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POST-RETIREMENT AND OTHER LONG-TERM EMPLOYEES BENEFITS
 12 Months Ended
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.