IAS 19 paras 103, 128, past service cost from plan amendment and actuarial gain from related changes in assumptions

Swisscom Ltd – Annual report – 31 December 2016

Industry: telecoms

10 Post-employment benefits (extract 1)

Defined benefit plans

Swisscom maintains several pension plans for employees in Switzerland and Italy. Expenses of defined benefit plans totalled CHF 363 million in 2016 (prior year: CHF 346 million). Of this amount, CHF 338 million (prior year: CHF 320 million) was recorded as personnel expense and CHF 25 million (prior year: CHF 26 million) as finance expense.


The majority of Swisscom’s employees in Switzerland are insured for the risks of old age, death and disability by the independent pension plan, comPlan. The comPlan pension plan has the legal form of a foundation. The organisation, benefits and the system of funding are set forth in Pension Fund Rules. The supreme governing body of comPlan is the Foundation Council. The overall management of the pension plan and responsibility for its financial stability is incumbent on the Foundation Council. The Council is constituted by an equal number of representatives of the employees and the employer. The Pension Fund Rules, together with the relevant laws, ordinances and directives of the Federal Council concerning occupational pension plans, in particular the provisions contained therein concerning funding and measures to eliminate funding deficits, form the formal regulatory framework of the pension plan which is binding for financial-statement reporting and the actuarial assumptions.

The level of benefits payable by comPlan exceed the legally prescribed minimum. The standard retirement age is 65. Employees qualify for early retirement at the earliest on their 58th birthday, whereby the rate of conversion is reduced in line with the longer expected duration of pension payments. Furthermore, employees may choose to take their entire pension or part thereof in the form of a capital payment. The amount of the pension paid results from the conversion rate which is applied to the accumulated savings of the retirees. For individuals retiring at the age of 65, the rate of conversion is currently 6.11%. The accumulated savings result from employee and employer contributions which are paid into the individual savings account of each insured person as well as the interest accruing on the accumulated savings. The interest rate to be applied to the accumulated pension savings is set annually by the Foundation Council. The plan is funded through employer and employee contributions which vary with the salary level as well as the return on the plan assets. The level of recurring contributions provided for under the pension-fund rules is graduated according to age groups and for the employer amount to 8.35% to 16.35% and those of the employees to 5.5% to 9.5% of the ensured salary. In case of retirement before the ordinary retirement age, the employer finances additionally a bridging pension up until the ordinary retirement age with an overall maximum cost of CHF 80,100 per employee. The amount of disability pensions in relation to the salary is the same for all insured employees, irrespective of the number of service years.

In the event of a foreseeable funding deficit, computed in accordance with local financial-statement accounting principles, the Foundation Council lays down appropriate measures to eliminate the funding deficit which will lead to the restoration of a financial equilibrium within a reasonable time-frame. The measures may consist of the levying of restructuring contributions, a lower level of interest accruing or zero interest, the curtailment of insured benefits or in a combination of such measures. As a general rule, the measures must lead to the elimination of the funding deficit within a timeframe of 5 to 7 years. Should the current funding be insufficient from an actuarial perspective and there exists, as a result, a structural financing shortfall, the top priority is to eliminate this shortfall by adjusting the benefits or recurring contributions. Insofar as other measures do not achieve the goal, comPlan can levy contributions to eliminate a funding deficit from the employer and employees (restructuring contributions) so long as a funding deficit persists. The employer’s restructuring contributions must, at a minimum, be equal to the sum of employee contributions. Under the formal regulatory framework of the pension plan, the employer has no legal obligation to pay additional contributions to eliminate more than 50% of a funding deficit or of a structural funding shortfall. In the case of Swisscom, a de-facto obligation over and above the legal minimum obligation exists deriving from customary company-specific practice. In the case of the actuarial valuation, the legal and de-facto obligations are regarded as the upper limit of the employer’s share of the costs of future benefits within the meaning of IAS 19.87(c).

As a consequence of the low interest-rate level and increasing life expectancy, the Foundation Council of comPlan decided upon various measures to ensure the financial equilibrium between the pension-fund liabilities and the funding of benefits and communicated this decision in October 2016. The core elements of the measures comprise a lowering of the conversion rate from 6.11% to 5.34% in monthly steps beginning in July 2017 through to September 2020 and an increase in recurring savings contributions of the employees and employer. The recurring contributions provided under the pension-fund rules are raised from 10.05% to 16.65% for the employer and for the employees, from 6.6% to 10.6% of the insured salaries. Moreover, and in order to cushion the impact of future pension reductions, special contributions will be credited to the individual savings accounts of insured employees born in 1969 and later during a maximum period of 5 years. Swisscom bears a share totalling CHF 50 million of the costs of the special contributions through an extraordinary payment in 2017. The remaining costs of an anticipated amount of approx. CHF 250 million will be financed by using freely available funds of comPlan. As a result of the special contributions, the extent of pension reductions for the beneficiaries will be limited to 6%. The various measures give rise to a past-service cost of CHF 3 million which was recognised in the fourth quarter of 2016 as part of pension-fund expense in the income statement. This is based on a revaluation of the net pension-fund obligations using the market values of the plan assets which were valid as of the date of the pension-fund amendment and the current actuarial assumptions which take into account the risk-sharing features. The past service cost equates to the difference resulting from the valuation based upon the previous pension-fund benefits and contributions and the valuation based upon the benefits and contributions provided for under the amended pension-fund rules. Ignoring the risk-sharing features, a negative past-service cost of CHF 546 million would have resulted from the plan amendment.

In accordance with the Swiss accounting standards applicable to the pension fund (Swiss GAAP ARR), the surplus amounts to CHF 0.1 billion, corresponding to a coverage ratio of around 101% (prior year: 108%). The main reasons for the difference compared with IFRS are the application of differing actuarial assumptions with regard to the discount rate, life expectancy or risk sharing, as well as a different actuarial measurement method. The Investment Commission is the central management, coordination and monitoring body for the management of the pension plan assets. The pension plan assets are administered using mandated, independent financial service providers. Monitoring is supported by an external investment controller. The Foundation Council determines the investment strategy and tactical bandwidths within the framework of the legal provisions. Within its terms of reference, the Investment Commission may undertake the asset allocation.

Other pension plans

In addition to the plans of various subsidiary companies in Switzerland which did not join comPlan, other pension plans include the pension plan for Fastweb employees. Employees of the Italian subsidiary Fastweb have acquired entitlements to future pension benefits up to the end of 2006. These benefits are recorded in the balance sheet as defined-benefit obligations.

Pension cost



In addition, other comprehensive income includes an actuarial gain of CHF 1,162 million (prior year: loss of CHF 393 million) which may be analysed as follows:


Gains aggregating CHF 991 million arising from the amendment to the financial assumptions of comPlan comprise the impact of the recognition of risk-sharing features for the first time in the financial assumptions totalling CHF 856 million.

10 Post-employment benefits (extract 2)

Actuarial assumptions


The discount rate is based upon CHF-denominated corporate bonds with an AA rating issued by domestic and foreign issuers and listed on the Swiss Exchange. Future growth factors for salaries correspond to a long-term historical average value which is specific to Swisscom. The level of growth in pensions reflects comPlan’s lack of potential. Interest accruing on the retirement savings equates to the discount rate. As regards the life-expectancy assumptions, Swisscom applies the BVG 2010 generation tables until the end of 2015 and for 2016 onwards, the BVG 2015 generation tables.

For the actuarial computations as of 31 December 2016 and the effects of the pension-fund amendments decided upon in the fourth quarter of 2016, the risk-sharing effects contained in the formal regulatory framework were taken into account in the financial assumptions in two steps. With the implicit assumption of a future return on plan assets equal to the discount rate, the recurrent contributions provided for under the pension-fund rules are insufficient for the correct current funding of the benefits provided for under the pension-fund rules of comPlan. There results a structural funding shortfall. For the actuarial computations, it is assumed, as a first step, that the Foundation Council will decide upon measures to eliminate the funding gap in accordance with the formal regulatory framework. As a measure, it is assumed that future pensions will be lowered gradually over a period of 10 years by 5.6%. This assumption considers that for the determination of the conversion rate in the extra-mandatory portion, the discount rate of 0.64% used for the actuarial computation will be applied and that the legal conversion rate of 6.8% will be applied in the mandatory area. Even after assuming a curtailment of future benefits, there remains a structural funding shortfall which is arithmetically divided over the employer and employees in a second step. The assumption is that the obligation of the employer legally and de-facto is limited to 60% of the funding shortfall. These assumptions are based upon the legal provisions regarding the elimination of funding deficits as well as the specific behavioural patterns and measures taken both by the employer and the Foundation Council. As a result of the assumption of a curtailment in benefits and a limitation of the share of the funding shortfall, there results a reduction in defined-benefit obligations of CHF 856 million, which was recognised in other comprehensive income as a change in accounting estimate. Of this amount, CHF 145 million relates to the curtailment of benefits assumed in the first step. The effect of limiting the employer’s obligations in the second step amounts to CHF 711 million. No risk-sharing features were taken into account for the actuarial computation as of 31 December 2015. The estimation process to determine the financial assumptions taking into account the risk-sharing features contained in the formal regulatory framework was amended in 2016 in order to present a more realistic view of the effective pension-plan expense which will arise for the company. With the current low level of interest rates, failure to take the risk-sharing features into consideration leads to a distorted presentation of the recognised net pension-fund liability and to unrealistically high negative past-service costs in the case of plan amendments.