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Annual Report 2016

14 Benefit plans

Defined benefit pension plans and post-retirement benefits

The Group sponsors various funded defined benefit pension plans. Employer contributions to the plans are charged to income on a basis which recognises the costs of pensions over the expected service lives of employees covered by the plans. The Group’s funding policy for these plans is to contribute annually at a rate that is intended to maintain a level percentage of compensation for the employees covered. A full valuation is prepared at least every three years.

The Group also provides certain healthcare and life insurance benefits for retired employees and their dependants. Employees become eligible for these benefits when they become eligible for pension benefits.

The measurement date of these plans is 31 December for each year presented.

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2015
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Benefit obligation as of 1 January

3 685

2 389

371

6 445

Service cost

111

8

5

124

Interest cost

42

79

10

131

Actuarial gains/losses

236

–67

–2

167

Benefits paid

–189

–74

–16

–279

Employee contribution

26

 

 

26

Acquisitions/disposals/additions

 

2

 

2

Effect of settlement, curtailment and termination

2

 

 

2

Effect of foreign currency translation

–36

–131

–5

–172

Benefit obligation as of 31 December

3 877

2 206

363

6 446

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets as of 1 January

3 535

2 354

0

5 889

Actual return on plan assets

36

7

 

43

Company contribution

94

85

16

195

Benefits paid

–189

–74

–16

–279

Employee contribution

26

 

 

26

Acquisitions/disposals/additions

 

1

 

1

Effect of settlement, curtailment and termination

2

 

 

2

Effect of foreign currency translation

–25

–138

 

–163

Fair value of plan assets as of 31 December

3 479

2 235

0

5 714

Funded status

–398

29

–363

–732

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2016
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Benefit obligation as of 1 January

3 877

2 206

363

6 446

Service cost

113

8

5

126

Interest cost

31

76

10

117

Actuarial gains/losses

71

349

9

429

Benefits paid

–140

–72

–16

–228

Employee contribution

25

 

 

25

Acquisitions/disposals/additions

 

 

 

0

Effect of settlement, curtailment and termination

1

 

 

1

Effect of foreign currency translation

–62

–209

–2

–273

Benefit obligation as of 31 December

3 916

2 358

369

6 643

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets as of 1 January

3 479

2 235

0

5 714

Actual return on plan assets

128

256

 

384

Company contribution

95

62

16

173

Benefits paid

–140

–72

–16

–228

Employee contribution

25

 

 

25

Acquisitions/disposals/additions

 

 

 

0

Effect of settlement, curtailment and termination

1

 

 

1

Effect of foreign currency translation

–56

–224

 

–280

Fair value of plan assets as of 31 December

3 532

2 257

0

5 789

Funded status

–384

–101

–369

–854

Amounts recognised in “Other assets” and “Accrued expenses and other liabilities” in the Group’s balance sheet as of 31 December were as follows:

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2015
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Non-current assets

 

232

 

232

Current liabilities

 

–3

–15

–18

Non-current liabilities

–398

–200

–348

–946

Net amount recognised

–398

29

–363

–732

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2016
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Non-current assets

 

140

 

140

Current liabilities

 

–2

–15

–17

Non-current liabilities

–384

–239

–354

–977

Net amount recognised

–384

–101

–369

–854

Amounts recognised in accumulated other comprehensive income, gross of tax, as of 31 December were as follows:

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2015
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Net gain/loss

1 133

384

–43

1 474

Prior service cost/credit

–78

2

–67

–143

Total

1 055

386

–110

1 331

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2016
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Net gain/loss

1 113

513

–30

1 596

Prior service cost/credit

–69

2

–58

–125

Total

1 044

515

–88

1 471

Components of net periodic benefit cost

The components of pension and post-retirement cost for the years ended 31 December were as follows:

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2015
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Service cost (net of participant contributions)

111

8

5

124

Interest cost

42

79

10

131

Expected return on assets

–113

–95

 

–208

Amortisation of:

 

 

 

 

Net gain/loss

76

22

–4

94

Prior service cost

–9

 

–10

–19

Effect of settlement, curtailment and termination

2

 

 

2

Net periodic benefit cost

109

14

1

124

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2016
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Service cost (net of participant contributions)

113

8

5

126

Interest cost

31

76

10

117

Expected return on assets

–113

–89

 

–202

Amortisation of:

 

 

 

 

Net gain/loss

76

11

–4

83

Prior service cost

–9

 

–9

–18

Effect of settlement, curtailment and termination

1

 

 

1

Net periodic benefit cost

99

6

2

107

Other changes in plan assets and benefit obligations recognised in other comprehensive income for the years ended 31 December were as follows:

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2015
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Net gain/loss

313

21

–2

332

Amortisation of:

 

 

 

 

Net gain/loss

–76

–22

4

–94

Prior service cost

9

 

10

19

Effect of settlement, curtailment and termination

 

 

 

0

Exchange rate gain/loss recognised during the year

 

–22

 

–22

Total recognised in other comprehensive income, gross of tax

246

–23

12

235

Total recognised in net periodic benefit cost and other comprehensive income, gross of tax

355

–9

13

359

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2016
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Net gain/loss

56

182

9

247

Amortisation of:

 

 

 

 

Net gain/loss

–76

–11

4

–83

Prior service cost

9

 

9

18

Effect of settlement, curtailment and termination

 

 

 

0

Exchange rate gain/loss recognised during the year

 

–42

 

–42

Total recognised in other comprehensive income, gross of tax

–11

129

22

140

Total recognised in net periodic benefit cost and other comprehensive income, gross of tax

88

135

24

247

The estimated net loss and prior service credit for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2017 are USD 104 million and USD 9 million, respectively. The estimated net gain and prior service credit for the other defined post-retirement benefits that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2017 are USD 2 million and USD 9 million, respectively.

The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 6 016 million and USD 6 205 million as of 31 December 2015 and 2016, respectively.

Pension plans with an accumulated benefit obligation in excess of plan assets as of 31 December were as follows:

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USD millions

2015

2016

Projected benefit obligation

4 883

5 478

Accumulated benefit obligation

4 843

5 441

Fair value of plan assets

4 283

4 854

Principal actuarial assumptions

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Swiss plan

 

Foreign plans weighted average

 

Other benefits weighted average

 

 

 

 

 

 

 

 

 

 

2015

2016

 

2015

2016

 

2015

2016

Assumptions used to determine obligations at the end of the year

 

 

 

 

 

 

 

 

Discount rate

0.8%

0.6%

 

3.7%

2.9%

 

2.7%

2.4%

Rate of compensation increase

2.0%

1.8%

 

2.9%

3.1%

 

2.1%

2.1%

 

 

 

 

 

 

 

 

 

Assumptions used to determine net periodic pension costs for the year ended

 

 

 

 

 

 

 

 

Discount rate

1.1%

0.8%

 

3.5%

3.7%

 

2.7%

2.7%

Expected long-term return on plan assets

3.3%

3.3%

 

4.3%

4.1%

 

 

 

Rate of compensation increase

2.3%

2.0%

 

2.9%

2.9%

 

2.1%

2.1%

 

 

 

 

 

 

 

 

 

Assumed medical trend rates at year end

 

 

 

 

 

 

 

 

Medical trend – initial rate

 

 

 

 

 

 

6.1%

5.1%

Medical trend – ultimate rate

 

 

 

 

 

 

4.6%

3.8%

Year that the rate reaches the ultimate trend rate

 

 

 

 

 

 

2020

2021

The expected long-term rates of return on plan assets are based on long-term expected inflation, interest rates, risk premiums and targeted asset category allocations. The estimates take into consideration historical asset category returns.

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend rates would have had the following effects for 2016:

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USD millions

1 percentage point increase

1 percentage point decrease

Effect on total of service and interest cost components

1

–1

Effect on post-retirement benefit obligation

27

–23

Plan asset allocation by asset category

The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2015 and 2016 was as follows:

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Swiss plan allocation

 

Foreign plans allocation

 

 

 

 

 

 

 

 

 

2015

2016

Target allocation

 

2015

2016

Target allocation

Asset category

 

 

 

 

 

 

 

Equity securities

26%

27%

25%

 

26%

23%

23%

Debt securities

47%

44%

47%

 

68%

51%

53%

Real estate

21%

22%

20%

 

0%

0%

1%

Other

6%

7%

8%

 

6%

26%

23%

Total

100%

100%

100%

 

100%

100%

100%

Actual asset allocation is determined by a variety of current economic and market conditions and considers specific asset class risks.

Equity securities include Swiss Re common stock of USD 6 million (0.1% of total plan assets) and USD 7 million (0.1% of total plan assets) as of 31 December 2015 and 2016, respectively.

The Groupʼs pension plan investment strategy is to match the maturity profiles of the assets and liabilities in order to reduce the future volatility of pension expense and funding status of the plans. This involves balancing investment portfolios between equity and fixed income securities. Tactical allocation decisions that reflect this strategy are made on a quarterly basis.

Assets measured at fair value

For a description of the different fair value levels and valuation techniques see Note 8 “Fair value disclosures”.

Certain items reported as pension plan assets at fair value in the following table are not within the scope of Note 8, namely two positions: real estate and an insurance contract.

Real estate positions classified as level 1 and level 2 are exchange traded real estate funds where a market valuation is readily available. Real estate reported on level 3 is property owned by the pension funds. These positions are accounted for at the capitalised income value. The capitalisation based on sustainable recoverable earnings is conducted at interest rates that are determined individually for each property, based on the property’s location, age and condition. If properties are intended for disposal, the estimated selling costs and taxes are recognised in provisions. Sales gains or losses are allocated to income from real estate when the contract is concluded.

The fair value of the insurance contract is based on the fair value of the assets backing the contract.

Other assets classified within level 3 mainly consist of private equity investments valued with the same methodology as mentioned in Note 8.

As of 31 December, the fair values of pension plan assets by level of input were as follows:

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Quoted prices in active markets for identical assets
(Level 1)

Significant other observable inputs (Level 2)

Significant unobservable inputs (Level 3)

Total

Assets

 

 

 

 

Fixed income securities:

 

 

 

 

Debt securities issued by the US government and government agencies

34

149

 

183

Debt securities issued by non-US governments and government agencies

 

799

 

799

Corporate debt securities

 

2 179

 

2 179

Residential mortgage-backed securities

 

16

 

16

Commercial mortgage-backed securities

 

1

 

1

Other asset-backed securities

 

4

 

4

Equity securities:

 

 

 

 

Equity securities held for proprietary investment purposes

917

572

 

1 489

Derivative financial instruments

–9

 

 

–9

Real estate

129

9

596

734

Other assets

19

79

142

240

Total assets at fair value

1 090

3 808

738

5 636

Cash

82

–4

 

78

Total plan assets

1 172

3 804

738

5 714

Download

2016
USD millions

Quoted prices in active markets for identical assets
(Level 1)

Significant other observable inputs (Level 2)

Significant unobservable inputs (Level 3)

Investments measured at net asset value as practical expedient

Total

Assets

 

 

 

 

 

Fixed income securities:

 

 

 

 

 

Debt securities issued by US government and government agencies

28

145

 

 

173

Debt securities issued by non-US governments and government agencies

 

348

 

 

348

Corporate debt securities

 

2 069

9

 

2 078

Residential mortgage-backed securities

 

26

 

 

26

Commercial mortgage-backed securities

 

4

 

 

4

Other asset-backed securities

 

6

 

 

6

Equity securities:

 

 

 

 

 

Equity securities held for proprietary investment purposes

1 004

451

97

 

1 552

Derivative financial instruments

 

–6

 

 

–6

Real estate

 

 

612

 

612

Other assets

 

514

 

387

901

Total assets at fair value

1 032

3 557

718

387

5 694

Cash

97

–2

 

 

95

Total plan assets

1 129

3 555

718

387

5 789

Assets measured at fair value using significant unobservable inputs (level 3)

For the years ended 31 December, the reconciliation of fair value of pension plan assets using significant unobservable inputs were as follows:

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2015
USD millions

Real estate

Other assets

Total

Balance as of 1 January

578

139

717

Realised/unrealised gains/losses:

 

 

 

Relating to assets still held at the reporting date

10

–13

–3

Relating to assets sold during the period

 

17

17

Purchases, issuances and settlements

12

6

18

Transfers in and/or out of level 3

 

 

0

Impact of foreign exchange movements

–4

–7

–11

Closing balance as of 31 December

596

142

738

Download

2016
USD millions

Real estate

Other assets

Total

Balance as of 1 January

596

142

738

Realised/unrealised gains/losses:

 

 

 

Relating to assets still held at the reporting date

17

–14

3

Relating to assets sold during the period

 

13

13

Purchases, issuances and settlements

8

21

29

Transfers in and/or out of level 3

 

–53

–53

Impact of foreign exchange movements

–9

–3

–12

Closing balance as of 31 December

612

106

718

Expected contributions and estimated future benefit payments

The employer contributions expected to be made in 2017 to the defined benefit pension plans are USD 151 million and to the post-retirement benefit plan are USD 15 million.

As of 31 December 2016, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows:

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USD millions

Swiss plan

Foreign plans

Other benefits

Total

2017

196

71

15

282

2018

193

75

15

283

2019

186

78

16

280

2020

185

80

17

282

2021

180

82

18

280

Years 2022–2026

847

446

101

1 394

Defined contribution pension plans

The Group sponsors a number of defined contribution plans to which employees and the Group make contributions. The accumulated balances are paid as a lump sum at the earlier of retirement, termination, disability or death. The amount expensed in 2015 and in 2016 was USD 77 million and USD 69 million, respectively.