C21. Provisions for pensions and employment contracts

Cost-employment benefits

Telia Company provides defined benefit pension plans to most of its employees in Sweden, Finland and Norway. The pension plans mainly include retirement pension, disability pension and family pension.

Employees in Telia Company AB and most of its Swedish subsidiaries are eligible for retirement benefits under the ITP-Tele (ITP 2 plan) defined benefit plan. However, all employees born in 1979 and later are covered by a defined contribution pension plan (the ITP 1 plan). The part of the swedish ITP 2 multi-employer pension plan that is secured by paying pension premiums to Alecta is accounted for as a defined contribution plan as the plan administrator does not provide sufficient information necessary to account for the plan as a defined benefit plan. Telia Company’s portion of total premiums in the Alecta ITP 2 plan is 0.15 percent and the share of total number of active insured in ITP 2 is 0.9 percent. Expected contribution to the ITP 2 plan for 2017 is SEK 37 million.

Telia Company’s employees in Finland are entitled to statutory pension benefits pursuant to the Finnish Employees Pensions Act, a defined benefit pension arrangement with retirement, disability, unemployment and death benefits (TyEL pension). In addition, certain employees have additional pension coverage through a supplemental pension plan. In Finland, a part of the pension is funded in advance and the remaining part financed as a pay-as-you-go pension (i.e. contributions are set at a level that is expected to be sufficient to pay the required benefits falling due in the same period).

Telia Norway operates a defined benefit pension, which was closed for new entrants in 2011.

The pension obligations are secured mostly by pension funds, but also by provisions in the statements of financial position combined with pension credit insurance.

Telia Company’s defined benefit plan members are approximately divided between the following groups; 22 percent active members, 42 percent vested deferreds and 37 percent retirees.

Telia Company’s employees in many other countries are usually covered by defined contribution pension plans. Contributions to the latter are normally set at a certain percentage of the employee’s salary and are expensed as incurred.

Pension obligations and pension expenses

Total amounts recognized in the statements of financial position for pension obligations were as follows.

SEK in millions

Dec 31, 2016

Dec 31, 2015

Present value of funded pension obligations

23,413

21,888

Fair value of plan assets

-26,146

-25,110

Surplus/Deficit of funded plans

-2,733

-3,222

Present value of unfunded pension obligations

1,462

1,274

Net assets (-)/provisions (+) for pension obligations

-1,271

-1,949

of which recognized as provisions

2,109

1,824

of which recognized as assets

-3,380

-3,773

Total pension expenses were distributed as follows.

SEK in millions

Jan–Dec 2016

Jan–Dec 2015

Current service cost

297

368

Curtailment of pension obligations

-48

-32

Termination benefits

6

7

Pension premiums, defined benefit/defined contribution pension plans and pay-as-you-go systems

869

795

Pension-related social charges and taxes, other pension expenses

63

183

Less termination benefits (incl. premiums and pension-related social charges) reported as restructuring charges

-31

-23

Total pension expenses in operating income from continuing operations

1,156

1,298

of which defined benefit pension plans

249

336

of which pension premiums paid to the ITP pension plan

36

32

Total pension expenses in operating income, discountinued operations

2

2

Net interest on the net defined benefit liability (asset)

-97

72

Total pension expenses (+)/income (-) in financial items

-97

72

Remeasurement gains (-)/losses (+)

   

Gain/loss from change in financial assumptions

2,333

-4,184

Experience gains/losses

-451

-423

Gain/loss from change in demographic assumptions

-62

317

Return on plan assets (excluding interest income)

-523

-32

Total pension expenses recorded in OCI, defined benefit pension plans

1,297

-4,322

Specifications to defined benefit obligations and fair value of plan assets

Movements in the present value of defined benefit obligations were as follows.

SEK in millions

2016

2015

Opening balance, present value of pension obligations

23,162

27,734

Current service cost

297

368

Interest expenses

811

787

Benefits paid

-1,143

-1,149

Benefits paid, early retirement

-4

-4

Termination benefits

6

7

Curtailment of pension obligations

-48

-32

Operations acquired

15

Remeasurement gains (-)/losses (+)

   

Gain/loss from change in financial assumptions

2,333

-4,184

Experience gains/losses

-451

-423

Gain/loss from change in demographic assumptions

-62

317

Exchange rate differences

178

-274

Reclassification to liabilities directy associated with assets classified as held for sale

-205

Closing balance, present value of pension obligations

24,875

23,162

Movements in the fair value of plan assets were as follows.

SEK in millions

2016

2015

Opening balance, fair value of plan assets

25,110

24,519

Interest income

908

715

Contribution to pension funds

79

81

Payment from pension funds

-616

-80

Operations acquired

12

Remeasurement gains (-)/losses (+)

   

Return on plan assets (excluding interest income)

523

32

Exchange rate differences

199

-169

Reclassification to liabilities directy associated with assets classified as held for sale

-57

Closing balance, fair value of plan assets

26,146

25,110

Principal actuarial assumptions

The actuarial calculation of pension obligations and pension expenses is based on the following principal assumptions, each presented as a weighted average for the different pension plans. These assumptions are the most significant ones in terms of the risk for changes in Telia Company’s pension obligations. The discount rate reflects the interest rate level at which the pension liabilities could be effectively settled and affects the value of the defined benefit obligations.

As in previous years the discount rate for Sweden is determined by the covered bond market. Since the commitment has a longer duration than most covered bonds, an extrapolation of the yield curve is performed and used with the corresponding duration of Telia Company:s pension obligations. The management of Telia Company then adjust the difference between the long-term inflation target of the central bank and the actual market inflation at the end of the period. The discount rate for Finland is based on high-quality corporate bonds with long duration. Norway sets the discount rate on the same basis as Sweden.

The expected annual adjustments and increased longevity have an impact on future pension payments and therefore the pension obligation. For Sweden and Norway, management has chosen to use the annual inflation target rates set by the national and European central banks. For Finland, the inflation assumption is derived from long-term inflation swaps. See below for a sensitivity analysis related to a change in the significant assumptions used in calculating the pension provision.

Percentages, except longevity

Dec 31, 2016

Dec 31, 2015

Discount rate

2.99

3.57

Annual adjustments to pensions

1.81

1.81

Longevity

   

life expectancy 65 year old male (year)

20

20

life expectancy 65 year old female (year)

23

23

The sensitivity of the defined benefit obligations to changes in the weighted principal assumptions was as follows.

 

Change in
assumption (p.p.)

Impact on defined benefit obligation
(SEK in millions)

Discount rate

+0.50

-2,285

Discount rate

-0.50

2,598

Annual adjustments to pensions

+0.50

2,477

Annual adjustments to pensions

-0.50

-2,179

Longevity

+1 year

744

The sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may by correlated.

Investment strategy

The assets of Telia Company pension funds constitute pension plan assets and are valued at fair value. These assets are used as prime funding source for the pension obligations, and exist primarily in Sweden and Finland. The pension funds invest the assets in such a manner that the liquidity of the pension funds is ensured. The investment horizons are long-term, and aimed to cover the growth of pension liability. The weighted average duration for the pension obligation plans is approximately 19 years. Investment plans are approved by the boards of the pension funds. The investment activities comply with the rules and regulations issued by the authorities governing pension foundations.

For the Swedish pension fund (Swedish Fund) which represents approximately 85 percent of the total group plan assets, Telia Company apply a minimum funding requirement. The allocation was successful and the portfolio’s performance was positive throughout the year. As of December 31, 2016, the strategic asset allocation decided by the Board of the Swedish Fund, was 54 percent fixed income, 27 percent equities and 19 percent alternative investments. The Alternative investments include Hedge Funds and Private Equity. The actual allocation may deviate from the strategic allocation in a range up to a specified risk limit. The work to improve balance between risk and return in the Swedish Pension Fund continues. Reduced allocation to fixed income in favor of equity and real estate enhanced the risk and return during 2016. Implications of changes during 2016 are both enhanced diversification, lower cost and increased performance.

Total plan-asset allocation

As of the end of the reporting period, plan assets were allocated as follows.

SEK in millions

Asset category

Dec 31, 2016

Dec 31, 2015

Quoted

Unquoted

Total

Percent

Quoted

Unquoted

Total

Percent

Equity instruments

8,500

216

8,716

33

6,925

142

7,067

28

Debt instruments

12,062

371

12,433

48

13,185

419

13,604

54

Real estate

1,014

1,014

4

283

283

1

Cash and cash equivalents

274

111

385

1

286

83

368

1

Alternative investments

185

3,255

3,440

13

177

3,462

3,639

15

Other

158

158

1

149

149

1

Total

21,021

5,125

26,146

100

20,573

4,538

25,110

100

of which shares in Telia Company AB

14

 

14

0.1

15

 

15

0.1

Future contributions

For companies in Sweden, pension liabilities are secured also by pension credit insurance. This means that, should the net provision for pension obligation increase, each company can choose if and when to contribute to the pension fund or otherwise to recognize a provision. To pension funds outside Sweden, Telia Company expects to contribute SEK 99 million in 2017.