Pensions and other postretirement benefits

Defined-benefit plan pensions

Employee pension plans have been established in many countries in accordance with the legal requirements, customs and the local situation in the countries involved. The Company also sponsors a number of defined-benefit pension plans. The benefits provided by these plans are based on employees’ years of service and compensation levels. The measurement date for all defined-benefit plans is December 31.

The Company’s contributions to the funding of defined-benefit pension plans are determined based upon various factors, including minimum contribution requirements, as established by local government, legal and tax considerations as well as local customs.

Summary of pre-tax costs for pensions and other postretirement benefits

In 2009 curtailment gains totaling EUR 134 million related to changes in retiree medical plans positively impacted the result.

The table below provides a summary of the changes in the defined-benefit obligations for defined-benefit pension plans and the fair value of their plan assets for 2009 and 2008. It also provides a reconciliation of the funded status of these plans to the amounts recognized in the Consolidated balance sheets.

The classification of the net balance is as follows:

Cumulative amount of actuarial (gains) and losses recognized in the Consolidated statements of comprehensive income (pre tax): EUR 1,767 million (2008: EUR 1,026 million).

Plan assets in the Netherlands

The Company’s pension plan asset allocation in the Netherlands at December 31, was as follows:

The objective of the Matching portfolio is to match part of the interest rate sensitivity of the plan’s real pension liabilities. The Matching portfolio is mainly invested in euro-denominated government bonds and investment grade debt securities and derivatives. Leverage or gearing is not permitted. The size of the Matching portfolio is targeted to be at least 70% of the fair value of the plan’s real pension obligations (on the assumption of 2% inflation). The objective of the Return portfolio is to maximize returns within well-specified risk constraints. The long-term rate of return on total plan assets is expected to be 5.7% per annum, based on expected long-term returns on debt securities, equity securities and real estate of 4.5%, 9.0% and 8.0%, respectively.

Philips Pension Fund in the Netherlands

On November 13, 2007, various officials, on behalf of the Public Prosecutor’s office in the Netherlands, visited a number of offices of the Philips Pension Fund and the Company in relation to a widespread investigation into potential fraud in the real estate sector. The Company was notified that one former employee and one employee of an affiliate of the Company had been detained. This affiliate, Philips Real Estate Investment Management B.V., managed the real estate portfolio of the Philips Pension Fund between 2002 and 2008. The investigation by the public prosecutor concerns the potential involvement of (former) employees of a number of Dutch companies with respect to fraud in the context of certain real estate transactions. Neither the Philips Pension Fund nor any Philips entity is a suspect in this investigation. The Philips Pension Fund and Philips are cooperating with the authorities and have also conducted their own investigation. Formal notifications of suspected fraud have been filed with the public prosecutor against the (former) employees concerned and with our insurers. Furthermore, actions have been taken to claim damages from the responsible individuals and legal entities. At this time it is not possible to assess the outcome of this matter nor the potential consequences. At present, it is management’s assessment that this matter will not cause a decline in plan assets nor an increase in pension costs in any material respect.

Plan assets in other countries

The Company’s pension plan asset allocation in other countries at December 31, is shown in the table below. This table also shows the target allocation for 2010:

Plan assets in 2009 no longer include property occupied by the Philips Group (2008: EUR 12 million).

Pension expense of defined-benefit plans recognized in the Consolidated statements of income:

Amounts recognized in the Consolidated statements of comprehensive income:

The pension expense of defined-benefit plans is recognized in the following line items in the Consolidated statements of income:

The Company also sponsors defined-contribution and similar types of plans for a significant number of salaried employees. The total cost of these plans amounted to EUR 107 million (2008: EUR 96 million, 2007: EUR 84 million). In 2009, the defined-contribution cost includes contributions to multi-employer plans of EUR 5 million (2008: EUR 4 million; 2007: EUR 4 million).

Cash flows and costs in 2010

Philips expects considerable cash outflows in relation to employee benefits which are estimated to amount to EUR 425 million in 2010, consisting of EUR 237 million employer contributions to defined-benefit pension plans, EUR 103 million employer contributions to defined-contribution pension plans, EUR 59 million expected cash outflows in relation to unfunded pension plans and EUR 26 million in relation to unfunded retiree medical plans. The employer contributions to defined-benefit pension plans are expected to amount to EUR 145 million for the Netherlands and EUR 92 million for other countries. The Company is reviewing the future funding of the existing deficits in its pension plans in the US and UK.
The cost for 2010 is expected to amount to EUR 131 million, consisting of EUR 10 million for defined-benefit pension plans, EUR 103 million for defined-contribution pension plans and EUR 18 million for defined-benefit retiree medical plans.

Assumptions

A significant demographic assumption used in the actuarial valuations is the mortality table. The mortality tables used for the Company’s major schemes are:
Netherlands: Prognosis table 2005-2050 including experience rating WW2008
United Kingdom retirees: PA 92 C 2017
United Kingdom non-retirees: PA 92 C 2027
United States: RP2000 CH Fully Generational
Germany: Richttafeln 2005 G.K. Heubeck

The Expected Return on Assets for any funded plan equals the average of the expected returns per asset class weighted by their portfolio weights in accordance with the fund’s strategic asset allocation. Where liability-driven investment (LDI) strategies apply the weights are in accordance with the actual matching part and the strategic asset allocation of the return portfolio.

The weighted averages of the assumptions used to calculate the defined-benefit obligations as of December 31 were as follows:

The weighted averages of the assumptions used to calculate the net periodic pension cost for years ended December 31:

Defined-benefit plans: other postretirement benefits

In addition to providing pension benefits, the Company provides other postretirement benefits, primarily retiree medical benefits, in certain countries. The Company funds those other postretirement benefit plans as claims are incurred.

Movements in the net liability for other defined-benefit obligations:

Other postretirement benefit expense recognized in the Consolidated statements of income:

Amounts recognized in the Consolidated statements of comprehensive income:

The expense for other postretirement benefits is recognized in the following line items in the Consolidated statements of income:

The weighted average assumptions used to calculate the postretirement benefit obligations other than pensions as of December 31 were as follows:

The weighted average assumptions used to calculate the net cost for years ended December 31:

Assumed healthcare cost trend rates at December 31:

Sensitivity analysis

Assumed healthcare trend rates have a significant effect on the amounts reported for the retiree medical plans. A one percentage-point change in assumed healthcare cost trend rates would have the following effects as at December 31: