SCH2017_DRF_EN_Livre.indb

5 Consolidated financial statements at December 31, 2017 Notes to the consolidated financial statements

Pensions and other post-employment benefit obligations

NOTE 22

The Group has set up various post-employment benefit plans for employees covering pensions, termination benefits, healthcare, life insurance and other benefits. Besides, the Group proposes as well,

long-term benefit plans for current employees, primarily long service awards and similar benefits, mainly in France, Australia and India.

Assumptions and sensitivity analysis Actuarial valuations are generally performed each year. The assumptions used vary according to the economic conditions prevailing in the country concerned, as follows:

Group weighted average rate

Of which US

Dec. 31, 2017

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

Discount rate

2.65% 3.28% 2.71%

2.72% 3.19% 3.83%

3.50%

3.98%

Rate of compensation increases

n.a.

n.a.

Interest income (1)

4.00%

4.25%

(1) Under IAS 19 revised, the rate applied in the calculation of the interest income is the discount rate at the beginning of the period.

Pensions and termination benefits Pension obligations primarily concern the Group’s North American and European subsidiaries. These plans feature either a lump-sum payment on the employee’s retirement or regular pension payments after retirement. The amount is based on years of service, grade and end-of-career salary. The average duration of the North American plans is 11.5 years. The majority of benefit obligations under these plans, which represent 96% of the Group’s total commitment or EUR9,528 million at December 31, 2017, are partially or fully funded through payments to external funds. These funds are not invested in Group assets. External funds are invested in equities (around 14%), bonds (around 80%), real estate (around 1%) and cash and others assets (around 5%). Main contributions are primarily for the North American plans and amount to EUR92 million in 2017. They are estimated at EUR61 million for 2018, EUR97 million for 2019 and EUR88 million for 2020. At December 31, 2017, provisions for pensions and termination benefits total EUR1,324 million, compared with EUR1,530 million in 2016. These provisions have been included in non-current liabilities, as the current portion was not considered material in relation to the total liability. Payments made under defined contribution plans are recorded in the income statement in the year of payment and are in full settlement of the Group’s liability. Defined contribution plan payments total EUR76 million in 2017, compared with EUR84 million in 2016.

The discount rate is determined on the basis of the interest rate for investment-grade (AA) corporate bonds or, if a liquid market does not exist, government bonds with a maturity that matches the duration of the benefit obligation. In the United States, the average discount rate is determined on the basis of a yield curve for investment-grade (AA and AAA) corporate bonds. In the main geographical zones, the discount rates currently stand at 1.00% for 10 years duration and 1.50% for 15 years duration in the euro zone, 3.50% in the United States and 2.50% in the United Kingdom. A 0.5 point increase in the discount rate would reduce pension and termination benefit obligations by around EUR658 million and the service cost by EUR2 million. A 0.5 point decrease would increase pension and termination benefit obligations by EUR740 million and the service cost by EUR2 million. The post-employment healthcare obligation mainly concerns the United States. A one point increase in the healthcare costs rate would increase the post-employment healthcare obligation by EUR13 million and the sum of the service cost and interest cost by EUR0.5 million. A one point decrease in healthcare costs rate would decrease the post-employment healthcare obligation by EUR12 million and the sum of the service cost and interest cost by EUR0.5 million. In 2017, the rate of healthcare cost increases in the United States is based on a decreasing trend from 7.67% in 2018 to 4.5% in 2028 for pre 65 retirees and from 5.67% in 2018 to 4.5% in 2022 for post 65 retirees. In 2016, the rate of healthcare cost increases in the United States is based on a decreasing trend from 8.00% in 2017 to 4.5% in 2028 for pre 65 retirees and from 6.00% in 2017 to 4.5% in 2022 for post 65 retirees.

2017 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC

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