: this is an unfunded defined-benefit plan based on the final salary. It provides a supplementary pension in addition to the state pension. The plan was closed in October 1982; consequently the members of the plan are employees whose employment began prior to that date;
  • USA – Tyre Business: this is a funded defined-benefit plan based on the final salary. It provides a supplementary pension in addition to the state pension and is administered by a trust. The plan was closed in 2001 and frozen in 2003 for employees who were transferred to a defined-contribution scheme. All members of the plan are retired;
  • UK: these are funded defined-benefit plans based on the final salary. They provide a supplementary pension in addition to the state pension and are administered in trusts. The plans were closed in 2001. The Tyre Business plan was frozen in 2010 for employees hired before 2001, who were transferred to a defined-contribution plan. The plan operated by the subsidiary Pirelli UK Ltd, which includes the employees in the Cables and Systems segment sold in 2005, had already been frozen at the time of the sale in 2005.

 

The changes in the period in the present value of the liabilities for pension funds (funded and unfunded) are as follows:

(in thousands of euro)

12/31/2011 12/31/2010
Opening balance 1,091,594 1,000,797
Translation differences 33,114 34,245
Discontinued operations - (8,142)
Movements through Income Statement:   
- current service cost 1,006 2,128
- interest cost 55,869 56,820
- curtailment/settlement - (1,049)
Actuarial (gains) losses recognised in Equity 35,024 60,478
Employee contributions 26 317
Benefits paid (55,752) (53,442)
Other (259) (558)
Closing balance 1,160,622 1,091,594

 

The fair value of the pension plan assets changed during the year as follows:

(in thousands of euro)

12/31/2011 12/31/2010
Opening balance (789,013) (686,119)
Translation differences (26,346) (25,116)
Movements through Income Statement:   
- expected return on plan assets (51,302) (48,864)
Actuarial (gains) losses recognised in Equity 44,667 (39,665)
Employer contributions (36,737) (22,829)
Employee contributions (26) (13,916)
Benefits paid 49,294 46,937
Other 259 559
Closing balance
(809,204) (789,013)

 

The assumptions used to calculate the expected return on the pension plan assets are based on the expected returns of the underlying assets (shares, bonds and deposits). The expected return is derived from the general average of the returns expected from the assets for each separately identified investment class, with reference to an effective or objective composition of the assets.

The expected return of each investment class is derived from the market returns available at the reporting date. In particular, the expected return on stock is derived from a risk-free rate of return with the addition of an adequate risk premium.

The following table shows a breakdown of the composition for funded pension plan assets:

(in %)
  12/31/2011 12/31/2010
UK USA OTHER
COUNTRIES
UK USA OTHER
COUNTRIES
Shares 10% 70% - 63% 70% -
Bonds 14% 25% - 27% 25% -
Deposits 19% - - 2% - -
Balanced funds 56% - - - - -
Other 1% 5% 100% 8% 5% 100%
 
100% 100% 100% 100% 100% 100%

 

In the United Kingdom, the investment strategy has been modified by adopting a new governance system, called fiduciary management. This aims to guarantee higher professional standards and faster reaction to financial market dynamics, as part of a mandate that defines management limits, especially in terms of risk management. Consequently a portfolio of financial instruments was defined with the aim of exact replication of pension liability dynamics in terms of related cash flows. This approach has already reduced the risks related to interest rates and inflation rates by one third. These risks will be further reduced by increasing the degree of their coverage gradually as financial market conditions allow, in view of progressive de-risking.

The actual return of pension plan assets was as follows:

(in thousands of euro)
   USA UK OTHER COUNTRIES TOTAL
Actual return 2011 - (Gains)
losses
(2,694) (5,564) (166) (8,424)
Actual return 201o - (Gains)
losses
(6,961) (81,399) (290) (88,650)

 

The pension fund costs expensed to income are as follows:

(in thousands of euro)
   
2011 2010
Current service cost 1,006 2,128
Interest cost 55,869 56,820
Expected return on plan assets (51,302) (48,864)
Curtailment - (1,049)
  
5,573 9,035

 

The amounts expensed to the income statement are included in the item “Personnel Expense” (note 32).

The contributions expected to be paid into the pension funds during 2012 total euro 36,232 thousand.

 

Employees’ leaving indemnities (TFR) – Italian companies

Employees’ leaving indemnities (Italian companies) changed as follows:

(in thousands of euro)
  12/31/2011 12/31/2010
Opening balance 44,470 51,454
Discontinued operations - (5,538)
Movements through Income Statement 2,165 2,341
Curtailment - 371
Actuarial (gains) losses recognised in Equity (166) 314
Payments/advances (5,690) (4,621)
Other (295) 149
Closing balance 40,484 44,470
of which:  
- Tyre 34,792 34,767
- Other 5,692 9,703

 

The changes recognised in the income statement for 2011 relate only to interest costs accrued on employees’ leaving indemnities at December 31, 2010. Following the reform introduced in the 2007 Italian Budget Act, employees’ leaving indemnities were transformed into a definedcontribution plan.

The amounts expensed to the income statement are included in the item “Personnel Expenses” (note 32).

 

Healthcare plans

Healthcare plans are broken down as follows:

(in thousands of euro)
    USA  
Liabilities recognised at 12/31/2011 21,270
Liabilities recognised at 12/31/2010 19,768

 

The healthcare plan existing in the United States (Tyre Business) covers both white and blue collars, both active and retired.

The plan is divided into two components “pre-Medicare” and “post-Medicare”; the latter is reserved for participants more than 65 years old.

Contributions are paid by both the employer and the employees.

The changes in the period in liabilities recognised for healthcare plans are as follows:

(in thousands of euro)
  31/12/2011 31/12/2010
Opening balance 19,768 17,899
Translation differences 716 1,390
Movements through Income Statement:  
- current service cost 4 5
- interest cost 925 1,070
Actuarial (gains) losses recognised in Equity 1,019 448
Benefits paid (1,162) (1,044)
Closing balance 21,270 19,768

 

The effect of an increase or decrease of one percentage point in the projected healthcare cost trend rates is as follows:

(in thousands of euro) 
 
1% Increase 1% decrease
 
12/31/2011 12/31/2010 12/31/2011 12/31/2010
Effect on current service cost and interest cost 33 38 (32) (36)
Effect on liabilities recognised in the balance sheet 765 711 (742) (692)

 

The healthcare plan costs expensed to income are as follows:

(in thousands of euro) 
   20112010
Current service costs 4 5
Interest cost 925 1,070
   929 1,075

 

The amounts expensed to the income statement are included in the item “Personnel Expense” (note 32).

 

Additional information regarding post-employment benefits

Net actuarial losses accrued in 2011 and recognised directly in equity totalled euro 80,647 thousand (at December 31, 2010 net actuarial losses totalled euro 21,618 thousand).

The cumulative amount of net losses at December 31, 2011, euro 486,590 thousand, including euro 486,562 thousand attributable to the owners of the parent (at December 31, 2010 net losses totalled euro 405,911 thousand, including euro 405,889 thousand attributable to the owners of the parent), is broken down as follows:

(in thousands of euro)

CUMULATIVE 12/31/2011
ITALY GERMANY USA UK OTHER CONTRIES TOTAL
Pension funds - (10,267) (102,845) (368,267) (10,471) (491,850)
Healthcare plans - - (10,708) - - (10,708)
Employees’ leaving indemnity 15,968 - - - - 15,968
Total actuarial gains (losses) recognised in Equity 15,968 (10,267) (113,553) (368,267) (10,471) (486,590)

 

The figure includes the portion of actuarial gains/(losses) determined upon transition to IFRS.

The breakdown by country at December 31, 2010, which also included the amount determined upon transition to IFRS, was as follows:

(in thousands of euro)

CUMULATIVE 12/31/2010
ITALY GERMANY USA UK OTHER CONTRIES TOTAL
Pension funds - (8,924) (85,461) (307,234) (10,404) (412,023)
Healthcare plans - - (9,689) - - (9,689)
Employees’ leaving indemnity 15,801 - - - - 15,801
Total actuarial gains (losses) recognised in Equity 15,801 (8,924) (95,150) (307,234) (10,404) (405,911)

 

The principal actuarial assumptions used at December 31, 2011 and for determining the projected cost for 2012 are as follows:

December 31 2011
 
ITALY GERMANY NETHERLANDS UK USA
Discount rate 4.60% 4.60% 4.60% 4.80% 4.60%
Inflation rate 2.00% 2.00% 2.00% 3.00% -
Expected return on plan assets - - 4.60% 5.77% 7.10%
Expected rate of wage and salary increase - 2.50% 2.00% 3.00% - 4.00% -
Healthcare cost trend rates - initial  - - - - 7.50%
Healthcare cost trend rates - final  - - - - 4.50%

 

The principal actuarial assumptions used at December 31, 2010 and for determining the projected cost for 2012 are as follows:

December 31 2010
  ITALY GERMANY NETHERLANDS UK USA
Discount rate 4.75% 4.75% 4.75% 5.40% 5.10%
Inflation rate 2.00% 2.00% 2.00% 3.30% -
Expected return on plan asset - - 4.75% 6.56% 7.25%
Expected rate of wage and salary increases - 2.50% 2.00% 3.30% - 4.30% -
Healthcare cost trend rates - initial - - - - 8.00%
Healthcare cost trend rates - finale - - - - 4.50%

 

The discount rates are used to measure the obligation and the financial component of the net present cost. The Group selected these rates on the basis of the yield curve of fixed-income securities (corporate bonds) of major companies (with AA+ ratings) at the valuation date of the plans.

The healthcare cost trend rate represents the projected increase in expenses for medical assistance. This rate is determined on the basis of the specific experience of the segment and of various trends, including the specific inflation projections in the healthcare sector.

The initial rate used represents a short-term trend based on recent experience and on prevailing market conditions. The final rate used is a long-term assumption which takes into account, among other factors, inflation in healthcare costs on the basis of the general inflation trend, incremental medical inflation, technologies, new drugs, the average age of the population and a different mix of medical services.

The expected rates of return on the assets reflect the estimates of the trend in average longterm rates of the pension plan assets for the entire duration of the obligation. The expected return is defined for each asset class (equities, bonds, cash, and real estate) and is net of the projected administrative costs.

The historical trend and the correlation of the returns, estimates of future trends and other significant financial factors are analysed to ensure that they are reasonable and consistent.

The adjustments based on past experience, in relation to defined benefit plans, are as follows:

(in thousands of euro)
  12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007
Experience adjustments on plan liabilities - (gains)
losses
(14,842) 19,295 942 (9,553) 16,097
Experience adjustments on plan assets - (gains)
losses
36,985 (39,786) (56,158) 224,875 (744)

 

The adjustments of liabilities represent the change of the actuarial liability not deriving from modifications of the actuarial assumptions. They normally include changes in the demographic and compensation structure. Changes to the plan rules (past service costs) are excluded from the past experience.

The adjustments of the assets represent the difference between the actual return on plan assets and the expected return at the beginning of the year.

 

Other benefits

Other benefits are broken down as follows:

(in thousands of euro)
 
12/31/2011 12/31/2010
Long-term bonus plans 7,659 57,847
Jubilee awards 14,633 13,249
Benefits similar to employees’ leaving indemnity - non-Italian companies 25,374 23,840
Other long-term benefits 20,898 19,969
 
68,564 114,905

 

The long-term bonus plans for management, amounting to Euro 7,659 thousand (Euro 57,847 thousand at December 31, 2010) reflects the amount accrued for 2011, approved by the Board of Directors of PIRELLI & C. S.p.A. on November 3, 2010 for 2011-2013 and earmarked for all Group executives. The decrease from December 31, 2010 stems from reclassification of the bonus plan (for 2009-2011) approved by the Board of Directors of PIRELLI & C. S.p.A. on April 21, 2009 and reserved for about 90 senior managers, as current payables to employees insofar as their right was vested.