14.

POST-EMPLOYMENT 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 left the company immediately as of December 31, 2013, 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, 2013			December 31, 2012			December 31, 2013			December 31, 2012
Change in benefit obligation:

Benefit obligation at beginning of year		901			794			63			52
Service cost		37			40			8			9
Interest cost		28			31			2			3
Employee contributions		5			6			—			—
Benefits paid		(19	)		(21	)		(4	)		(3	)
Effect of curtailment		(3	)		—			(2	)		—
Effect of settlement		(32	)		(31	)		—			—
Actuarial (gain) loss		(92	)		58			—			2
Transfer in		12			70			1			3
Transfer out		(12	)		(70	)		(1	)		(3	)
Acquisition / change in scope		9			—			1			—
Plan amendment		5			4			—			—
ST-Ericsson deconsolidation		(49	)		—			(4	)		—
Foreign currency translation adjustment		17			20			1			—
Benefit obligation at end of year		807			901			65			63

Change in plan assets:

Plan assets at fair value at beginning of year		422			378			—			—
Expected return on plan assets		18			18			—			—
Employer contributions		29			34			—			—
Employee contributions		5			6			—			—
Benefits paid		(9	)		(11	)		—			—
Effect of settlement		(25	)		(30	)		—			—
Actuarial gain (loss)		14			17			—			—
Transfer in		8			40			—			—
Transfer out		(8	)		(40	)		—			—
Foreign currency translation adjustments		5			10			—			—
ST-Ericsson deconsolidation		(11	)		—			—			—
Plan assets at fair value at end of year		448			422			—			—

Funded status		(359	)		(479	)		(65	)		(63	)

Net amount recognized in the balance sheet consisted of the following:

Non-current assets		10			5			—			—
Current liabilities		(12	)		(16	)		(5	)		(3	)
Long-term liabilities		(357	)		(468	)		(60	)		(60	)
Net amount recognized		(359	)		(479	)		(65	)		(63	)

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, 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
Net amount generated/arising in current year		(105	)		5			(100	)
Amortization		(15	)		(5	)		(20	)
Foreign currency translation adjustment		2			—			2
Other comprehensive loss as at December 31, 2013		91			9			100

In 2014, the Company expects to amortize $2 million of actuarial losses and $1 million of past service cost.

The accumulated benefit obligations were as follows:

Pension Benefits

Other Long-Term Benefits

December 31,
2013

December 31,
2012

December 31,
2013

December 31,
2012

Accumulated benefit obligations

717

779

The components of the net periodic benefit cost included the following:


	Pension Benefits									Other Long-term Benefits
	Year ended December 31, 2013			Year ended December 31, 2012			Year ended December 31, 2011			Year ended December 31, 2013			Year ended December 31, 2012		Year ended December 31, 2011
Service cost		37			40			34			8			9		8
Interest cost		28			31			33			2			3		3
Expected return on plan assets		(18	)		(18	)		(20	)		—			—		—
Amortization of actuarial net loss (gain)		11			12			6			—			2		(5	)
Amortization of prior service cost		5			5			1			—			—		—
Effect of settlement		1			—			(1	)					—		—
Effect of curtailment		—			—			—			(2	)		—		—

Net periodic benefit cost		64			70			53			8			14		6

The weighted average assumptions used in the determination of the benefit obligation and the plan assets for the pension plans and the other long-term benefits were as follows:


Assumptions	December 31, 2013			December 31, 2012
Discount rate		3.83	%		3.43	%
Salary increase rate		2.82	%		2.92	%
Expected long-term rate of return on funds for the pension expense of the year		4.88	%		4.43	%

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, 2013			Year ended December 31, 2012			Year ended December 31, 2011
Discount rate		3.43	%		4.14	%		4.68	%
Salary increase rate		2.92	%		2.99	%		3.13	%
Expected long-term rate of return on funds for the pension expense of the year		4.43	%		4.57	%		4.99	%

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, 2013 and at December 31, 2012 is as follows:


	Percentage of Plan Assets at December
Asset Category	2013			2012
Equity securities		43	%		37	%
Bonds securities remunerating interest		30	%		31	%
Real estate		2	%		2	%
Other		25	%		30	%
Total		100	%		100	%

The Company’s detailed pension plan asset allocation including the fair-value measurements of those plan assets as at December 31, 2013 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		7		7		—		—
Equity securities		192		7		185		—
Government debt securities		12		12		—		—
Corporate debt securities		122		4		118		—
Investment funds		1		1		—		—
Real estate		9		—		5		4
Other (mainly insurance assets – contracts and reserves)		105		—		—		105
TOTAL		448		31		308		109

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

For plan assets measured at fair value using significant unobservable inputs (Level 3), the reconciliation between January 1, 2013 and December 31, 2013 is presented as follows:


In millions of U.S. dollars	Fair Value Measurements using Significant Unobservable Inputs (Level 3)
January 1, 2013		120
Contributions (employer and employee)		15
Benefits paid		(2	)
Settlements		(23	)
ST-Ericsson deconsolidation		(4	)
Foreign currency translation adjustment		3

December 31, 2013		109

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

The Company’s investment strategy for its pension plans is to optimize the long-term investment return on plan assets in relation to the liability structure to maintain an acceptable level of risk while minimizing the cost of providing pension benefits and maintaining adequate funding levels in accordance with applicable rules in each jurisdiction. The Company’s practice is to periodically conduct a review in each subsidiary of its asset allocation strategy, in such a way that the asset allocation is in line with the targeted asset allocation with reasonable boundaries. This was the case for year-end 2013. A portion of the fixed income allocation is reserved in short-term cash to provide for expected benefits to be paid. The Company’s asset portfolios are managed in such a way as to achieve adapted 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 $29 million and $34 million in 2013 and 2012 respectively and the Company expects to contribute cash of $26 million in 2014.

The Company’s estimated future benefit payments as of December 2013 are as follows:


Years	Pension Benefits		Other Long-term Benefits
2014		29		5
2015		21		9
2016		20		4
2017		34		4
2018		31		5
From 2019 to 2023		211		28

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 both as of December 31, 2013 and 2012. The annual cost of these plans amounted to approximately $89 million, $94 million and $98 million in 2013, 2012 and 2011, respectively. The benefits accrued to employees on a pro-rata basis, during their employment period, are based on the individuals’ salaries.