25. Provisions for employee benefits

Group companies provide post-employment benefits for their active employees and for retirees, either directly or by contributing to independently administered funds. The way these benefits are provided varies according to the legal, fiscal and economic conditions of each country in which the Group operates, the benefits generally being based on the employees’ remuneration and years of service.

Group companies provide post-employment benefits under defined contribution and defined benefit plans.

In the case of defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the Group has no further payment obligations. The entity recognizes the contribution cost when the employee has rendered his service and includes this cost by function in Cost of sales, Selling, general and administrative costs and Research and development costs. In 2013, these expenses totaled €485 million (€490 million in 2012).

Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions made by an entity, and sometimes by its employees, into an entity, or fund, that is legally separate from the employer from which the employee benefits are paid. Benefits are generally payable under these plans after the completion of employment.

The plans are classified by the Group on the basis of the type of benefit provided as follows: Health care plans, Pension plans and Other post-employment benefits.

Health care plans

The item Health care plans comprises obligations for health care and insurance plans granted to employees of the Group working in the United States and Canada (relating to Agricultural and Construction Equipment segment). These plans generally cover employees retiring on or after reaching the age of 55 who have had at least 10 years of service.

CNH Industrial United States salaried and non-represented hourly employees and Canadian employees hired after January 1, 2001 and January 1, 2002, respectively, are not eligible for postretirement health care and life insurance benefits under the CNH Industrial plans. These benefits may be subject to deductibles, co-payment provisions and other limitations, and CNH Industrial has reserved the right to change or terminate these benefits, subject to the provisions of any collective bargaining agreement. Until December 31, 2006 these plans were fully unfunded; starting in 2007, the Group began making contributions on a voluntary basis to a separate and independently managed fund established to finance the North American health care plans.

Pension plans

The item Pension plans consists principally of the obligations of Agricultural and Construction Equipment segment companies operating in the United States and in the United Kingdom and the obligations of Trucks and Commercial Vehicles segment companies operating in Germany (towards certain employees and former employees of the Group) and in the United Kingdom.

Under these plans, a contribution is generally made to a separate fund (trust) which independently administers the plan assets. The Group’s funding policy is to contribute amounts to the plan equal to the amounts required to satisfy the minimum funding requirements prescribed by the laws and regulations of each individual country. Prudently the Group makes discretionary contributions in addition to the funding requirements. If these funds are overfunded, that is if they present a surplus compared to the requirements of law, the Group companies concerned could not be required to contribute to the plan in respect of a minimum performance requirement as long as the fund is in surplus.

The investment strategy varies by country depending on the circumstances of the underlying plan. Typically, less mature plan benefit obligations are funded by using more equity securities as they are expected to achieve long-term growth while exceeding inflation. More mature plan benefit obligations are funded using more fixed income securities as they are expected to produce current income with limited volatility. Risk management practices include the use of multiple asset classes and investment managers within each asset class for diversification purposes. Specific guidelines for each asset class and investment manager are implemented and monitored.

Other post-employment benefits

The item Other post-employment benefits mainly includes loyalty bonuses, which are due to employees who reach a specified seniority and are generally settled when an employee leaves the company as well as the Italian employee leaving entitlements (TFR) for those benefits accruing up to December 31, 2006 as, after the legislation changes occurred in 2007, this scheme is classified as a defined contribution plan. Schemes included in this item are unfunded.

Provisions for employee benefits at December 31, 2013 and 2012 are as follows: 

(€ million)At December 31, 2013At December 31, 2012
Post-employment benefits:     
Health care plans732865
Pension plans615661
Other361376
Total Post-employment benefits1,7081,902
Other provisions for employees193240
Other long-term employee benefits6671
Total Provision for employee benefits1,9672,213
Defined benefit plan assets3238
Total Defined benefit plan assets3238
The item Other provisions for employees consists of the best estimate at the balance sheet date of short-term employee benefits payable by the Group within twelve months from the end of the period in which the employees render the related service.
The item Other long-term employee benefits consists of the Group’s obligation for those benefits generally payable during employment on reaching a certain level of seniority in the company or when a specified event occurs, and reflects the probability of payment and the length of time over which this will be made.

In 2013 and in 2012 changes in Other provisions for employees and in Other long-term employee benefits are as follows: 
(€ million)At December 31, 2012ProvisionUtilizationChange in the scope of consolidation and otherAt December 31, 2013
Other provisions for employees240179(206)(20)193
Other long-term employee benefits714(9)-66
Total311183(215)(20)259
(€ million)At December 31, 2011ProvisionUtilizationChange in the scope of consolidation and other changesAt December 31, 2012
Other provisions for employees322220(272)(30)240
Other long-term employee benefits6314(6)-71
Total385234(278)(30)311
Post-employment benefits and Other long-term employee benefits are calculated on the basis of the following main assumptions:
 Assumptions used to determine funded status at year-end
 At December 31, 2013At December 31, 2012
(in %)Health care
plans
Pension plansOtherHealth care
plans
Pension plansOther
Weighted-average discount rates4.674.052.973.793.753.30
Weighted-average rate of compensation increase3.423.352.633.422.992.75
Weighted-average, initial healthcare cost trend rate8.19n/an/a7.04n/an/a
Weighted-average, ultimate healthcare cost trend rate5.00n/an/a5.00n/an/a
 Assumptions used to determine expense at year-end
 At December 31, 2013At December 31, 2012
(in %)Health care
plans
Pension plansOtherHealth care
plans
Pension plansOther
Weighted-average discount rates3.793.753.304.574.614.62
Weighted-average rate of compensation increase3.422.992.753.443.163.11
Weighted-average, initial healthcare cost trend rate7.04n/an/a7.54n/an/a
Weighted-average, ultimate healthcare cost trend rate5.00n/an/a5.00n/an/a

The weighted-average discount rates are used in measurements of pension and postretirement benefit obligations and net interest on the net defined benefit liability/asset. The weighted-average discount rates are based on a benefit cash flow-matching approach and represent the rates at which the benefit obligations could effectively be settled as of the measurement date. The benefit cash flow-matching approach involves analyzing Group’s projected cash flows against a high quality bond yield curve, mainly calculated using a wide population of AA-graded corporate bonds subject to minimum amounts outstanding and meeting other defined selection criteria. The discount rates for the Group’s remaining obligations are based on benchmark yield data of high-quality fixed income investments for which the timing and amounts of payments approximate the timing and amounts of projected benefit payments.

The weighted-average health care trend rate represents the rate at which health care costs are assumed to increase.

Rates are determined based on CNH Industrial’s specific experience, consultation with actuaries and outside consultants, and various trend factors including general and health care sector-specific inflation projections from the United States Department of Health and Human Services Health Care Financing Administration for CNH Industrial’s U.S. assumptions. The weighted-average initial trend is a short-term assumption based on recent experience and prevailing market conditions. The weighted-average ultimate trend is a long-term assumption of health care cost inflation based on general inflation, incremental medical inflation, technology, new medicine, government cost-shifting, utilization changes, aging population, and a changing mix of medical services. CNH Industrial expects to achieve the ultimate healthcare cost trend rate in 2017 and 2018 for US and Canada plans, respectively.

Assumed discount rates and health care cost trend rates have a significant effect on the amount recognized in the 2013 financial statements. A one percentage point change in assumed discount rates would have the following effects: 

(€ million)One percentage point increaseOne percentage point decrease
Effect on health care defined benefit obligation at December 31, 2013(77)94
Effect on pension plans defined benefit obligation at December 31, 2013(269)328

A one percentage point change in assumed health care cost trend rates would have the following effects:

(€ million)One percentage point increaseOne percentage point decrease
Effect on health care defined benefit obligation at December 31, 201398(75)

The amounts recognized in the statement of financial position for post-employment benefits at December 31, 2013 and 2012 are as follows: 

 Health care plansPension plansOther
  At December 31, At December 31, At December 31,
(€ million)201320122013201220132012
Present value of funded obligations8039032.4982.621361376
Less: Fair value of plan assets(71)(69)(1.935)(1.974)--
Deficit/(surplus)732834563647361376
Effect of the asset ceiling--207--
Net liability/(Net asset)732834583654361376
Reimbursement rights------
Amounts at year-end:      
Liabilities732865615661361376
Assets-(31)(32)(7)--
Net liability732834583654361376

Changes in the present value of post-employment obligations in 2013 and 2012 are as follows:

 Health care plansPension plansOther
(€ million)201320122013201220132012
Present value of obligation at the beginning of the year9038982,6212,416376338
Current service cost672017107
Interest expense334095111711
Other costs--3---
Contribution by plan participants5523--
Remeasurements:      
Actuarial losses/(gains) from changes in demographic assumptions245(15)(1)(7)
Actuarial losses/(gains) from changes in financial assumptions(44)43(38)240934
Other remeasurements(12)(17)12(3)213
Total remeasurements(54)30(21)2221040
Exchange rate differences(39)(17)(72)---
Benefits paid(59)(60)(150)(150)(27)(29)
Past service cost-----8
Change in scope of consolidation------
Curtailments------
Settlements------
Other changes8--2(15)1
Present value of obligation at the end of the year8039032,4982,621361376

Other remeasurements mainly include in 2013 and in 2012 the amount of experience adjustments.

Changes in the fair value of plan assets in 2013 and 2012 are as follows: 

 Health-care plansPension plans
(€ million)2013201220132012
Fair value of plan assets at the beginning of the year69621,9741,846
Interest income237386
Remeasurements:    
Return on plan assets566386
Actuarial gains/(losses) from changes in financial assumptions---4
Total remeasurements566390
Exchange rate differences(3)(1)(70)-
Contribution by employer52544193
Contribution by plan participants5523
Benefits paid(59)(61)(140)(141)
Change in scope of consolidation----
Settlements----
Other changes-1(8)(3)
Fair value of plan assets at the end of the year71691,9351,974

Net benefit cost/(income) recognized during 2013 and 2012 is as follows:

 Health care plansPension plansOther
(€ million)201320122013201220132012
Service cost:     
Current service cost672017107
Past service cost and (gain)/loss from curtailments and settlements-----8
Total Service cost6720171015
Net interest expense31372225711
Other costs--3---
Net benefit cost/(income) recognized to profit or loss374445421726
Remeasurements:      
Return on plan assets(5)(6)(63)(86)--
Actuarial losses/(gains) from changes in demographic assumptions245(15)(1)(7)
Actuarial losses/(gains) from changes in financial assumptions(44)43(38)236934
Other remeasurements(12)(17)12(3)213
Total remeasurements(59)24(84)1321040
Exchange rate differences(36)(16)(2)---
Net benefit cost/(income) recognized to other comprehensive income(95)8(86)1321040
Total net benefit cost/(income) recognized during the year(58)52(41)1742766

Changes in the effects of the asset ceiling for 2013 and 2012 are as follows:

 Health care plansPension plans
(€ million)2013201220132012
Effect of the asset ceiling at the beginning of the year--72
Other comprehensive (income)/loss--17-
Other increase/(decrease)--(4)5
Effect of the asset ceiling at the end of the year--207

Plan assets do not include treasury shares of CNH Industrial N.V. or properties occupied by Group companies. The fair value of the plan assets at December 31, 2013 may be disaggregated by asset class and level as follows. Fair value levels presented below are described in the Significant accounting policies – Fair value measurement section of these Notes.

 

 At December 31, 2013
 Health care plansPension plans
(€ million)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Equity securities:----82--82
U.S. equities – Large cap----26--26
U.S. equities – Mid cap----33--33
U.S. equities – Small cap11--1169--69
Non-U.S. equities11--11210--210
Total equity securities        
Fixed income securities:        
U.S. government bonds----250--250
Non-U.S. government bonds----73277-350
U.S. corporate bonds-----234-234
Non-U.S. corporate bonds----179-80
Mortgage backed securities-----6-6
Other fixed income securities----2729-56
Total fixed income securities----351625-976
Other types of investments:        
Mutual funds (1)-----513-513
Investment funds--------
Insurance contracts----1-2425
Derivatives - Credit contracts-----10-10
Real estate----25--25
Other-60-60-132-132
Total other types of investments-60-602665524705
Cash and cash equivalents----2321-44
Total1160-716101,301241,935

(1) This category includes mutual funds which primarily invest in non-U.S. equities and non-U.S. corporate bonds.

The fair value of the plan assets at December 31, 2012 may be disaggregated by asset class and level as follows.

Fair value levels presented below are described in the Significant accounting policies – Fair value measurement section of these Notes.

 At December 31, 2012
 Health care plansPension Plans
(€ million)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Equity securities:        
U.S. equities – Large cap----10510-115
U.S. equities – Mid cap----34--34
U.S. equities – Small cap----51--51
Non-U.S. equities10--10339-42
Total equity securities10--1022319-242
Fixed income securities:        
U.S. government bonds----1872-189
Non-U.S. government bonds----19348-367
U.S. corporate bonds-----200-200
Non-U.S. corporate bonds-----70-70
Mortgage backed securities-----8-8
Other fixed income securities----1816-34
Total fixed income securities----224644-868
Other types of investments:        
Mutual funds (1)-----543-543
Investment funds (2)-57-57-208-208
Insurance contracts------2222
Derivatives - Credit contracts-----1-1
Real estate-----24-24
Other (3)-2-2341-44
Total other types of investments-59-59381722842
Cash and cash equivalents----220-22
Total1059-694521,500221,974
(1) This category includes mutual funds which primarily invest in non-U.S. equities and non-U.S. corporate bonds.
(2) This category includes primarily commingled funds which invest in equities.
(3) This category includes also hedge funds.

Provided that the above plan assets are measured at fair value at December 31, 2013 and 2012 there was no exposure to sovereign debt securities which might have suffered impairment losses.

The best estimate of expected contribution to pension and health care plans for 2014 is as follows:

 

(€ million)2014
Pension plans22
Health care plans-
Total expected contribution22

The best estimate of expected benefit payments in 2014 and in the following ten years is as follows:

 Expected benefit payments
(€ million)201420152016201720182019 to
2024
Total
Health care plans5656565656252532
Pension plans1511471471491507611,505
Other191314182183168
Total Post-employment benefits2262162172232271,0962,205
Other long-term employee benefits343321328
Total2292202202262291,1092,233

Potential outflows in the years after 2014 are subject to a number of uncertainties, including future asset performance and changes in assumptions.

The weighted average durations of post-employment benefits are as follows: 

 N° of years
Health care plans  10
Pension plans 12
Other 10