12 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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2012
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Benefit obligation as of 1 January

3 328

1 952

363

5 643

Service cost

106

6

6

118

Interest cost

78

94

13

185

Amendments

 

2

 

2

Actuarial gains/losses

231

212

24

467

Benefits paid

–158

–74

–15

–247

Employee contribution

25

 

 

25

Acquisitions/disposals/additions

 

 

–9

–9

Effect of curtailment and termination benefits

1

–56

 

–55

Effect of foreign currency translation

81

56

1

138

Benefit obligation as of 31 December

3 692

2 192

383

6 267

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets as of 1 January

2 983

1 814

 

4 797

Actual return on plan assets

206

190

 

396

Company contribution

88

74

15

177

Benefits paid

–158

–74

–15

–247

Employee contribution

25

 

 

25

Acquisitions/disposals/additions

 

 

 

0

Effect of curtailment and termination benefits

1

–56

 

–55

Effect of foreign currency translation

69

53

 

122

Fair value of plan assets as of 31 December

3 214

2 001

0

5 215

Funded status

–478

–191

–383

–1 052

 

 

 

 

 

 

 

 

 

 

2013
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Benefit obligation as of 1 January

3 692

2 192

383

6 267

Service cost

118

7

6

131

Interest cost

72

87

11

170

Amendments

 

 

 

0

Actuarial gains/losses

–338

57

–47

–328

Benefits paid

–137

–73

–15

–225

Employee contribution

26

 

 

26

Acquisitions/disposals/additions

 

 

 

0

Effect of curtailment and termination benefits

1

 

 

1

Effect of foreign currency translation

97

35

3

135

Benefit obligation as of 31 December

3 531

2 305

341

6 177

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets as of 1 January

3 214

2 001

 

5 215

Actual return on plan assets

221

141

 

362

Company contribution

227

143

15

385

Benefits paid

–137

–74

–15

–226

Employee contribution

26

 

 

26

Acquisitions/disposals/additions

 

 

 

0

Effect of curtailment and termination benefits

1

 

 

1

Effect of foreign currency translation

109

34

 

143

Fair value of plan assets as of 31 December

3 661

2 245

0

5 906

Funded status

130

–60

–341

–271

Amounts recognised in the balance sheet, as of 31 December were as follows:

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2012
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Non-current assets

 

51

 

51

Current liabilities

 

–3

–16

–19

Non-current liabilities

–478

–239

–367

–1 084

Net amount recognised

–478

–191

–383

–1 052

 

 

 

 

 

 

 

 

 

 

2013
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Non-current assets

130

49

 

179

Current liabilities

 

–2

–16

–18

Non-current liabilities

 

–107

–325

–432

Net amount recognised

130

–60

–341

–271

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

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2012
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Net gain/loss

1 034

379

–67

1 346

Prior service cost/credit

–1

2

–100

–99

Total

1 033

381

–167

1 247

 

 

 

 

 

 

 

 

 

 

2013
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Net gain/loss

521

385

–109

797

Prior service cost/credit

–2

2

–88

–88

Total

519

387

–197

709

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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2012
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Service cost (net of participant contributions)

106

6

6

118

Interest cost

78

94

13

185

Expected return on assets

–100

–98

 

–198

Amortisation of:

 

 

 

 

Net gain/loss

42

12

–9

45

Prior service cost

 

 

–11

–11

Effect of settlement, curtailment and termination

1

10

 

11

Net periodic benefit cost

127

24

–1

150

 

 

 

 

 

 

 

 

 

 

2013
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Service cost (net of participant contributions)

118

7

6

131

Interest cost

72

87

11

170

Expected return on assets

–102

–99

 

–201

Amortisation of:

 

 

 

 

Net gain/loss

57

18

–6

69

Prior service cost

 

 

–10

–10

Effect of settlement, curtailment and termination

1

 

 

1

Net periodic benefit cost

146

13

1

160

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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2012
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Net gain/loss

125

120

24

269

Prior service cost/credit

 

2

 

2

Amortisation of:

 

 

 

 

Net gain/loss

–42

–12

9

–45

Prior service cost

 

 

11

11

Effect of settlement, curtailment and termination

 

–10

 

–10

Exchange rate gain/loss recognised during the year

 

11

 

11

Total recognised in other comprehensive income, gross of tax

83

111

44

238

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

210

135

43

388

 

 

 

 

 

 

 

 

 

 

2013
USD millions

Swiss
plan

Foreign
plans

Other
benefits

Total

Net gain/loss

–457

15

–46

–488

Prior service cost/credit

 

 

 

0

Amortisation of:

 

 

 

 

Net gain/loss

–57

–18

6

–69

Prior service cost

 

 

10

10

Effect of settlement, curtailment and termination

 

 

 

0

Exchange rate gain/loss recognised during the year

 

10

 

10

Total recognised in other comprehensive income, gross of tax

–514

7

–30

–537

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

–368

20

–29

–377

The estimated net loss and prior service cost for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2014 are USD 61 million and USD 1 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 2014 are USD 11 million and USD 11 million, respectively.

The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 5 767 million and USD 5 735 million as of 31 December 2012 and 2013, 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

2012

2013

Projected benefit obligation

4 652

594

Accumulated benefit obligation

4 584

593

Fair value of plan assets

3 938

490

Principal actuarial assumptions

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Swiss plan

Foreign plans weighted average

Other benefits weighted average

 

 

 

 

 

 

 

 

2012

2013

2012

2013

2012

2013

Assumptions used to determine obligations at the end of the year

 

 

 

 

 

 

Discount rate

2.0%

2.3%

4.2%

4.4%

3.1%

3.5%

Rate of compensation increase

2.3%

2.3%

3.2%

3.4%

3.4%

2.1%

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Discount rate

2.4%

2.0%

4.9%

4.2%

3.5%

3.1%

Expected long-term return on plan assets

3.3%

3.3%

5.3%

5.1%

 

 

Rate of compensation increase

2.3%

2.3%

2.2%

3.2%

3.9%

3.4%

 

 

 

 

 

 

 

Assumed medical trend rates at year end

 

 

 

 

 

 

Medical trend – initial rate

 

 

 

 

6.2%

6.0%

Medical trend – ultimate rate

 

 

 

 

4.5%

4.5%

Year that the rate reaches the ultimate trend rate

 

 

 

 

2019

2018

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 2013:

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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

23

–21

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 2012 and 2013 was as follows:

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Swiss plan allocation

Foreign plans allocation

 

 

 

 

 

 

 

 

2012

2013

Target allocation

2012

2013

Target allocation

Asset category

 

 

 

 

 

 

Equity securities

27%

27%

25%

37%

36%

34%

Debt securities

45%

41%

48%

55%

59%

61%

Real estate

19%

19%

21%

1%

1%

2%

Other

9%

13%

6%

7%

4%

3%

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 5 million (0.1% of total plan assets) and USD 7 million (0.1% of total plan assets) as of 31 December 2012 and 2013, 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 3 “Fair value disclosures”.

Certain items reported as pension plan assets at fair value in the table below are not within the scope of Note 3, 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 3.

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

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2012
USD millions

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:

 

2 626

 

2 626

Debt securities issued by the US government and government agencies

 

62

 

62

Debt securities issued by non-US governments and government agencies

 

1 031

 

1 031

Corporate debt securities

 

1 474

 

1 474

Residential mortgage-backed securities

 

49

 

49

Commercial mortgage-backed securities

 

5

 

5

Other asset-backed securities

 

5

 

5

Equity securities:

 

 

 

 

Equity securities held for proprietary investment purposes

866

735

 

1 601

Derivative financial instruments

3

 

 

3

Real estate

50

20

572

642

Other assets

 

48

125

173

Total assets at fair value

919

3 429

697

5 045

Cash

170

 

 

170

Total plan assets

1 089

3 429

697

5 215

 

 

 

 

 

 

 

 

 

 

2013
USD millions

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:

 

2 838

 

2 838

Debt securities issued by the US government and government agencies

 

136

 

136

Debt securities issued by non-US governments and government agencies

 

1 028

 

1 028

Corporate debt securities

 

1 647

 

1 647

Residential mortgage-backed securities

 

21

 

21

Commercial mortgage-backed securities

 

1

 

1

Other asset-backed securities

 

5

 

5

Equity securities:

 

 

 

 

Equity securities held for proprietary investment purposes

1 030

801

 

1 831

Derivative financial instruments

16

 

 

16

Real estate

54

17

631

702

Other assets

136

58

132

326

Total assets at fair value

1 236

3 714

763

5 713

Cash

193

 

 

193

Total plan assets

1 429

3 714

763

5 906

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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2012
USD millions

Real estate

Other assets

Total

Balance as of 1 January

549

119

668

Realised/unrealised gains/losses:

 

 

 

Relating to assets still held at the reporting date

1

–13

–12

Relating to assets sold during the period

 

3

3

Purchases, issuances and settlements

10

15

25

Transfers in and/or out of Level 3

 

 

0

Impact of foreign exchange movements

12

1

13

Closing balance as of 31 December

572

125

697

 

 

 

 

 

 

 

 

2013
USD millions

Real estate

Other assets

Total

Balance as of 1 January

572

125

697

Realised/unrealised gains/losses:

 

 

 

Relating to assets still held at the reporting date

31

1

32

Relating to assets sold during the period

 

4

4

Purchases, issuances and settlements

11

–1

10

Transfers in and/or out of Level 3

 

 

0

Impact of foreign exchange movements

17

3

20

Closing balance as of 31 December

631

132

763

Expected contributions and estimated future benefit payments

The employer contributions expected to be made in 2014 to the defined benefit pension plans are USD 195 million and to the post-retirement benefit plan are USD 16 million.

As of 31 December 2013, 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

2014

216

75

16

307

2015

210

79

17

306

2016

210

83

18

311

2017

208

86

19

313

2018

206

89

20

315

Years 2019–2023

982

486

107

1575

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 2012 and in 2013 was USD 71 million and USD 74 million, respectively.