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EMPLOYEE BENEFITS | 12 Months Ended
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Dec. 31, 2017
EMPLOYEE BENEFITS |
EMPLOYEE BENEFITS | NOTE 19 — EMPLOYEE BENEFITS Total assets and liabilities of all types of employee benefits granted by the Company and its subsidiaries as of December 31, 2017 are as follows:
|  | 2017 |  | 2016 |
Plan assets - Defined contribution pension plan |  | 1,149 |  | 1,490 |
Plan assets - Defined benefit pension plan |  | — |  | 55,307 |
Total assets |  | 1,149 |  | 56,797 |
Actuarial liabilities - Defined benefit pension plan |  | 1,084,758 |  | 1,144,080 |
Acturial liabilities - Post-employment health care benefit |  | 316,230 |  | 305,447 |
Retirement and termination benefit liabilities |  | 23,876 |  | 55,276 |
Total liabilities |  | 1,424,864 |  | 1,504,803 |
Current |  | 253 |  | 409 |
Non-current |  | 1,424,611 |  | 1,504,394 |
a) Post-employment defined benefit pension plan The Company’s Canadian and US subsidiaries sponsor defined benefit plans (Canadian Plan and American Plan), collectively referred to as the North-American Plans, that cover substantially all their employees and provide supplemental benefits to employees during retirement. Additionally, the Company and its subsidiaries in Brazil sponsored a defined benefit pension plan (Brazilian plans), which are managed through Gerdau - Sociedade de Previdência Privada, a closed supplementary pension entity. In 2010, it was approved the settlement of a defined benefit plan, in which the participants had the rights for the benefit settled. All participants of those plans, which are now settled, were able to: (i) choose to adhere to a new defined contribution plan, when it was authorized to transfer the amount related to the individual mathematical reserve from the settled plan for the new plan and add amounts to this reserve through future contributions and sponsors, plus the resources profitability; or (ii) do not transfer the reserve and maintain the benefit settled in the defined benefit plan, adjusted by the INPC (National Index of Consumer Prices). The assumptions adopted for pension plans can have a significant effect on the amounts disclosed and recorded for these plans. Due to the migration process and the closing of the Brazilian pension plans in 2010, the Company is not calculating the potential effects of changes in discount rates and expected return rate on assets for these plans. The potential effects of changes to the North-American Plans on the Consolidated Statement of Income are presented below:
|  | 1% Increase |  | 1% Decrease |
Discount rate |  | (19,286 | ) | 15,457 |
The accumulated amount recognized in other Comprehensive Income for employee benefits is R$ (1,227,722) as of December 31, 2017 (R$ (1,111,842) as of December 31, 2016). Defined Benefit Pension Plan The current expenses of the defined benefit pension plans are as follows:
|  | 2017 |  | 2016 |  | 2015 |
Cost of current service |  | 60,595 |  | 57,619 |  | 121,962 |
Interest expense |  | 90,381 |  | 199,389 |  | 226,406 |
Return on plan assets |  | (64,128 | ) | (186,856 | ) | (216,005 | )
Past service cost |  | 1,082 |  | 2,788 |  | (151,685 | )
Curtailment |  | — |  | — |  | (4,510 | )
Settlement |  | (566 | ) | 609 |  | — |
Interest cost on unrecoverable surplus |  | 21,211 |  | 22,916 |  | 23,515 |
Net pension cost |  | 108,575 |  | 96,465 |  | (317 | )
The reconciliations of assets and liabilities of the plans are as follows:
|  | 2017 |  | 2016 |
Present value of defined benefit obligation |  | (4,314,592 | ) | (4,174,653 | )
Fair value of plan assets |  | 3,456,613 |  | 3,292,890 |
Asset ceiling restrictions on recognition of net funded assets |  | (226,779 | ) | (207,010 | )
Net |  | (1,084,758 | ) | (1,088,773 | )
Plan assets |  | — |  | 55,307 |
Defined benefit obligation |  | (1,084,758 | ) | (1,144,080 | )
Changes in plan assets and actuarial liabilities were as follows:
|  | 2017 |  | 2016 |  | 2015 |
Variation of the plan obligations |  |  |  |  |  |  |
Obligation at the begining of the year |  | 4,174,653 |  | 4,739,299 |  | 3,791,670 |
Cost of service |  | 60,595 |  | 57,619 |  | 121,962 |
Interest expense |  | 195,557 |  | 199,389 |  | 226,406 |
Payments of the benefits |  | (335,471 | ) | (317,505 | ) | (398,778 | )
Past service cost |  | 1,082 |  | 2,788 |  | (114,899 | )
Curtailment |  | — |  | — |  | (41,296 | )
Settlement |  | (52,035 | ) | 609 |  | — |
Acturial remeasurements |  | 235,549 |  | 186,905 |  | (202,749 | )
Liabilities held for sale (note 3.4) |  | (101,794 | ) | — |  | — |
Exchange Variance |  | 136,456 |  | (694,451 | ) | 1,356,983 |
Obligation at the end of the year |  | 4,314,592 |  | 4,174,653 |  | 4,739,299 |
|  | 2017 |  | 2016 |  | 2015 |
Variation of the plan assets |  |  |  |  |  |  |
Fair value of the plan assets at the begining of the year |  | 3,292,890 |  | 3,865,411 |  | 3,319,133 |
Return of the plan assets |  | 169,304 |  | 186,857 |  | 216,005 |
Contributions from sponsors |  | 111,450 |  | (47,574 | ) | (14,986 | )
Curtailment |  | — |  | — |  | (5,248 | )
Settlement |  | (51,469 | ) | (6,710 | ) | — |
Payments of benefits |  | (335,471 | ) | (317,505 | ) | (398,778 | )
Remeasurement |  | 232,214 |  | 109,153 |  | (235,275 | )
Assets held for sale (note 3.4) |  | (73,127 | ) | — |  | — |
Exchange Variance |  | 110,822 |  | (496,742 | ) | 984,560 |
Fair value of plan assets at the end of the year |  | 3,456,613 |  | 3,292,890 |  | 3,865,411 |
The fair value of plan assets include shares of the Company in the amount of R$ 3,558 as of December 31, 2017 (R$ 1,895 as of December 31, 2016). Amounts recognized as actuarial gains and losses in the Statement of Comprehensive Income are as follows:
|  | 2017 |  | 2016 |  | 2015 |
Remeasurements |  | (232,214 | ) | (109,153 | ) | 235,275 |
Actuarial Remeasurements |  | 235,549 |  | 186,905 |  | (202,749 | )
Restriction recognized in Other Comprehensive Income |  | (1,696 | ) | 3,065 |  | (44,453 | )
Remeasurements recognized in Other Comprehensive Income |  | 1,639 |  | 80,817 |  | (11,927 | )
The historical actuarial remeasurements are as follows:
|  | 2017 |  | 2016 |  | 2015 |  | 2014 |  | 2013 |
Present value of defined benefit obligation |  | (4,314,592 | ) | (4,174,653 | ) | (4,739,299 | ) | (3,791,670 | ) | (3,113,818 | )
Fair value of the plan assets |  | 3,456,613 |  | 3,292,890 |  | 3,865,411 |  | 3,319,133 |  | 3,081,582 |
Surplus (Deficit) |  | (857,979 | ) | (881,763 | ) | (873,888 | ) | (472,537 | ) | (32,236 | )
Experience adjustments on plan liabilities (Gain) |  | 235,549 |  | 186,905 |  | (202,749 | ) | 466,829 |  | (272,767 | )
Experience adjustments on plan assets (Gain) |  | (232,214 | ) | (109,153 | ) | 235,275 |  | (69,748 | ) | 33,417 |
Actuarial remeasurements are recognized in the period in which they occur and are recorded directly in comprehensive income. The allocations for plan assets are presented below:
|  | 2017 |
|  | Brazilian Plans |  | American Plans |
Fixed income |  | 98.0 | % | 48.3 | %
Variable income |  | — |  | 45.0 | %
Others |  | 2.0 | % | 6.7 | %
Total |  | 100.0 | % | 100.0 | %
|  | 2016 |
|  | Brazilian Plans |  | American Plans |
Fixed income |  | 97.0 | % | 45.8 | %
Variable income |  | — |  | 48.5 | %
Others |  | 3.0 | % | 5.7 | %
Total |  | 100.0 | % | 100.0 | %
The investment strategy for the Brazilian Plan is based on a long-term macroeconomic scenario. This scenario assumes a reduction in Brazil’s sovereign risk, moderate economic growth, stable levels of inflation, exchange rates and moderate interest rates. The Canadian and American subsidiaries have an Investment Committee that defines the investment policy for the defined benefit plans. The primary investment objective is to ensure the security of benefits that were accrued under the plans, providing an adequately funded asset pool which is separated and independent of the Company. To reach this objective, the fund must invest in a manner that adheres to safeguards and diversification to which a prudent investor of pension funds would normally adhere. These subsidiaries retain specialized consultants that advice and support Investment Committee decisions and recommendations. The asset mix policy considers the principles of diversification and long-term investment goals, as well as liquidity requirements. To do this, the target allocation ranges between 50% in shares, 40% in debt securities and 10% in alternative securities. The tables below show a summary of the assumptions used to calculate the defined benefit plans in 2017 and 2016, respectively:
|  | 2017 |
|  | Brazilian Plan |  | North America Plan |
Average discount rate |  | 9.84% |  | 3.25% - 4.25% |
Rate of increase in compensation |  | Not applicable |  | 3.00% |
Mortality table |  | AT-2000 per sex |  | RP-2006 and MP-2017 |
Mortality table of disabled |  | AT-2000 per sex |  | RP-2006 and MP-2017 |
Rate of rotation |  | Based on service and salary level/null |  | Based on age and/or the service |
|  | 2016 |
|  | Brazilian Plan |  | North America Plan |
Average discount rate |  | 10.87% |  | 3.75% - 4.25% |
Rate of increase in compensation |  | Not applicable |  | 3.25% |
Mortality table |  | RP-2000 |  | CPM-2014 and RP-2014 |
Mortality table of disabled |  | AT-2000 per sex |  | Rates by age |
Rate of rotation |  | Based on service and salary level/null |  | Based on age and/or the service |
b) Post-employment defined contribution pension plan The Company and its subsidiaries in Brazil, in the United States and in Canada maintain a defined contribution plan to which contributions are made by the sponsor in proportion to the contributions made by its participating employees. The total cost of these plans was R$ 132,399 in 2017 (R$ 143,561 in 2016). c) Post-employment health care benefit plan The North American plans include, in addition to pension benefits, specific health care benefits for employees who retire after a certain age and with a certain number of years of service. The Americans and Canadian subsidiaries have the right to change or eliminate these benefits, and the contributions are actuarially calculated. The net periodic costs of post-employment health care benefits are as follows:
|  | 2017 |  | 2016 |  | 2015 |
Current service cost |  | 4,441 |  | 4,481 |  | 5,935 |
Interests expense |  | 12,162 |  | 15,494 |  | 18,981 |
Past service cost |  | 5,769 |  | (75,787 | ) | — |
Net cost pension benefit |  | 22,372 |  | (55,812 | ) | 24,916 |
The funded status of the post-employment health benefits plans is as follows:
|  | 2017 |  | 2016 |
Present value of obligations |  | (316,364 | ) | (305,447 | )
Total net liabilities |  | (316,364 | ) | (305,447 | )
Changes in plan assets and actuarial liabilities were as follows:
|  | 2017 |  | 2016 |  | 2015 |
Change in benefit obligation |  |  |  |  |  |  |
Benefit obligation at beginning of the year |  | 305,447 |  | 446,842 |  | 351,538 |
Cost of service |  | 4,441 |  | 4,481 |  | 5,935 |
Interest expense |  | 12,162 |  | 15,494 |  | 18,981 |
Past service cost |  | 5,769 |  | (75,787 | ) | — |
Contributions from participants |  | 1,556 |  | 2,212 |  | 2,206 |
Payment of benefits |  | (14,230 | ) | (14,799 | ) | (17,245 | )
Remeasurements |  | (14,452 | ) | (3,673 | ) | (45,884 | )
Exchange variations |  | 15,671 |  | (69,323 | ) | 131,311 |
Benefit obligation at the end of the year |  | 316,364 |  | 305,447 |  | 446,842 |
|  | 2017 |  | 2016 |  | 2015 |
Change in plan assets |  |  |  |  |  |  |
Contributions from sponsors |  | 12,572 |  | 12,463 |  | 14,733 |
Contributions from participants |  | 1,556 |  | 2,212 |  | 2,206 |
Payments of benefits |  | (14,128 | ) | (14,675 | ) | (16,939 | )
Fair value of plan assets at end of the year |  | — |  | — |  | — |
The historical actuarial gains and losses of the plans are as follows:
|  | 2017 |  | 2016 |  | 2015 |  | 2014 |  | 2013 |
Present value of defined benefit obligation |  | (316,364 | ) | (305,488 | ) | (446,843 | ) | (351,538 | ) | (369,086 | )
Deficit |  | (316,364 | ) | (305,488 | ) | (446,843 | ) | (351,538 | ) | (369,086 | )
Experience adjustments on plan liabilities |  | (14,452 | ) | (3,673 | ) | (45,884 | ) | 42,345 |  | (20,980 | )
The amounts recognized as actuarial gains and losses in other comprehensive income are as follows:
|  |  |  | 2017 |  | 2016 |  | 2015 |
Losses on actuarial obligation |  |  |  | 14,452 |  | (3,673 | ) | (45,884 | )
Actuarial losses recognized in Equity |  |  |  | 14,452 |  | (3,673 | ) | (45,884 | )
The accounting assumptions adopted for post-employment health benefits are as follows:
|  | 2017 |  | 2016 |
Average discount rate |  | 3.25% - 3.50% |  | 3.75% - 4.25% |
Health treatment - rate assumed next year |  | 6.88% - 7.60% |  | 6.40% - 6.80% |
Health treatment - Assumed rate of decline in the cost to achieve in the years of 2026 to 2041 |  | 4.00% - 4.50% |  | 4.00% - 4.50% |
The assumptions adopted for post-employment health benefits have a significant effect on the amounts disclosed and recorded for post-employment health benefits plans. The change of one point percentage on discount rates would have the following effects:
|  | 1% Increase |  | 1% Decrease |
Effect over total service costs and interest costs |  | 92 |  | (765 | )
Effect over benefit plan obligations |  | 37,871 |  | (47,434 | )
d) Other retirement and termination benefits The benefits of this plan provide a compensation supplement up to retirement date, cost of living allowance, and other benefits as a result of termination and retirement of the employees. The Company estimates that the total obligation for these benefits was R$ 23,876 as of December 31, 2017 (R$ 55,276 as of December 31, 2016).

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