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Post-employment benefits for associates | 12 Months Ended
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Dec. 31, 2020
Disclosure of defined benefit plans [abstract] |
Post-employment benefits for associates | 25. Post-employment benefits for associates Defined benefit plans In addition to the legally required social security schemes, the Group has numerous independent pension and other post-employment benefit plans. In most cases, these plans are externally funded in entities that are legally separate from the Group. For certain Group companies, however, no independent plan assets exist for the pension and other post-employment benefit obligations of associates. In these cases, the related unfunded liability is included in the balance sheet. The defined benefit obligations (DBOs) of all major pension and other post-employment benefit plans are reappraised annually by independent actuaries. Plan assets are recognized at fair value. The major plans are based in Switzerland, the United States, the United Kingdom, Germany and Japan, which represent 95% of the Group’s total DBO for pension plans. Details of the plans in the two most significant countries, Switzerland and the United States, which represent 81% of the Group’s total DBO for post-employment benefit plans, are provided below. Swiss-based pension plans represent the most significant portion of the Group’s total DBO and plan assets. For the active insured members born on or after January 1, 1956, or having joined the plans after December 31, 2010, the benefits are partially linked to the contributions paid into the plan. Certain features of Swiss pension plans required by law preclude the plans from being categorized as defined contribution plans. These factors include a minimum interest guarantee on retirement savings accounts, a predetermined factor for converting the accumulated savings account balance into a pension, and embedded death and disability benefits. All benefits granted under Swiss-based pension plans are vested, and Swiss legislation prescribes that the employer has to contribute a fixed percentage of an associate’s pay to an external pension fund. Additional employer contributions may be required whenever the plan’s statutory funding ratio falls below a certain level. The associate also contributes to the plan. The pension plans are run by separate legal entities, each governed by a board of trustees that – for the principal plans – consists of representatives nominated by Novartis and the active insured associates. The boards of trustees are responsible for the plan design and asset investment strategy. In December 2020 the Board of Trustees of the Novartis Swiss Pension Fund agreed to adjust the annuity conversion rate at retirement with effect from January 1, 2022. This amendment does not affect existing pensioners, and its impact on existing plan participants will be mitigated by way of defined compensatory measures. This amendment resulted in a net pre-tax curtailment gain of USD 101 million (CHF 90 million). The United States pension plans represent the second-largest component of the Group’s total DBO and plan assets. The principal plans (Qualified Plans) are funded, whereas plans providing additional benefits for executives (Restoration Plans) are unfunded. Employer contributions are required for Qualified Plans whenever the statutory funding ratio falls below a certain level. Furthermore, in certain countries, associates are covered under other post-employment benefit plans and post-retirement medical plans. In the US, other post-employment benefit plans consist primarily of post-employment healthcare benefits, which have been closed to new members since 2015. Part of the costs of these plans is reimbursable under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. There is no statutory funding requirement for these plans. The Group is funding these plans to the extent that it is tax efficient. The following tables are a summary of the funded and unfunded defined benefit obligation for pension and other post-employment benefit plans of associates at December 31, 2020 and 2019:
|  | Pension plans |  | Other post-employment benefit plans |
(USD millions) |  | 2020 |  | 2019 |  | 2020 |  | 2019 |
Benefit obligation at January 1 |  | 23 066 |  | 22 179 |  | 746 |  | 1 073 |
Benefit obligations related to discontinued operations 1 |  |  |  | – 662 |  |  |  | – 385 |
Current service cost |  | 372 |  | 336 |  | 11 |  | 13 |
Interest cost |  | 222 |  | 330 |  | 20 |  | 29 |
Past service costs and settlements |  | – 102 |  | – 168 |  | 1 |  |  |
Administrative expenses |  | 24 |  | 24 |  |  |  |  |
Remeasurement losses/(gains) arising from changes in financial assumptions |  | 1 166 |  | 1 791 |  | 40 |  | 76 |
Remeasurement (gains)/losses arising from changes in demographic assumptions |  | – 28 |  | – 193 |  | – 13 |  | – 9 |
Experience-related remeasurement losses/(gains) |  | 159 |  | 184 |  | – 132 |  | – 22 |
Currency translation effects |  | 1 810 |  | 283 |  | – 7 |  |  |
Benefit payments |  | – 1 264 |  | – 1 256 |  | – 33 |  | – 30 |
Contributions of associates |  | 186 |  | 169 |  |  |  |  |
Effect of acquisitions, divestments or transfers |  | – 9 |  | 49 |  | – 1 |  | 1 |
Benefit obligation at December 31 |  | 25 602 |  | 23 066 |  | 632 |  | 746 |
Fair value of plan assets at January 1 |  | 19 810 |  | 18 838 |  | 134 |  | 119 |
Plan assets related to discontinued operations 1 |  |  |  | – 424 |  |  |  | – 40 |
Interest income |  | 166 |  | 257 |  | 4 |  | 3 |
Return on plan assets excluding interest income |  | 1 318 |  | 1 656 |  | 4 |  | 10 |
Currency translation effects |  | 1 620 |  | 304 |  |  |  |  |
Novartis Group contributions |  | 464 |  | 420 |  | – 20 |  | 74 |
Contributions of associates |  | 186 |  | 169 |  |  |  |  |
Settlements |  | 15 |  | – 193 |  |  |  |  |
Benefit payments |  | – 1 264 |  | – 1 256 |  | – 33 |  | – 30 |
Effect of acquisitions, divestments or transfers |  | 2 |  | 39 |  |  |  | – 2 |
Fair value of plan assets at December 31 |  | 22 317 |  | 19 810 |  | 89 |  | 134 |
Funded status |  | – 3 285 |  | – 3 256 |  | – 543 |  | – 612 |
Limitation on recognition of fund surplus at January 1 |  | – 65 |  | – 68 |  |  |  |  |
Change in limitation on recognition of fund surplus (incl. exchange rate differences) |  | 16 |  | 7 |  |  |  |  |
Interest income on limitation of fund surplus |  | – 2 |  | – 4 |  |  |  |  |
Limitation on recognition of fund surplus at December 31 |  | – 51 |  | – 65 |  |  |  |  |
Net liability in the balance sheet at December 31 |  | – 3 336 |  | – 3 321 |  | – 543 |  | – 612 |
1 Notes 1, 2 and 30 provide information related to discontinued operations.
The reconciliation of the net liability from January 1 to December 31 is as follows:
|  | Pension plans |  | Other post-employment benefit plans |
(USD millions) |  | 2020 |  | 2019 |  | 2020 |  | 2019 |
Net liability at January 1 |  | – 3 321 |  | – 3 409 |  | – 612 |  | – 954 |
Less: net liability related to discontinued operations 1 |  |  |  | 238 |  |  |  | 345 |
Current service cost |  | – 372 |  | – 336 |  | – 11 |  | – 13 |
Net interest expense |  | – 58 |  | – 77 |  | – 16 |  | – 26 |
Administrative expenses |  | – 24 |  | – 24 |  |  |  |  |
Past service costs and settlements |  | 117 |  | – 25 |  | – 1 |  |  |
Remeasurements |  | 21 |  | – 126 |  | 109 |  | – 35 |
Currency translation effects |  | – 190 |  | 21 |  | 7 |  |  |
Novartis Group contributions |  | 464 |  | 420 |  | – 20 |  | 74 |
Effect of acquisitions, divestments or transfers |  | 11 |  | – 10 |  | 1 |  | – 3 |
Change in limitation on recognition of fund surplus |  | 16 |  | 7 |  |  |  |  |
Net liability at December 31 |  | – 3 336 |  | – 3 321 |  | – 543 |  | – 612 |
Amounts recognized in the consolidated balance sheet |  |  |  |  |  |  |  |  |
Prepaid benefit cost |  | 202 |  | 148 |  |  |  |  |
Accrued benefit liability |  | – 3 538 |  | – 3 469 |  | – 543 |  | – 612 |
1 Notes 1, 2 and 30 provide information related to discontinued operations.
The following table shows a breakdown of the DBO for pension plans by geography and type of member, and the breakdown of plan assets into the geographical locations in which they are held:
|  | 2020 |  | 2019 |
(USD millions) |  | Switzerland |  | United States |  | Rest of the world |  | Total |  | Switzerland |  | United States |  | Rest of the world |  | Total |
Benefit obligation at December 31 |  | 16 807 |  | 3 788 |  | 5 007 |  | 25 602 |  | 15 106 |  | 3 552 |  | 4 408 |  | 23 066 |
Thereof unfunded |  |  |  | 701 |  | 516 |  | 1 217 |  |  |  | 670 |  | 466 |  | 1 136 |
By type of member |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Active |  | 6 837 |  | 665 |  | 1 573 |  | 9 075 |  | 6 167 |  | 630 |  | 1 400 |  | 8 197 |
Deferred pensioners |  |  |  | 1 290 |  | 1 819 |  | 3 109 |  |  |  | 1 205 |  | 1 517 |  | 2 722 |
Pensioners |  | 9 970 |  | 1 833 |  | 1 615 |  | 13 418 |  | 8 939 |  | 1 717 |  | 1 491 |  | 12 147 |
Fair value of plan assets at December 31 |  | 16 396 |  | 2 487 |  | 3 434 |  | 22 317 |  | 14 457 |  | 2 311 |  | 3 042 |  | 19 810 |
Funded status |  | – 411 |  | – 1 301 |  | – 1 573 |  | – 3 285 |  | – 649 |  | – 1 241 |  | – 1 366 |  | – 3 256 |
The following table shows a breakdown of the DBO for other post-employment benefit plans by geography and type of member, and the breakdown of plan assets into the geographical locations in which they are held:
|  | 2020 |  | 2019 |
(USD millions) |  | United States |  | Rest of the world |  | Total |  | United States |  | Rest of the world |  | Total |
Benefit obligation at December 31 |  | 543 |  | 89 |  | 632 |  | 658 |  | 88 |  | 746 |
Thereof unfunded |  | 454 |  | 89 |  | 543 |  | 524 |  | 88 |  | 612 |
By type of member |  |  |  |  |  |  |  |  |  |  |  |  |
Active |  | 80 |  | 25 |  | 105 |  | 121 |  | 36 |  | 157 |
Deferred pensioners |  | 17 |  | 0 |  | 17 |  | 15 |  | 0 |  | 15 |
Pensioners |  | 446 |  | 64 |  | 510 |  | 522 |  | 52 |  | 574 |
Fair value of plan assets at December 31 |  | 89 |  | 0 |  | 89 |  | 134 |  | 0 |  | 134 |
Funded status |  | – 454 |  | – 89 |  | – 543 |  | – 524 |  | – 88 |  | – 612 |
The following table shows the principal weighted average actuarial assumptions used for calculating defined benefit plans and other post-employment benefits of associates:
|  | Pension plans |  | Other post-employment benefit plans |
|  | 2020 |  | 2019 |  | 2018 |  | 2020 |  | 2019 |  | 2018 |
Weighted average assumptions used to determine benefit obligations at December 31 |  |  |  |  |  |  |  |  |  |  |  |  |
Discount rate |  | 0.6% |  | 1.0% |  | 1.6% |  | 2.9% |  | 3.6% |  | 4.4% |
Expected rate of pension increase |  | 0.3% |  | 0.3% |  | 0.4% |  |  |  |  |  |  |
Expected rate of salary increase |  | 2.7% |  | 2.8% |  | 2.8% |  |  |  |  |  |  |
Interest on savings account |  | 0.1% |  | 0.3% |  | 0.8% |  |  |  |  |  |  |
Current average life expectancy for a 65-year-old male in years |  | 22 |  | 22 |  | 22 |  | 21 |  | 21 |  | 21 |
Current average life expectancy for a 65-year-old female in years |  | 24 |  | 24 |  | 24 |  | 23 |  | 23 |  | 23 |
Changes in the aforementioned actuarial assumptions can result in significant volatility in the accounting for the Group’s pension plans in the consolidated financial statements. This can result in substantial changes in the Group’s other comprehensive income, long-term liabilities and prepaid pension assets. The DBO is significantly impacted by assumptions regarding the rate that is used to discount the actuarially determined post-employment benefit liability. This rate is based on yields of high-quality corporate bonds in the country of the plan. Decreasing corporate bond yields decrease the discount rate, so that the DBO increases and the funded status decreases. In Switzerland, an increase in the DBO due to lower discount rates is slightly offset by lower future benefits expected to be paid on the associate’s savings account where the assumption on interest accrued changes in line with the discount rate. The impact of decreasing interest rates on a plan’s assets is more difficult to predict. A significant part of the plan assets is invested in bonds. Bond values usually rise when interest rates decrease and may therefore partially compensate for the decrease in the funded status. Furthermore, pension assets also include significant holdings of equity instruments. Share prices tend to rise when interest rates decrease and therefore often counteract the negative impact of the rising defined benefit obligation on the funded status (although the correlation of interest rates with equities is not as strong as with bonds, especially in the short term). The expected rate for pension increases significantly affects the DBO of most plans in Switzerland, Germany and the United Kingdom. Such pension increases also decrease the funded status, although there is no strong correlation between the value of the plan assets and pension/inflation increases. Assumptions regarding life expectancy significantly impact the DBO. An increase in longevity increases the DBO. There is no offsetting impact from the plan assets, as no longevity bonds or swaps are held by the pension funds. Generational mortality tables are used where this data is available. The following table shows the sensitivity of the defined benefit pension obligation to the principal actuarial assumptions for the major plans in Switzerland, the United States, the United Kingdom, Germany and Japan on an aggregated basis:
(USD millions) |  | Change in 2020 year-end defined benefit pension obligation |
25 basis point increase in discount rate |  | – 885 |
25 basis point decrease in discount rate |  | 942 |
One-year increase in life expectancy |  | 993 |
25 basis point increase in rate of pension increase |  | 589 |
25 basis point decrease in rate of pension increase |  | – 143 |
25 basis point increase of interest on savings account |  | 62 |
25 basis point decrease of interest on savings account |  | – 30 |
25 basis point increase in rate of salary increase |  | 61 |
25 basis point decrease in rate of salary increase |  | – 61 |
The healthcare cost trend rate assumptions used for other post-employment benefits are as follows:
|  | 2020 |  | 2019 |  | 2018 |
Healthcare cost trend rate assumed for next year |  | 6.3% |  | 6.5% |  | 7.0% |
Rate to which the cost trend rate is assumed to decline |  | 4.5% |  | 4.5% |  | 4.5% |
Year that the rate reaches the ultimate trend rate |  | 2028 |  | 2028 |  | 2028 |
The following table shows the weighted average plan asset allocation of funded defined benefit pension plans at December 31, 2020 and 2019:
|  | Pension plans |
(as a percentage) |  | Long-term target minimum |  | Long-term target maximum |  | 2020 |  | 2019 |
Equity securities |  | 15 |  | 40 |  | 28 |  | 27 |
Debt securities |  | 20 |  | 60 |  | 34 |  | 36 |
Real estate |  | 5 |  | 20 |  | 17 |  | 17 |
Alternative investments |  | 0 |  | 20 |  | 13 |  | 15 |
Cash and other investments |  | 0 |  | 15 |  | 8 |  | 5 |
Total |  |  |  |  |  | 100 |  | 100 |
Cash and most of the equity and debt securities have a quoted market price in an active market. Real estate and alternative investments, which include hedge fund, private equity, infrastructure and commodity investments, usually have a quoted market price or a regularly updated net asset value. The strategic allocation of assets of the different pension plans is determined with the objective of achieving an investment return that, together with the contributions paid by the Group and its associates, is sufficient to maintain reasonable control over the various funding risks of the plans. Based upon the market and economic environments, actual asset allocations may temporarily be permitted to deviate from policy targets. The asset allocation currently includes investments in shares of Novartis AG as per the below table:
|  | December 31, 2020 |  | December 31, 2019 |
Investment in shares of Novartis AG |  |  |  |  |
Number of shares (in millions) |  | 2.3 |  | 2.3 |
Market value (in USD billions) |  | 0.2 |  | 0.2 |
The weighted average duration of the defined benefit obligation is 15.4 years (2019: 15.2 years). The Group’s ordinary contribution to the various pension plans is based on the rules of each plan. Additional contributions are made whenever this is required by statute or law (i.e., usually when statutory funding levels fall below predetermined thresholds). The only significant plans that are foreseen to require additional funding are those in the United Kingdom and Germany. The expected future cash flows in respect of pension and other post-employment benefit plans at December 31, 2020, were as follows:
(USD millions) |  | Pension plans |  | Other post- employment benefit plans |
Novartis Group contributions |  |  |  |  |
2021 (estimated) |  | 404 |  | 40 |
Expected future benefit payments |  |  |  |  |
2021 |  | 1 245 |  | 40 |
2022 |  | 1 198 |  | 41 |
2023 |  | 1 191 |  | 41 |
2024 |  | 1 182 |  | 40 |
2025 |  | 1 165 |  | 40 |
2026–2030 |  | 5 651 |  | 181 |
Defined contribution plans In many subsidiaries, associates are covered by defined contribution plans. Contributions charged to the consolidated income statement for the defined contribution plans were:
(USD millions) |  | 2020 |  | 2019 |  | 2018 |
Contributions for defined contribution plans continuing operations |  | 501 |  | 422 |  | 443 |
For defined contribution plans for discontinued operations, see Note 30.

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