25. Provisions for employee benefits

Group’s provisions and net assets for employee benefits are as follows:

(€ million)At 31 December 2013At 31 December 2012At 1 January 2012
Present value of defined benefit obligations:      
Pension benefits 23,136 26,973 25,202
Health care and life insurance plans 1,945 2,289 2,07
Other post-employment benefits 984 960 919
Total present value of defined benefit obligations 26,065 30,222 28,191
       
Fair value of plan assets 18,982 20,049 20,005
       
Asset ceiling 3 - -
Total net defined benefit plans 7,086 10,173 8,186
of which:      
Net defined benefit liability 7,181 10,256 8,28
(Defined benefit plan asset) (95) (83) (94)
       
Other provisions for employees and liabilities for share based payments 1,084 1,230 1,304
Total Provisions for employee benefits 8,265 11,486 9,584

The Group provides post-employment benefits for certain of their active employees and retirees. The way these benefits are provided varies according to the legal, fiscal and economic conditions of each country in which the Group operates and may change periodically. The plans are classified by the Group on the basis of the type of benefit provided as follows: Pension benefits, Health care and life insurance plans, and Other post-employment benefits.  Moreover, Group companies provide post-employment benefits, such as pension or health care benefits, to its employees under defined contribution plans. In this case, the Group pays contributions to public or private insurance plans on a legally mandatory, contractual, or voluntary basis. By paying these contributions the Group fulfills all of its obligations. The Group recognizes the cost for defined contribution plans over the period in which the employee renders service and classifies this by function in Cost of sales, Selling, general and administrative costs and Research and development costs. In 2013 this costs totaled €1,288 million (€1,087 million in 2012).

Pension benefits

Group companies in the United States, Canada and Mexico sponsor both non-contributory and contributory defined benefit pension plans. The non-contributory pension plans cover certain hourly and salaried employees. Benefits are based on a fixed rate for each year of service. Additionally, contributory benefits are provided to certain salaried employees under the salaried employees’ retirement plans. These plans provide benefits based on the employee’s cumulative contributions, years of service during which the employee contributions were made and the employee’s average salary during the five consecutive years in which the employee’s salary was highest in the 15 years preceding retirement.

In the United Kingdom, the Group participates, amongst others, in a pension plan financed by various entities belonging to the Group, called the “Fiat Group Pension Scheme” covering mainly deferred and retired employees.

Liabilities arising from these plans are usually funded by contributions made by Group subsidiaries and, at times by their employees, into legally separate trusts from which the employee benefits are paid.  The Group’s funding policy for defined benefit pension plans is to contribute at least the minimum amounts required by applicable laws and regulations. Occasionally, additional discretionary contributions in excess of these legally required are made to achieve certain desired funding levels. In the U.S. these excess amounts are tracked, and the resulting credit balance can be used to satisfy minimum funding requirements in future years. As of 31 December 2013, the combined credit balances for the U.S. qualified pension plans was approximately €1.9 billion, the usage of this credit balances to satisfy minimum funding requirements is subject to the plans maintaining certain funding levels. The Group contributions to funded pension plans for 2014 are expected to be €666 million, of which €647 million related to Chrysler and more specifically, €573 million are discretionary contributions and €74 million will be made to satisfy minimum funding requirement. The expected benefit payments for pension plans are as follows:

(€ million)Expected benefit payments
2014 1,654
2015 1,623
2016 1,598
2017 1,572
2018 1,554
2019-2023 7,552

The following summarizes the changes in the pension plans:

 20132012
(€ million)ObligationFair value of
plan assets
Asset
ceiling
Liability (asset)ObligationFair value of
plan assets
Asset
ceiling
Liability
(asset)
Amounts at 1 January 26,973 (20,049) - 6,924 25,202 (20,005) - 5,197
Included in the Income statement                
Current service cost 292 - - 292 271 - - 271
Interest expense/(income) 1,026 (768) - 258 1,199 (942) - 257
Other administration costs - 42 - 42 - 44 - 44
Past service costs (credits)
and gains or losses arising from
settlements 
(176) 14 - (162) 10 - - 10
Included in Other comprehensive
income/losses
               
Actuarial losses (gains) from:                
  • Demographic assumptions
(35) - - -35 172 - - 172
  • Financial assumptions
(1,943) (1) - (1,944) 2,556 - - 2,556
  • Other
(2) 2 - - (248) - - (248)
Return on assets - (518) - (518) - (989) - (989)
Changes in the effect of limiting net assets  - - 3 3 - - - -
Changes in exchange rates (1,352) 1,107 - (245) (402) 286 - (116)
Other                
Employer contributions - (458) - (458) - (216) - (216)
Plan participant contributions 9 (9) - - 10 (9) - (9)
Benefits paid (1,673) 1,667 - (6) (1,796) 1,781 - (15)
Other changes 17 (11) - 6 (1) 1 - -
Amounts at 31 December 23,136 (18,982) 3 4,157 26,973 -20,049 - 6,924

During the second quarter of 2013, Chrysler amended its U.S. and Canadian salaried defined benefit pension plans. The U.S. plans were amended in order to comply with U.S. regulations, cease the accrual of future benefits effective 31 December 2013, and enhance the retirement factors. The Canada amendment ceases the accrual of future benefits effective 31 December 2014, enhances the retirement factors and continues to consider future salary increases for the affected employees. An interim re-measurement was performed for these plans, which resulted a curtailment gain of €166 million recognized in unusual income in the Income statement (see Note 8). In addition, the Group recognized a €509 million reduction to its pension obligation, a €7 million reduction to defined benefit plan assets and a corresponding €502 million increase in accumulated Other comprehensive income/(losses).

During 2013 an increase in discount rates resulted in actuarial gains for the year ended 31 December 2013, compared with actuarial losses for the year ended 31 December 2012, when interest rates declined from the prior year end. The actuarial losses were partially offset by the return on plan assets during the year.

The fair value of plan assets by class is as follows:

 At 31 December 2013At 31 December 2012
(€ million)Amountof which have a
quoted market price
in an active market
Amountof which have a
quoted market price
in an active market
Cash and cash equivalent 532 401 516 403
US equity securities 2,047 2,033 1,882 1,787
Non-US equity securities 1,54 1,531 1,558 1,549
Commingled funds 1,518 195 967 69
Equity instruments 5,105 3,759 4,407 3,405
Government securities 2,545 729 3,632 1,708
Corporate bonds (including Convertible and high yield bonds) 5,049 38 5,271 11
Other fixed income 635 - 717 1
Fixed income securities 8,229 767 9,62 1,719
Private equity funds 1,713 - 1,861 -
Mutual funds 4 - 3 3
Real estate funds 1,222 - 1,221 -
Hedge funds 1,759 - 1,844 -
Investments funds 4,698 - 4,929 3
Insurance contracts and other 418 46 577 7
Total fair value of plan assets 18,982 4,974 20,049 5,537

Non-US Equity securities are invested broadly in developed international and emerging markets. Debt instruments are fixed income securities which comprise primarily long duration U.S. Treasury and global government bonds, as well as U.S. developed international and emerging market companies’ debt securities diversified by sector, geography and through a wide range of market capitalization. Private equity funds include those in limited partnerships that invest primarily in operating companies that are not publicly traded on a stock exchange. Real estate investments includes those in limited partnerships that invest in various commercial and residential real estate projects both domestically and internationally. Hedge fund investments include those seeking to maximize absolute return using a broad range of strategies to enhance returns and provide additional diversification.

The investment strategies and objectives for pension assets in the U.S., Canada and Mexico reflect a balance of liability-hedging and return-seeking investment considerations. The investment objectives are to minimize the volatility of the value of the pension assets relative to the pension liabilities and to ensure assets are sufficient to pay plan obligations. The objective of minimizing the volatility of assets relative to liabilities is addressed primarily through asset diversification, partial asset−liability matching and hedging. Assets are broadly diversified across many asset classes to achieve risk−adjusted returns that, in total, lower asset volatility relative to the liabilities. Additionally, in order to minimize pension asset volatility relative to the pension liabilities, a portion of the pension plan assets are allocated to fixed income securities. The group policy, for these plans, rebalances investments regularly and ensures actual allocations are in line with target allocations as appropriate.

Assets are actively managed, primarily, by external investment managers. Investment managers are not permitted to invest outside of the asset class or strategy for which they have been appointed. The Group uses investment guidelines to ensure investment managers invest solely within the mandated investment strategy. Certain investment managers use derivative financial instruments to mitigate the risk of changes in interest rates and foreign currencies impacting the fair values of certain investments. Derivative financial instruments may also be used in place of physical securities when it is more cost effective and/or efficient to do so. Plan assets do not include shares of Fiat S.p.A. or properties occupied by Group companies.

Sources of potential risk in the pension plan assets measurements relate to market risk, interest rate risk and operating risk. Market risk is mitigated by diversification strategies and as a result, there are no significant concentrations of risk in terms of sector, industry, geography, market capitalization, or counterparty. Interest rate risk is mitigated by partial asset−liability matching. The fixed income target asset allocation partially matches the bond−like and long−dated nature of the pension liabilities. Interest rate increases generally will result in a decline in the fair value of the investments in fixed income securities and the present value of the obligations. Conversely, interest rate decreases generally will increase the fair value of the investments in fixed income securities and the present value of the obligations.

The weighted average assumptions used to determine the defined benefit obligations are as follows:

 At 31 December 2013At 31 December 2012
(In %) USA Canada UK USA Canada UK
Discount rate 4.7 4.6 4.5 4.0 3.9 4.6
Future salary increase rate 3.0 3.5 3.1 3.0 3.5 3.0

The discount rates are used in measuring the obligation and the interest expense/(income) of net period cost. The Group selects these rates on the basis of the rate on return on high-quality (AA rated) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected pension and other post-employment plan. The average duration of the U.S. and Canadian liabilities was approximately 11 and 12 years, respectively. The average duration of the UK pension liabilities was approximately 21 years.

The effect of the increase or decrease of 0.1% in the assumed discount rate, holding all other assumptions constant, would be as follows:

(€ million)0.1% decrease
in discount rate
0.1% increase
in discount rate
Effect on defined benefit obligation 265 (261)

Health care and life insurance plans

Liabilities arising from these plans comprise obligations for retiree health care and life insurance granted to employees and to retirees in the U.S. and Canada by Chrysler Group companies. Upon retirement from the Company, these employees may become eligible for continuation of certain benefits. Benefits and eligibility rules may be modified periodically. These plans are unfunded. The expected benefit payments for unfunded health care and life insurance plans are as follows:

(€ million)Expected benefit payments
2014 128
2015 127
2016 127
2017 127
2018 126
2019-2023 631

Changes in the net defined benefit obligations for healthcare and life insurance plans are as follows:

(€ million)20132012
Present value of obligations at 1 January 2,289 2,07
Included in Income statement    
Current service cost 23 22
Interest expense 89 103
Past service costs (credits) and gains or losses arising from settlements  - -6
Included in OCI    
Actuarial losses (gains) from:    
  • Demographic assumptions
(21) 52
  • Financial assumptions
(207) 231
  • Other
11 (1)
Effect of movements in exchange rates (112) -38
Other    
Benefits paid (126) (145)
Other (1) 1
Present value of obligations at 31 December 1,945 2,289

Health care and life insurance plans are accounted for on an actuarial basis, which requires the selection of various assumptions, in particular, it requires the use of estimates of the present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events such as health care cost increases and demographic experience.

The weighted average assumptions used to determine the defined benefit obligations are as follows:

 At 31 December 2013At 31 December 2012
(In %) USA Canada USA Canada
Discount rate 4.9 4.7 4.1 3.9
Salary growth n/a 2.7 n/a 2.7
Weighted average ultimate healthcare cost trend rate 5.0 3.6 5.0 3.7

The discount rates used for the measurement of these obligations are based on yields of high-quality (AA-rated) fixed income securities for which the timing and amounts of payments match the timing and amounts of the projected benefit payments. The average duration of the U.S. and Canadian liabilities was approximately 12 and 15 years, respectively.

The effect of the increase or decrease of 0.1% in the assumed discount rate, holding all other assumptions constant, is as follows:

(€ million)0.1% decrease
 in discount rate
0.1% increase
in discount rate
Effect on defined benefit obligation 24 (23)

The annual rate of increase in the per capita cost of covered U.S. health care benefits assumed for 2013 was 6.8% (8.0% in 2012). The annual rate was assumed to decrease gradually to 5.0% after 2017 and remain at that level thereafter. The annual rate of increase in the per capita cost of covered Canadian health care benefits assumed for 2013 was 3.3% (3.7% in 2012). The annual rate was assumed to remain at 3.6% thereafter.

The assumed health care cost trend rate has a significant effect on the amounts reported for postretirement health care and life insurance benefits. A one percentage point change in the assumed health care cost trend rate for U.S. and Canada combined would have the following effects as of 31 December 2013:

(€ million)1 % decrease in assumed health care trend rate1 % increase in assumed health care trend rate
Effect on defined benefit obligation (40) 48

Other post-employment benefits

Other post-employment benefits includes other employee benefits granted to Group employees in Europe and comprise, amongst other, the Italian TFR (obligation amounting to €825 million at 31 December 2013 and to €796 million at 31 December 2012), consisting of the residual obligation for the benefit due to employees of Italian companies until 31 December 2006, having more than 50 employees and accrued over the employee’s working life for the others and settled when an employee leaves the Group. These schemes are unfunded.

Changes in defined benefit obligations for other post-employment benefits are as follows:

(€ million)20132012
Present value of obligations at 1 January 960 919
Included in Income statement    
Current service cost 9 8
Interest expenses 15 24
Past service costs (credits) and gains or losses arising from settlements  - (3)
Included in OCI    
Actuarial losses (gains) from:    
  • Demographic assumptions
(1) (4)
  • Financial assumptions
34 51
  • Other
23 25
Effect of movements in exchange rates (4) 2
Other    
Benefits paid (57) (76)
Change in the scope of consolidation 21 -
Other (16) 14
Present value of obligations at 31 December 984 960

The main assumptions used in developing the required estimates for other post- employment benefits include the discount rate, the retirement or employee leaving rate and the mortality rates.

The discount rates used for the measurement of the Italian TFR obligation are based on yields of high-quality (AA rated) fixed income securities for which the timing and amounts of payments match the timing and amounts of the projected benefit payments. For this plan, the single weighted average discount rate that reflects the estimated timing and amount of the scheme future benefit payments for 2013 is equal to 2.77% (3.4% in 2012). The average duration of the Italian TFR is approximately 7 years. Retirement or employee leaving rates are developed to reflect actual and projected Group experience and law requirements for retirement in Italy. The effect on the TFR obligation of 1% increase or decrease in the assumed discount rate, holding all other assumption constant, is negative for €43 million and positive for €52 million respectively.

Other provisions for employees and liabilities for share based payments

At 31 December 2013, Other provisions for employees and liabilities for share based payments comprised other long term benefits obligations for €332 million (€323 million at 31 December 2012), representing the expected obligation for benefits as jubilee and long term disability granted to certain employees by the Group. This item also comprised Liabilities for share-based payments amounting to €123 million at 31 December 2013 (€125 million at 31 December 2012).