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10 Post-employment benefits

Defined benefit plans

­Swisscom maintains several pension plans for employees in Switzerland and Italy. Expenses of defined benefit plans totalled CHF 363 million in 2016 (prior year: CHF 346 million). Of this amount, CHF 338 million (prior year: CHF 320 million) was recorded as personnel expense and CHF 25 million (prior year: CHF 26 million) as finance expense.

comPlan

The majority of Swisscom’s employees in Switzerland are insured for the risks of old age, death and disability by the independent pension plan, comPlan. The comPlan pension plan has the legal form of a foundation. The organisation, benefits and the system of funding are set forth in Pension Fund Rules. The supreme governing body of comPlan is the Foundation Council. The overall management of the pension plan and responsibility for its financial stability is incumbent on the Foundation Council. The Council is constituted by an equal number of representatives of the employees and the employer. The Pension Fund Rules, together with the relevant laws, ordinances and directives of the Federal Council concerning occupational pension plans, in particular the provisions contained therein concerning funding and measures to eliminate funding deficits, form the formal regulatory framework of the pension plan which is binding for financial-statement reporting and the actuarial assumptions.

The level of benefits payable by comPlan exceed the legally prescribed minimum. The standard retirement age is 65. Employees qualify for early retirement at the earliest on their 58th birthday, whereby the rate of conversion is reduced in line with the longer expected duration of pension payments. Furthermore, employees may choose to take their entire pension or part thereof in the form of a capital payment. The amount of the pension paid results from the conversion rate which is applied to the accumulated savings of the retirees. For individuals retiring at the age of 65, the rate of conversion is currently 6.11%. The accumulated savings result from employee and employer contributions which are paid into the individual savings account of each insured person as well as the interest accruing on the accumulated savings. The interest rate to be applied to the accumulated pension savings is set annually by the Foundation Council. The plan is funded through employer and employee contributions which vary with the salary level as well as the return on the plan assets. The level of recurring contributions provided for under the pension-fund rules is graduated according to age groups and for the employer amount to 8.35% to 16.35% and those of the employees to 5.5% to 9.5% of the ensured salary. In case of retirement before the ordinary retirement age, the employer finances additionally a bridging pension up until the ordinary retirement age with an overall maximum cost of CHF 80,100 per employee. The amount of disability pensions in relation to the salary is the same for all insured employees, irrespective of the number of service years.

In the event of a foreseeable funding deficit, computed in accordance with local financial-statement accounting principles, the Foundation Council lays down appropriate measures to eliminate the funding deficit which will lead to the restoration of a financial equilibrium within a reasonable time-frame. The measures may consist of the levying of restructuring contributions, a lower level of interest accruing or zero interest, the curtailment of insured benefits or in a combination of such measures. As a general rule, the measures must lead to the elimination of the funding deficit within a timeframe of 5 to 7 years. Should the current funding be insufficient from an actuarial perspective and there exists, as a result, a structural financing shortfall, the top priority is to eliminate this shortfall by adjusting the benefits or recurring contributions. Insofar as other measures do not achieve the goal, comPlan can levy contributions to eliminate a funding deficit from the employer and employees (restructuring contributions) so long as a funding deficit persists. The employer’s restructuring contributions must, at a minimum, be equal to the sum of employee contributions. Under the formal regulatory framework of the pension plan, the employer has no legal obligation to pay additional contributions to eliminate more than 50% of a funding deficit or of a structural funding shortfall. In the case of Swisscom, a de-facto obligation over and above the legal minimum obligation exists deriving from customary company-specific practice. In the case of the actuarial valuation, the legal and de-facto obligations are regarded as the upper limit of the employer’s share of the costs of future benefits within the meaning of IAS 19.87(c).

As a consequence of the low interest-rate level and increasing life expectancy, the Foundation Council of comPlan decided upon various measures to ensure the financial equilibrium between the pension-fund liabilities and the funding of benefits and communicated this decision in October 2016. The core elements of the measures comprise a lowering of the conversion rate from 6.11% to 5.34% in monthly steps beginning in July 2017 through to September 2020 and an increase in recurring savings contributions of the employees and employer. The recurring contributions provided under the pension-fund rules are raised from 10.05% to 16.65% for the employer and for the employees, from 6.6% to 10.6% of the insured salaries. Moreover, and in order to cushion the impact of future pension reductions, special contributions will be credited to the individual savings accounts of insured employees born in 1969 and later during a maximum period of 5 years. Swisscom bears a share totalling CHF 50 million of the costs of the special contributions through an extraordinary payment in 2017. The remaining costs of an anticipated amount of approx. CHF 250 million will be financed by using freely available funds of comPlan. As a result of the special contributions, the extent of pension reductions for the beneficiaries will be limited to 6%. The various measures give rise to a past-service cost of CHF 3 million which was recognised in the fourth quarter of 2016 as part of pension-fund expense in the income statement. This is based on a revaluation of the net pension-fund obligations using the market values of the plan assets which were valid as of the date of the pension-fund amendment and the current actuarial assumptions which take into account the risk-sharing features. The past service cost equates to the difference resulting from the valuation based upon the previous pension-fund benefits and contributions and the valuation based upon the benefits and contributions provided for under the amended pension-fund rules. Ignoring the risk-sharing features, a negative past-service cost of CHF 546 million would have resulted from the plan amendment.

In accordance with the Swiss accounting standards applicable to the pension fund (Swiss GAAP ARR), the surplus amounts to CHF 0.1 bil­lion, corresponding to a coverage ratio of around 101% (prior year: 108%). The main reasons for the difference compared with IFRS are the application of differing actuarial assumptions with regard to the discount rate, life expectancy or risk sharing, as well as a different actuarial measurement method. The Investment Commission is the central management, coordination and monitoring body for the management of the pension plan assets. The pension plan assets are administered using mandated, independent financial service providers. Monitoring is supported by an external investment controller. The Foundation Council determines the investment strategy and tactical bandwidths within the framework of the legal provisions. Within its terms of reference, the Investment Commission may undertake the asset allocation.

Other pension plans

In addition to the plans of various subsidiary companies in Switzerland which did not join comPlan, other pension plans include the pension plan for Fastweb employees. Employees of the Italian subsidiary Fastweb have acquired entitlements to future pension benefits up to the end of 2006. These benefits are recorded in the balance sheet as defined-benefit obligations.

Pension cost

Defined-benefit pension plans

In CHF million
 
comPlan
  Other
plans
 
2016
 
comPlan
  Other
plans
 
2015
Current service cost   322   8   330   305   13   318
Plan amendments   3     3     (3)   (3)
Administration expense   4   1   5   4   1   5
Total recognised in personnel expense   329   9   338   309   11   320
Interest expense on net defined benefit obligations   25     25   25   1   26
Total recognised in financial expense   25     25   25   1   26
Total expense of defined benefit plans recognised in income statement   354   9   363   334   12   346

In addition, other comprehensive income includes an actuarial gain of CHF 1,162 million (prior year: loss of CHF 393 million) which may be analysed as follows:


In CHF million
 
comPlan
  Other
plans
 
2016
 
comPlan
  Other
plans
 
2015
Actuarial gains and losses from:                        
Change of the demographical assumptions   102     102   (3)     (3)
Change of the financial assumptions   (991)   2   (989)   171   2   173
Experience adjustments to defined benefit obligations   36   (3)   33   85   (8)   77
Return on plan assets excluding the part recognised in financial result   (308)     (308)   146     146
Expense (income) of defined benefit plans recognised in other comprehensive income   (1,161)   (1)   (1,162)   399   (6)   393

Gains aggregating CHF 991 million arising from the amendment to the financial assumptions of comPlan comprise the impact of the recognition of risk-sharing features for the first time in the financial assumptions totalling CHF 856 million.

Defined-contribution pension plans

Expenses in 2016 for defined-contribution plans aggregated CHF 9 million (prior year: CHF 9 million).

Status of pension plans


In CHF million
 
comPlan
  Other
plans
 
2016
 
comPlan
  Other
plans
 
2015
                         
Defined benefit obligations
Balance at 1 January   12,183   117   12,300   11,406   294   11,700
Current service cost   322   8   330   305   13   318
Interest cost on defined benefit obligations   113   1   114   127   3   130
Employee contributions   178   2   180   169   6   175
Benefits paid   (325)   (9)   (334)   (288)   (19)   (307)
Actuarial losses (gains)   (853)   (1)   (854)   253   (6)   247
Additions from business combinations     1   1     89   89
Disposals from sales of subsidiaries         (37)   (1)   (38)
Plan amendments   3     3     (12)   (12)
Foreign currency translation adjustments           (2)   (2)
Transfer of pension plans to comPlan   14   (14)     248   (248)  
Balance at 31 December   11,635   105   11,740   12,183   117   12,300
           
                         
Plan assets
Balance at 1 January   9,307   74   9,381   9,026   242   9,268
Interest income on plan assets   88   1   89   102   2   104
Employer contributions   268   3   271   256   9   265
Employee contributions   178   2   180   169   6   175
Benefits paid   (325)   (9)   (334)   (288)   (19)   (307)
Return (expense) on plan assets excluding the part recognised in financial result   308     308   (146)     (146)
Additions from business combinations           59   59
Disposals from sales of subsidiaries         (23)     (23)
Plan amendments           (9)   (9)
Administration expense   (4)   (1)   (5)   (4)   (1)   (5)
Transfer of pension plans to comPlan   6   (6)     215   (215)  
Balance at 31 December   9,826   64   9,890   9,307   74   9,381
           
                         
Net defined benefit obligations
Net defined benefit obligations recognised at 31 December   1,809   41   1,850   2,876   43   2,919

Movements in recognised defined-benefit obligations are to be analysed as follows:


In CHF million
 
comPlan
  Other
plans
 
2016
 
comPlan
  Other
plans
 
2015
Balance at 1 January   2,876   43   2,919   2,380   52   2,432
Pension cost, net   354   9   363   334   12   346
Employer contributions and benefits paid   (268)   (3)   (271)   (256)   (9)   (265)
Disposals from sales of subsidiaries         (14)   (1)   (15)
Additions from business combinations     1   1     30   30
Expense (income) of defined benefit plans recognised in other comprehensive income   (1,161)   (1)   (1,162)   399   (6)   393
Foreign currency translation adjustments           (2)   (2)
Transfer of pension plans to comPlan   8   (8)     33   (33)  
Balance at 31 December   1,809   41   1,850   2,876   43   2,919

The weighted average duration of the net present value of the recorded pension obligations is 18 years, which is unchanged from that of the prior period.

Breakdown of pension plan assets

comPlan

The breakdown of the comPlan’s pension assets by the various investment categories and investment strategy is as follows:

      31.12.2016   31.12.2015

Category
  Investment
strategy
 
Quoted
  Not
quoted
 
Total
 
Quoted
  Not
quoted
 
Total
Government bonds Switzerland   8.0%   2.3%   4.5%   6.8%   2.2%   7.4%   9.6%
Corporate bonds Switzerland   6.0%   6.0%   0.0%   6.0%   7.8%   0.0%   7.8%
Government bonds developed markets, World   10.0%   8.4%   0.0%   8.4%   10.1%   0.0%   10.1%
Corporate bonds developed markets, World   9.0%   9.2%   0.0%   9.2%   9.0%   0.0%   9.0%
Government bonds emerging markets, World   7.0%   7.2%   0.0%   7.2%   6.5%   0.0%   6.5%
Private debt   6.0%   0.0%   6.2%   6.2%   0.0%   4.9%   4.9%
Third-party debt instruments   46.0%   33.1%   10.7%   43.8%   35.6%   12.3%   47.9%
Equity shares Switzerland   5.0%   5.2%   0.0%   5.2%   4.9%   0.0%   4.9%
Equity shares developed markets, World   12.0%   13.3%   0.0%   13.3%   11.0%   0.0%   11.0%
Equity shares emerging markets, World   8.0%   8.4%   0.0%   8.4%   7.4%   0.0%   7.4%
Equity instruments   25.0%   26.9%   0.0%   26.9%   23.3%   0.0%   23.3%
Real estate Switzerland   11.0%   7.5%   4.6%   12.1%   8.2%   3.6%   11.8%
Real estate World   6.0%   3.7%   1.2%   4.9%   3.7%   0.0%   3.7%
Real estate   17.0%   11.2%   5.8%   17.0%   11.9%   3.6%   15.5%
Commodities   4.0%   1.9%   2.0%   3.9%   1.7%   1.9%   3.6%
Private markets   7.0%   0.0%   7.0%   7.0%   0.0%   6.1%   6.1%
Cash and cash equivalents and other investments   1.0%   0.0%   1.4%   1.4%   0.0%   3.6%   3.6%
Cash and cash equivalents and alternative investments   12.0%   1.9%   10.4%   12.3%   1.7%   11.6%   13.3%
Total plan assets   100.0%   73.1%   26.9%   100.0%   72.5%   27.5%   100.0%

The investment strategy pursues the goal of achieving the highest possible return on assets within the framework of its risk tolerance and thus of generating income on a long-term basis in order to meet all financial obligations. This is achieved through a broad diversification of risks over various investment categories, markets, currencies and industry segments in both developed and emerging markets. The interest rate duration of interest-bearing assets is 5.52 years (prior year: 5.77 years) and the average rating of these assets is A–. Within the overall portfolio, all foreign currency positions are hedged against the Swiss franc following a currency strategy to the extent necessary to meet a pre-determined ratio of 94% (CHF or CHF-hedged). The unquoted and therefore rather illiquid investments make up 26.8% of total plan assets. Following this investment strategy, comPlan anticipates a target value for the value fluctuation reserve of 17.3% (basis: 2017 financial year).

Other pension plans

The other plans pursue the goal of achieving the highest possible return on assets within the framework of its risk tolerance and thus of generating income on a long-term basis in order to meet all financial obligations. This is achieved through a broad diversification of risks over various investment categories, markets, currencies and industry segments.

Additional information on plan assets

As of 31 December 2016, plan assets include Swisscom Ltd shares and bonds with a fair value of CHF 5 million (prior year: CHF 5 million). The effective return on plan assets in 2016 amounted to CHF 397 million (prior year: CHF –42 million).

In 2017, Swisscom expects to make payments to the pension funds for ordinary employee contributions totalling CHF 262 million (excluding payments for early retirements and changes to the pension plan).

Actuarial assumptions

  2016   2015
Assumptions   comPlan   Other plans   comPlan   Other plans
Discount rate at 31 December   0.64%   0.91%   0.94%   1.46%
Expected rate of salary increases   1.08%   0.74%   1.75%   1.64%
Expected rate of pension increases        
Interest on old age savings accounts   0.64%   1.03%   0.94%   1.34%
Share of employee contribution to funding shortfall   40%      
Life expectancy at age of 65 – men (number of years)   22.26   22.26   21.49   21.49
Life expectancy at age of 65 – women (number of years)   24.32   24.32   23.96   23.96

The discount rate is based upon CHF-denominated corporate bonds with an AA rating issued by domestic and foreign issuers and listed on the Swiss Exchange. Future growth factors for salaries correspond to a long-term historical average value which is specific to Swisscom. The level of growth in pensions reflects comPlan’s lack of potential. Interest accruing on the retirement savings equates to the discount rate. As regards the life-expectancy assumptions, Swisscom applies the BVG 2010 generation tables until the end of 2015 and for 2016 onwards, the BVG 2015 generation tables.

For the actuarial computations as of 31 December 2016 and the effects of the pension-fund amendments decided upon in the fourth quarter of 2016, the risk-sharing effects contained in the formal regulatory framework were taken into account in the financial assumptions in two steps. With the implicit assumption of a future return on plan assets equal to the discount rate, the recurrent contributions provided for under the pension-fund rules are insufficient for the correct current funding of the benefits provided for under the pension-fund rules of comPlan. There results a structural funding shortfall. For the actuarial computations, it is assumed, as a first step, that the Foundation Council will decide upon measures to eliminate the funding gap in accordance with the formal regulatory framework. As a measure, it is assumed that future pensions will be lowered gradually over a period of 10 years by 5.6%. This assumption considers that for the determination of the conversion rate in the extra-mandatory portion, the discount rate of 0.64% used for the actuarial computation will be applied and that the legal conversion rate of 6.8% will be applied in the mandatory area. Even after assuming a curtailment of future benefits, there remains a structural funding shortfall which is arithmetically divided over the employer and employees in a second step. The assumption is that the obligation of the employer legally and de-facto is limited to 60% of the funding shortfall. These assumptions are based upon the legal provisions regarding the elimination of funding deficits as well as the specific behavioural patterns and measures taken both by the employer and the Foundation Council. As a result of the assumption of a curtailment in benefits and a limitation of the share of the funding shortfall, there results a reduction in defined-benefit obligations of CHF 856 million, which was recognised in other comprehensive income as a change in accounting estimate. Of this amount, CHF 145 million relates to the curtailment of benefits assumed in the first step. The effect of limiting the employer’s obligations in the second step amounts to CHF 711 million. No risk-sharing features were taken into account for the actuarial computation as of 31 December 2015. The estimation process to determine the financial assumptions taking into account the risk-sharing features contained in the formal regulatory framework was amended in 2016 in order to present a more realistic view of the effective pension-plan expense which will arise for the company. With the current low level of interest rates, failure to take the risk-sharing features into consideration leads to a distorted presentation of the recognised net pension-fund liability and to unrealistically high negative past-service costs in the case of plan amendments.

Sensitivity analysis comPlan

  Defined benefit obligations   Current service cost 1

In CHF million
  Increase
Assumption
  Decrease
Assumption
  Increase
Assumption
  Decrease
Assumption
Discount rate (change +/–0.5%)   (574)   670   (40)   48
Expected rate of salary increases (change +/–0.5%)   47   (45)   7   (7)
Expected rate of pension increases (change +0.5%; –0.0%)   547     30  
Interest on old age savings accounts (change +/–0.5%)   25   (23)   8   (8)
Share of employee contribution to funding shortfall (change +/–10%)   178   (178)    
Life expectancy at age of 65 (change +/–0.5 year)   128   (129)   5   (5)
1 The sensitivity refers to the current service cost recorded in personnel expense.

The sensitivity analysis takes into consideration the movement in pension-fund obligations as well as current-service costs in adjusting the actuarial assumptions by half a percentage point and half a year, respectively. In the process, only one of the assumptions is adjusted each time, the other parameters remain unchanged. In the sensitivity analysis, in view of a negative movement in pension increases, no change was made as the reduction in pension benefits is not possible.