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POST-RETIREMENT AND OTHER LONG-TERM EMPLOYEES BENEFITS | 12 Months Ended
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Dec. 31, 2012
POST-RETIREMENT AND OTHER LONG-TERM EMPLOYEES BENEFITS |
15. | POST-RETIREMENT AND OTHER LONG-TERM EMPLOYEES BENEFITS
The Company and its subsidiaries have a number of defined benefit pension plans, mainly unfunded, and other long-term employees’ benefits covering employees in various countries. The defined benefit plans provide pension benefits based on years of service and employee compensation levels. The other long-term employees’ plans provide benefits due during the employees’ period of service after certain seniority levels. The Company uses a December 31 measurement date for its plans. Eligibility is generally determined in accordance with local statutory requirements. For Italian termination indemnity plan (“TFR”), generated before July 1, 2007, the Company continues to measure the vested benefits to which Italian employees are entitled as if they retired immediately as of December 31, 2012, in compliance with U.S. GAAP guidance on determining vested benefit obligations for defined benefit pension plans. The changes in benefit obligation and plan assets were as follows:
|  | Pension Benefits |  |  | Other Long-Term Benefits |
|  | December 31, 2012 |  |  | December 31, 2011 |  |  | December 31, 2012 |  |  | December 31, 2011 |
Change in benefit obligation: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Benefit obligation at beginning of year |  |  | 794 |  |  |  | 701 |  |  |  | 52 |  |  |  | 50 |
Service cost |  |  | 40 |  |  |  | 34 |  |  |  | 9 |  |  |  | 8 |
Interest cost |  |  | 31 |  |  |  | 33 |  |  |  | 3 |  |  |  | 3 |
Employee contributions |  |  | 6 |  |  |  | 7 |  |  |  | — |  |  |  | — |
Benefits paid |  |  | (21 | ) |  |  | (20 | ) |  |  | (3 | ) |  |  | (2 | )
Effect of settlement |  |  | (31 | ) |  |  | (18 | ) |  |  | — |  |  |  | — |
Actuarial (gain) loss |  |  | 58 |  |  |  | 73 |  |  |  | 2 |  |  |  | (5 | )
Transfer in |  |  | 70 |  |  |  | 3 |  |  |  | 3 |  |  |  | 1 |
Transfer out |  |  | (70 | ) |  |  | (3 | ) |  |  | (3 | ) |  |  | (1 | )
Plan amendment |  |  | 4 |  |  |  | — |  |  |  | — |  |  |  | — |
Foreign currency translation adjustment |  |  | 20 |  |  |  | (16 | ) |  |  | — |  |  |  | (2 | )
Benefit obligation at end of year |  |  | 901 |  |  |  | 794 |  |  |  | 63 |  |  |  | 52 |
Change in plan assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Plan assets at fair value at beginning of year |  |  | 378 |  |  |  | 372 |  |  |  | — |  |  |  | — |
Expected return on plan assets |  |  | 18 |  |  |  | 20 |  |  |  | — |  |  |  | — |
Employer contributions |  |  | 34 |  |  |  | 30 |  |  |  | — |  |  |  | — |
Employee contributions |  |  | 6 |  |  |  | 7 |  |  |  | — |  |  |  | — |
Benefits paid |  |  | (11 | ) |  |  | (8 | ) |  |  | — |  |  |  | — |
Effect of settlement |  |  | (30 | ) |  |  | (16 | ) |  |  | — |  |  |  | — |
Actuarial gain (loss) |  |  | 17 |  |  |  | (25 | ) |  |  | — |  |  |  | — |
Transfer in |  |  | 40 |  |  |  | 1 |  |  |  | — |  |  |  | — |
Transfer out |  |  | (40 | ) |  |  | (1 | ) |  |  | — |  |  |  | — |
Foreign currency translation adjustments |  |  | 10 |  |  |  | (2 | ) |  |  | — |  |  |  | — |
Plan assets at fair value at end of year |  |  | 422 |  |  |  | 378 |  |  |  | — |  |  |  | — |
Funded status |  |  | (479 | ) |  |  | (416 | ) |  |  | (63 | ) |  |  | (52 | )
Net amount recognized in the balance sheet consisted of the following: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-current assets |  |  | 5 |  |  |  | 1 |  |  |  | — |  |  |  | — |
Current liabilities |  |  | (16 | ) |  |  | (16 | ) |  |  | (3 | ) |  |  | (3 | )
Long-term liabilities |  |  | (468 | ) |  |  | (401 | ) |  |  | (60 | ) |  |  | (49 | )
Net amount recognized |  |  | (479 | ) |  |  | (416 | ) |  |  | (63 | ) |  |  | (52 | )
The components of accumulated other comprehensive income (loss) before tax effects were as follows:
|  | Actuarial (gains)/losses |  |  | Prior service cost |  |  | Total |
Other comprehensive loss as at December 31, 2010 |  |  | 86 |  |  |  | 11 |  |  |  | 97 |
Net amount generated/arising in current year |  |  | 98 |  |  |  | — |  |  |  | 98 |
Amortization |  |  | (6 | ) |  |  | (1 | ) |  |  | (7 | )
Foreign currency translation adjustment |  |  | (3 | ) |  |  | — |  |  |  | (3 | )
Other comprehensive loss as at December 31, 2011 |  |  | 175 |  |  |  | 10 |  |  |  | 185 |
Net amount generated/arising in current year |  |  | 43 |  |  |  | 4 |  |  |  | 47 |
Amortization |  |  | (14 | ) |  |  | (5 | ) |  |  | (19 | )
Foreign currency translation adjustment |  |  | 5 |  |  |  | — |  |  |  | 5 |
Other comprehensive loss as at December 31, 2012 |  |  | 209 |  |  |  | 9 |  |  |  | 218 |
In 2013, the Company expects to amortize $13 million of actuarial losses and $1 million of past service cost. The components of the net periodic benefit cost included the following:
|  | Pension Benefits |  |  | Other Long-term Benefits |
|  | Year ended December 31, 2012 |  |  | Year ended December 31, 2011 |  |  | Year ended December 31, 2010 |  |  | Year ended December 31, 2012 |  |  | Year ended December 31, 2011 |  |  | Year ended December 31, 2010 |
Service cost |  |  | 40 |  |  |  | 34 |  |  |  | 25 |  |  |  | 9 |  |  |  | 8 |  |  |  | 8 |
Interest cost |  |  | 31 |  |  |  | 33 |  |  |  | 26 |  |  |  | 3 |  |  |  | 3 |  |  |  | 2 |
Expected return on plan assets |  |  | (18 | ) |  |  | (20 | ) |  |  | (18 | ) |  |  | — |  |  |  | — |  |  |  | — |
Amortization of actuarial net loss (gain) |  |  | 12 |  |  |  | 6 |  |  |  | 4 |  |  |  | 2 |  |  |  | (5 | ) |  |  | 3 |
Amortization of prior service cost |  |  | 5 | (1) |  |  | 1 |  |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | 1 |
Effect of settlement |  |  | — |  |  |  | (1 | ) |  |  | 5 |  |  |  | — |  |  |  | — |  |  |  | — |
Effect of curtailment |  |  | — |  |  |  | — |  |  |  | (2 | ) |  |  | — |  |  |  | — |  |  |  | (1 | )
Net periodic benefit cost |  |  | 70 |  |  |  | 53 |  |  |  | 41 |  |  |  | 14 |  |  |  | 6 |  |  |  | 13 |
(1) | The amortization of prior service cost includes about $4 million costs in relation with ST-Ericsson April 2012 restructuring plan.
The weighted average assumptions used in the determination of the benefit obligation and the plan asset for the pension plans and the other long-term benefits were as follows:
Assumptions |  | December 31, 2012 |  |  | December 31, 2011 |
Discount rate |  |  | 3.43 | % |  |  | 4.14 | %
Salary increase rate |  |  | 2.92 | % |  |  | 2.99 | %
Expected long-term rate of return on funds for the pension expense of the year |  |  | 4.43 | % |  |  | 4.57 | %
The weighted average assumptions used in the determination of the net periodic benefit cost for the pension plans and the other long-term benefits were as follows:
Assumptions |  | Year ended December 31, 2012 |  |  | Year ended December 31, 2011 |  |  | Year ended December 31, 2010 |
Discount rate |  |  | 4.14 | % |  |  | 4.68 | % |  |  | 5.11 | %
Salary increase rate |  |  | 2.99 | % |  |  | 3.13 | % |  |  | 3.08 | %
Expected long-term rate of return on funds for the pension expense of the year |  |  | 4.57 | % |  |  | 4.99 | % |  |  | 5.28 | %
The discount rate was determined by reference to market yields on high quality long-term corporate bonds applicable to the respective country of each plan, with terms consistent with the term of the benefit obligations concerned. In developing the expected long-term rate of return on assets, the Company modelled the expected long-term rates of return for broad categories of investments held by the plan against a number of various potential economic scenarios. The Company’s pension plan asset allocation at December 31, 2012 and at December 31, 2011 is as follows:
|  | Percentage of Plan Assets at December |
Asset Category |  | 2012 |  |  | 2011 |
Equity securities |  |  | 37 | % |  |  | 31 | %
Bonds securities remunerating interest |  |  | 31 | % |  |  | 25 | %
Real estate |  |  | 2 | % |  |  | 3 | %
Other |  |  | 30 | % |  |  | 41 | %
Total |  |  | 100 | % |  |  | 100 | %
The Company’s detailed pension plan asset allocation including the fair-value measurements of those plan assets as at December 31, 2012 is as follows:
|  | Total |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Cash and cash equivalents |  |  | 5 |  |  |  | 5 |  |  |  | — |  |  |  | — |
Equity securities |  |  | 156 |  |  |  | 9 |  |  |  | 147 |  |  |  | — |
Government debt securities |  |  | 13 |  |  |  | 12 |  |  |  | 1 |  |  |  | — |
Corporate debt securities |  |  | 119 |  |  |  | 4 |  |  |  | 115 |  |  |  | — |
Investment funds |  |  | 7 |  |  |  | 1 |  |  |  | 3 |  |  |  | 3 |
Real estate |  |  | 9 |  |  |  | — |  |  |  | 5 |  |  |  | 4 |
Other (mainly insurance assets – contracts and reserves) |  |  | 113 |  |  |  | — |  |  |  | — |  |  |  | 113 |
TOTAL |  |  | 422 |  |  |  | 31 |  |  |  | 271 |  |  |  | 120 |
The Company’s detailed pension plan asset allocation including the fair-value measurements of those plan assets as at December 31, 2011 is as follows:
|  | Total |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Cash and cash equivalents |  |  | 10 |  |  |  | 10 |  |  |  | — |  |  |  | — |
Equity securities |  |  | 116 |  |  |  | 12 |  |  |  | 104 |  |  |  | — |
Government debt securities |  |  | 15 |  |  |  | 13 |  |  |  | 2 |  |  |  | — |
Corporate debt securities |  |  | 78 |  |  |  | 2 |  |  |  | 76 |  |  |  | — |
Derivatives |  |  | 16 |  |  |  | 16 |  |  |  | — |  |  |  | — |
Investment funds |  |  | 32 |  |  |  | — |  |  |  | 30 |  |  |  | 2 |
Real estate |  |  | 12 |  |  |  | — |  |  |  | 8 |  |  |  | 4 |
Other (mainly insurance assets – contracts and reserves) |  |  | 99 |  |  |  | 1 |  |  |  | — |  |  |  | 98 |
TOTAL |  |  | 378 |  |  |  | 54 |  |  |  | 220 |  |  |  | 104 |
The Company revised the hierarchy classification of certain plan assets for which the Company believes the observability of the inputs more closely represent Level 2 or Level 3 valuations. The prior period has been revised to conform to the current period presentation. In 2011, the Company reclassified $124 million of mutual funds from Level 1 to Level 2 and $94 million of pension insurance contracts mainly from Level 2 to Level 3. Fair value measurement is further described in Note 24. For plan assets measured at fair value using significant unobservable inputs (Level 3), the reconciliation between January 1, 2012 and December 31, 2012 is presented as follows:
In millions of U.S. dollars |  | Fair Value Measurements using Significant Unobservable Inputs (Level 3) |
January 1, 2012 |  |  | 104 |
Actual return on plan assets |  |  | 3 |
Contributions (employer and employee) |  |  | 16 |
Benefits paid |  |  | (3 | )
Settlements |  |  | (7 | )
Reclassification to Level 3 |  |  | 4 |
Foreign currency translation adjustment |  |  | 3 |
December 31, 2012 |  |  | 120 |
For plan assets measured at fair value using significant unobservable inputs (Level 3), the reconciliation between January 1, 2011 and December 31, 2011 is presented as follows:
In millions of U.S. dollars |  | Fair Value Measurements using Significant Unobservable Inputs (Level 3) |
January 1, 2011 |  |  | 12 |
Reclassification to Level 2 |  |  | (2 | )
Reclassification to Level 3 |  |  | 94 |
December 31, 2011 |  |  | 104 |
The Company’s investment strategy for its pension plans is to maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits while maintaining adequate funding levels. The Company’s practice is to periodically conduct a review in each subsidiary of its asset allocation strategy. A portion of the fixed income allocation is reserved in short-term cash to provide for expected benefits to be paid. The Company’s equity portfolios are managed in such a way as to achieve optimal diversity and in certain jurisdictions they are entirely managed by the multi-employer funds. The Company does not manage any assets internally. After considering the funded status of the Company’s defined benefit plans, movements in the discount rate, investment performance and related tax consequences, the Company may choose to make contributions to its pension plans in any given year in excess of required amounts. The Company contributions to plan assets were $34 million and $30 million in 2012 and 2011 respectively and the Company expects to contribute cash of $17 million in 2013. The Company’s estimated future benefit payments as of December 2012 are as follows:
Years |  | Pension Benefits |  |  | Other Long-term Benefits |
2013 |  |  | 27 |  |  |  | 3 |
2014 |  |  | 32 |  |  |  | 5 |
2015 |  |  | 25 |  |  |  | 11 |
2016 |  |  | 30 |  |  |  | 4 |
2017 |  |  | 36 |  |  |  | 4 |
From 2018 to 2022 |  |  | 203 |  |  |  | 29 |
The Company has certain defined contribution plans, which accrue benefits for employees on a pro-rata basis during their employment period based on their individual salaries. The Company accrued benefits related to defined contribution pension plans of $19 million and $17 million as of December 31, 2012 and 2011 respectively. The annual cost of these plans amounted to approximately $94 million, $98 million and $89 million in 2012, 2011 and 2010, respectively. The benefits accrued to employees on a pro-rata basis, during their employment period, are based on the individuals’ salaries.

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- Definition The entire disclosure for pension and other postretirement benefits. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 158 -Paragraph 7, 21, 22 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name FASB Staff Position (FSP) -Number FAS106-2 -Paragraph 20, 21, 22 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Implementation Guide (Q and A) -Number FAS88 -Paragraph 63 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 106 -Paragraph 518 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 715 -URI http://asc.fasb.org/topic&trid=2235017 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 132R -Paragraph 5, 6, 7, 8 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 132R -Paragraph 5 -Subparagraph b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 132R -Paragraph 8 -Subparagraph m -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 87 -Paragraph 264 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Accounting Principles Board Opinion (APB) -Number 30 -Paragraph 26 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Emerging Issues Task Force (EITF) -Number 03-2 -Paragraph 8 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 132R -Paragraph 5 -Subparagraph h -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 132R -Paragraph 5 -Subparagraph a -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 132R -Paragraph 5 -Subparagraph q -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. + Details
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