Ericsson sponsors a number of post-employment benefit plans through-out the Company, which are in line with market practice in each country.
The year 2014 was characterized by significant decreases in discount rates in most plans resulting in actuarial losses on defined benefit obliga-tions of SEK 14 billion. This was partly offset by positive development of plan assets resulting in actuarial gains of SEK 4 billion.
Swedish plans
Sweden has both defined benefit and defined contribution plans based on collective agreement between the parties in the Swedish labor market:
> A defined benefit plan, known as ITP 2 (occupational pension for sala-ried employees in manufacturing industries and trade), complemented by a defined contribution plan, known as ITPK (supplementary retire-ment benefits). This is a final salary-based plan.
> A defined contribution plan, known as ITP 1, for employees born in 1979 or later.
> A defined contribution plan ITP 1 or alternative ITP, for employees earn-ing more than 10 income base amount and who have opted out of the defined benefit plan ITP 2, where rules are set by the Company and approved by each employee selected to participate.
The Company has by far most of its Swedish pension liabilities under defined benefit plans which are funded to 56% (73%) through Ericsson Pensionsstiftelse (a Swedish Pension Foundation). The Pensionsstiftelse covers the liability up to the value of the defined benefit obligation based on Swedish GAAP calculations. There are no funding requirements for the Swedish plans. The disability- and survivors’ pension part of the ITP-plan is secured through an insurance solution with the company Alecta, see section about Multi-employer plans.
The benefit payments are done from the Company since the liability is growing and the necessary surplus therefore is not yet reached. For the unfunded plans the Company meets the payment obligation when it falls due. The responsibility for governance of the plans and the plan assets lies with the Company and the Pensionsstiftelse. The Swedish Pensionss-tiftelse is managed on the basis of a capital preservation strategy and the risk profile is set accordingly. Traditional asset-liability matching (ALM) studies are undertaken on a regular basis to allocate within different asset classes.
The plans are exposed to different risks, i.e., a sudden decrease in the bond yields, which would lead to an increase in the plan liability. A sudden instability in the financial market might also lead to a decrease in fair value of plan assets held by the Pensionsstiftelse, as the holdings of plan assets partly are exposed to equity markets; however, this may be partly offset by higher values in fixed income holdings. Swedish plans are linked to infla-tion and higher inflainfla-tion will lead to a higher liability. For the time being, inflation is a low risk factor to the Swedish plans as actual rate of inflation has not reached the ceiling target set by the Central Bank of Sweden.
Multi-employer plans
As before, the Company has secured the disability and survivors’ pension part of the ITP Plan through an insurance solution with the insurance com-pany Alecta. Although this part of the plan is classified as a multi-em-ployer defined benefit plan, it is not possible to get sufficient information to apply defined benefit accounting, as for most of the accrued pension benefits in Alecta, information is missing on the allocation of earnings pro-cess between employers. Full vesting is instead registered on the last employer. Alecta is not able to calculate a breakdown of assets and provi-sions for each respective employer, and therefore, the disability and survi-vors’ pension portion of the ITP Plan has been accounted for as a defined contribution plan.
Alecta has a collective funding ratio which acts as a buffer for its insur-ance commitments to protect against fluctuations in investment return and insurance risks. Alecta’s target ratio is 140% and reflects the fair value of Alecta’s plan assets as a percentage of plan commitments, then
mea-sured in accordance with Alecta’s actuarial assumptions, which are differ-ent from those in IAS 19R. Alecta’s collective funding ratio was 143%
(148%) as of December 31, 2014. The Company’s share of Alecta’s saving premiums is 0.6%; the total share of active members in Alecta are 2.3%.
The expected contribution to the plan is SEK 107 million for 2015.
Contingent liabilities / Assets pledged as collateral
Contingent liabilities include the Company’s mutual responsibility as a credit insured company of PRI Pensionsgaranti in Sweden. This mutual responsibility can only be imposed in the instance that PRI Pensionsga-ranti has consumed all of its assets, and it amounts to a maximum of 2%
of the Company’s pension liability in Sweden. The Company has a pledged business mortgage of SEK 2 billion to PRI Pensionsgaranti.
US plans
The Company operates defined benefit pension plans in the US, which are a combination of final salary pension plans and contribution-based arrangements. The final salary pension plans provide benefits to mem-bers in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on members’ length of service and their sal-ary in the final years leading up to retirement. Retirees generally do not receive inflationary increases once in payment.
The other type of plan is a contribution-based pension plan, which pro-vides a benefit determined using a “cash balance” approach. The balance is credited monthly with interest credits and contribution credits, based on a combination of current year salary and length of service.
The majority of benefit payments are from trustee-administered funds;
however, there are also a number of unfunded plans where the Company meets the benefit payment obligation as it falls due. In the US, the Com-pany’s policy is at least to meet or exceed the funding requirements of federal regulations. The funded level in the US Pension Plan is above the point at which minimum funding would be required for fiscal year 2014.
Plan assets held in trusts are governed by local regulations and prac-tice, as is the nature of the relationship between the Company and the trustees (or equivalent) and their composition. Responsibility for gover-nance of the plans – including investment decisions and contribution schedules – lies with the Plan Administrative Committee (PAC). The PAC is composed of representatives from the Company.
The Company’s plans are exposed to various risks associated with pension plans, i.e., a sudden decrease in bond yields would lead to an increase in the present value of the defined benefit obligation. A sudden instability in the financial markets might also lead to a decrease in the fair value of plan assets held by the trust. Pension benefits in the US are not linked to inflation; however, higher inflation poses the risk of increased final salaries being used to determine benefits for active employees. There is also a risk that the duration of payments to retirees will exceed the life expectancy in mortality tables.
Other plans
The Company also sponsors plans in other countries. The main plans are in Brazil, Ireland and the United Kingdom. The plan in Brazil is a pension plan wholly funded with a net surplus of assets. The plans in Ireland and the UK are final salary pension plans and are partly or wholly funded. The plans are managed by corporate trustees with directors appointed partly by the local company and partly by the plan members. The trustees are independent from the local company and subject to the specific country’s pension laws.
FINANCIALS – Consolidated financial statements
Amount recognized in the Consolidated balance sheet Amount recognized in the Consolidated balance sheet
Sweden US Other Total
2014
Defined benefit obligation (DBO) 32,885 18,281 22,586 73,752
Fair value of plan assets 18,412 19,665 18,785 56,862
Deficit/surplus (+/–) 14,473 –1,384 3,801 16,890
Plans with net surplus, excluding asset ceiling 1) – 2,057 1,438 3,495
Provision for post-employment benefits 2) 14,473 673 5,239 20,385
2013
Defined benefit obligation (DBO) 23,088 14,387 15,444 52,919
Fair value of plan assets 16,818 16,174 13,575 46,567
Deficit/surplus (+/–) 6,270 –1,787 1,869 6,352
Plans with net surplus, excluding asset ceiling 1) – 2,307 1,166 3,473
Provision for post-employment benefits 2) 6,270 520 3,035 9,825
1) Plans with a net surplus, i.e., where plan assets exceed DBO, are reported as Other financial assets, non-current: see Note C12, “Financial assets.”
The asset ceiling increased during the year by SEK 60 million from SEK 525 million in 2013 to SEK 585 million in 2014.
2) Plans with net liabilities are reported in the balance sheet as Post-employment benefits, non-current.
Total pension cost recognized in the Consolidated income statement
The costs for post-employment benefits within the Company are distributed between defined contribution plans and defined benefit plans, with a trend toward defined contribution plans.
Pension costs for defined contribution plans and defined benefit plans
Sweden US Other Total
2014
Pension cost for defined contribution plans 953 562 713 2,228
Pension cost for defined benefit plans 1,039 39 651 1,729
Total 1,992 601 1,364 3,957
Total pension cost expressed as a percentage of wages and salaries 6.8%
2013
Pension cost for defined contribution plans 1,088 502 778 2,368
Pension cost for defined benefit plans 1,581 85 392 2,058
Total 2,669 587 1,170 4,426
Total pension cost expressed as a percentage of wages and salaries 9.1%
2012
Pension cost for defined contribution plans 977 404 701 2,082
Pension cost for defined benefit plans 936 –454 198 680
Total 1,913 –50 899 2,762
Total pension cost expressed as a percentage of wages and salaries 5.7%
Change in the net defined benefit obligation Change in the net defined benefit obligation
Present value of obligation 20143)
Fair value of plan assets
2014 Total
2014
Present value of obligation 2013
Fair value of plan assets
2013 Total
2013
Opening balance 52,919 –46,567 6,352 51,958 –44,642 7,316
Reclassification 1) – – – 1,799 – 1,799
Included in the income statement:
Current service cost 1,476 – 1,476 1,351 – 1,351
Past service cost and gains and losses on settlements 31 – 31 363 – 363
Interest cost/ income (+/–) 2,347 –2,244 103 2,046 –1,846 200
Taxes and administrative expenses 54 31 85 129 16 145
Other 31 3 34 –4 3 –1
3,939 –2,210 1,729 3,885 –1,827 2,058
Remeasurements:
Return on plan assets excluding amounts in interest expense/income – –3,643 –3,643 – –550 –550
Actuarial gains/losses (–/+) arising from changes in demographic
assumptions 549 – 549 46 – 46
Actuarial gains/losses (–/+) arising from changes in financial assumptions 12,746 – 12,746 –3,629 – –3,629
Experience-based gains/losses (–/+) 305 – 305 611 – 611
13,600 –3,643 9,957 –2,972 –550 –3,522
Other changes:
Translation difference 4,949 –5,059 –110 –115 190 75
Contributions and payments from:
Employers 2) –574 –775 –1,349 –554 –971 –1,525
Plan participants 43 –26 17 55 –44 11
Payments from plans:
Benefit payments –1,282 1,282 0 –1,181 1,181 0
Settlements –1,013 1,016 3 –116 96 –20
Business combinations and divestments 4) 1,171 –880 291 160 – 160
Closing balance 73,752 –56,862 16,890 52,919 –46,567 6,352
1) The provision for the Swedish special payroll taxes which was previously included in Other current liabilities, was in 2013 re-classified as a pension liability in line with the implementation of the revised IAS 19R on January 1, 2013.
2) The expected contribution to the plan is SEK 1,092 million during 2015.
3) The weighted average duration of DBO is 19.4 years.
4) Business combinations in 2014 are mainly related to the acquisition of Red Bee Media. In 2013 business combinations are related to the acquisition of Modems.
Present value of the defined benefit obligation
Sweden US Other Total
2014
DBO, closing balance 32,885 18,281 22,586 73,752
Of which partially or fully funded 32,348 17,608 20,005 69,961
Of which unfunded 537 673 2,581 3,791
2013
DBO, closing balance 23,088 14,387 15,444 52,919
Of which partially or fully funded 22,598 13,867 13,396 49,861
Of which unfunded 490 520 2,048 3,058
FINANCIALS – Consolidated financial statements
Actuarial assumptions
Financial and demographic actuarial assumptions 1)
2014 2013
Financial assumptions
Discount rate, weighted average 3.4% 4.5%
Demographic assumptions
Life expectancy after age 65 in years, weighted average 22 22
1) Weighted average for the Group for disclosure purposes only. Country-specific assumptions were used for each actuarial calculation.
Actuarial assumptions are assessed on a quarterly basis.
See also Notes C1 and C2.
Sweden
The defined benefit obligation has been calculated using a discount rate based on yields of covered bonds, which is higher than a discount rate based on yields of government bonds. The Swedish covered bonds are considered high-quality bonds, mainly AAA-rated, as they are secured with assets, and the market for covered bonds is considered deep and liquid, thereby meeting the revised IAS 19 requirements.
US
The defined benefit obligation has been calculated using a discount rate based on yields of high-quality corporate bonds, where “high-quality” has been defined as a rating of AA and above.
Actuarial gains and losses reported directly in Other comprehensive income
2014 2013
Cumulative gain/loss (–/+) at beginning of year 5,219 8,696 Recognized gain/loss (–/+) during the year 9,957 –3,522
Translation difference 129 45
Cumulative gain/loss (–/+) at end of year 15,305 5,219
Total remeasurements in Other comprehensive income related to post- employment benefits
2014 2013
Actuarial gains and losses (+/–) –8,322 3,128
The effect of asset ceiling –60 –308
Swedish special payroll taxes 1) –1,635 394
Total –10,017 3,214
1) Swedish payroll taxes are included in recognized gain/loss during the year in OCI.
Sensitivity analysis of significant actuarial assumptions
Impact on DBO, SEK billion 2014 2013
2014
Discount rate +0.5% –7 –5
Discount rate –0.5% +8 +5
Asset allocation by asset type and geography
Sweden US Other Total Of which
unquoted 2014
Cash and cash equivalents 2,118 509 483 3,110 24%
Equity securities 4,598 1,003 4,389 9,990 10%
Debt securities 6,815 14,993 11,455 33,263 83%
Real estate 2,383 – 134 2,517 100%
Investment funds 2,498 2,309 557 5,364 67%
Assets held by insurance company – – 770 770 100%
Other – 851 997 1,848 71%
Total 18,412 19,665 18,785 56,862
Of which real estate occupied by the Company – – – –
Of which securities issued by the Company – – – –
2013
Cash and cash equivalents 592 218 261 1,071 35%
Equity securities 2,112 2,081 4,459 8,652 31%
Debt securities 3,601 6,934 6,982 17,517 61%
Real estate 1,649 – 76 1,725 100%
Investment funds 8,864 6,512 414 15,790 60%
Assets held by insurance company – – 633 633 100%
Other – 429 750 1,179 65%
Total 16,818 16,174 13,575 46,567
Of which real estate occupied by the Company – – – –
Of which securities issued by the Company 25 – – 25
C18 Provisions
Provisions
Warranty Restruc turing Other Total
2014
Opening balance 909 1,345 3,108 5,362
Additions 1,050 708 968 2,726
Reversal of excess amounts –319 –195 –424 –938
Negative effect on Income Statement 1,788
Utilization/Cash out –921 –1,202 –938 –3,061
Reclassifications 2 51 –16 37
Translation differences 103 94 104 301
Closing balance 824 801 2,802 4,427
2013
Opening balance 1,595 1,218 5,825 8,638
Additions 924 2,439 1,336 4,699
Reversal of excess amounts –588 –237 –736 –1,561
Negative effect on Income Statement 3,138
Cash out/utilization –948 –2,089 –2,984 –6,021
Balances regarding divested/acquired businesses –2 0 –10 –12
Reclassification 1 –3 –184 –186
Translation differences –73 17 –139 –195
Closing balance 909 1,345 3,108 5,362
Provisions will fluctuate over time depending on business mix, market mix and technology shifts. Risk assessment in the ongoing business is performed monthly to identify the need for new additions and reversals.
Management uses its best judgment to estimate provisions based on this assessment. Under certain circumstances, provisions are no longer required due to outcomes being more favorable than anticipated, which affect the provisions balance as a reversal. In other cases, the outcome can be negative, and if so, a charge is recorded in the income statement.
For 2014, new or additional provisions amounting to SEK 2.7 billion were made, and SEK 0.9 billion of provisions were reversed. The actual cash outlays for 2014 were SEK 3.1 billion compared with the estimated SEK 4.2 billion. The total cash out for 2014 was made up of warranty pro-visions of SEK 0.9 billion, restructuring propro-visions of SEK 1.2 billion and other provisions of SEK 0.9 billion. The expected total cash outlays in 2015 are approximately SEK 3.2 billion.
Of the total provisions, SEK 202 (222) million is classified as non-cur-rent. For more information, see Note C1, “Significant accounting policies”
and Note C2, “Critical accounting estimates and judgments.”
Warranty provisions
Warranty provisions are based on historic quality rates for established products as well as estimates regarding quality rates for new products and costs to remedy the various types of faults predicted. Provisions amounting to SEK 1.0 billion were made and due to more favorable out comes in certain cases reversals of SEK 0.3 billion were made.
The actual cash outlays for 2014 were SEK 0.9 billion, in line with the expected SEK 0.7 billion. The cash outlays of warranty provisions during year 2015 are estimated to total approximately SEK 0.9 billion.
Restructuring provisions
In 2014, SEK 0.7 billion in provisions were made and SEK 0.2 billion were reversed due to a more favorable outcome than expected. The cash out-lays were SEK 1.2 billion for the full year, in line with the expected SEK 1.1 billion. The cash outlays for 2015 for these provisions are estimated to total approximately SEK 0.6 billion.
Other provisions
Other provisions include provisions for probable contractual penalties, tax issues, litigations, supplier claims, and other. During 2014, new provisions amounting to SEK 1.0 billion were made and SEK 0.4 billion were reversed due to a more favorable outcome. The cash outlays were SEK 0.9 billion in 2014 compared to the estimate of SEK 2.4 billion. For 2015, the cash out-lays are estimated to total approximately SEK 1.7 billion.
FINANCIALS – Consolidated financial statements