22. Provisions for other liabilities and charges

The movements during the year in provisions for other liabilities and charges are presented in the following table:

(in thousands of Euros)

Beginning balance at 12/31/2006

145,119

Exchange differences

6,155

Change in scope of consolidation

320

Increase

15,588

Utilization/Release

(14,822)

Reclassification

(6,003)

Other

(26)

Ending balance at 12/31/2007

146,331

(in thousands of Euros)

Beginning balance at 12/31/2006

116,525

Exchange differences

(630)

Change in scope of consolidation

2,492

Increase

35,014

Utilization/Release

(87,489)

Reclassification

6,003

Other

(575)

Ending balance at 12/31/2007

71,340

At December 31, 2007, the non-current portion mainly includes Euros 82,174 thousand relating to the accruals for the legal and tax disputes of the subsidiary Pirelli Pneus S.A. with headquarters in Brazil, Euros 27,479 thousand for the risks of a fiscal nature of the parent Pirelli & C. S.p.A. and Euros 14,887 thousand for contractual commitments undertaken for the performance of extraordinary maintenance work on buildings sold.

The current portion refers to accruals for contractual guarantees and product claims. The reduction from December 31, 2006 is mainly due to the price adjustment paid in 2007 (Euros 39,855 thousand) regarding the sale of Pirelli’s operations in the Energy and Telecom Cables and Systems sectors to Goldman Sachs in July 2005. Some claims were also settled which reduced the provision by another Euros 20,270 thousand.

23. Employee benefit obligations

Employee benefit obligations include:

(in thousands of Euros)

12/31/2007

12/31/2006

Pension funds:

- funded

118,234

156,271

- unfunded

88,050

99,887

Employees' leaving indemnity (Italian companies)

74,559

96,824

Medical care plans

21,839

28,362

Other benefits

46,460

34,506

349,142

415,850

Pension funds

The composition of pension funds at December 31, 2007 is as follows:

(in thousands of Euros)

 

12/31/2007

 

Germany

Total unfunded pension funds

USA

UK

Other countries

Total funded pension funds

Funded

Present value of funded obligations

-

-

123,593

899,691

2,519

1,025,803

Fair value of plan assets

-

-

(103,933)

(801,632)

(2,004)

(907,569)

Unfunded

Present value of unfunded obligations

88,050

88,050

-

-

-

-

Net liability in the balance sheet of which:

88,050

88,050

19,660

98,059

515

118,234

- Tyre

87,269

87,269

19,660

65,278

515

85,453

- Real Estate

781

781

-

-

-

-

- Other

-

-

-

32,781

-

32,781

The composition of pension funds at December 31, 2006 was as follows:

(in thousands of Euros)

 

12/31/2006

 

Germany

Total
unfunded pension funds

USA

UK

Total funded pension funds

Funded

Present value of funded obligations

-

-

146,708

947,160

1,093,868

Fair value of plan assets

-

-

(113,136)

(824,461)

(937,597)

Unfunded

Present value of unfunded obligations

99,887

99,887

-

-

-

Net liability in the balance sheet of which:

99,887

99,887

33,572

122,699

156,271

- Tyre

99,887

99,887

33,572

62,071

95,643

- Other

-

-

-

60,628

60,628

The principal features of the pension plans in existence at December 31, 2007 are as follows:

  • Tyres Germany: this is an unfunded defined benefit plan based on the most recent remuneration. It guarantees another pension besides the government pension. The plan was closed in October 1982; consequently, the participants in the plan are employees who were hired prior to that date.
  • USA: this is a funded defined benefit plan based on the most recent remuneration. It guarantees another pension besides the government pension. The plan is under the administration of a trust. The plan was closed in 2001 and frozen in 2003 for those employees who changed over to a defined contribution scheme. None of the current participants in the plan are in service.
  • UK: these are funded defined benefit plans based on the most recent remuneration.
    They guarantee another pension besides the government pension. The plans are under the administration of a trust. The plans were closed in 2001; consequently, the participants in the plan are employees who were hired prior to that date.

The changes during the year in the present value of the liabilities for pension funds (funded and unfunded) are as follows:

(in thousands of Euros)

12/31/2007

12/31/2006

Beginning balance

1,193,755

1,199,282

Exchange differences

(99,276)

1,645

Change in scope of consolidation

752

-

Movements through the income statement

63,598

60,963

Actuarial (gains) losses recognized in equity

7,230

(13,413)

Employee contributions

1,620

1,774

Benefits paid

(53,760)

(56,451)

Other

(66)

(45)

Closing balance

1,113,853

1,193,755

The changes during the year in the fair value of the pension plan assets are as follows:

(in thousands of Euros)

12/31/2007

12/31/2006

Beginning balance

(937,597)

(857,857)

Exchange differences

85,947

(3,371)

Movements through the income statement

(67,042)

(58,374)

Actuarial (gains) losses recognized in equity

(3,030)

(33,029)

Employer contributions

(31,288)

(32,906)

Employee contributions

(1,620)

(1,774)

Benefits paid

47,004

49,679

Other

57

35

Closing balance

(907,569)

(937,597)

The assumptions made to compute the expected return of the pension fund assets are based on the expected returns of the underlying assets (shares, bonds and deposits). The expected return originates from the general average of the expected returns by the assets for every class of separately identified investments, with reference to an effective or objective composition of the assets.

The expected return of each class of investment originates from the market yields available at the balance sheet date. Specifically, the expected return of equity shares originates from a risk-free return rate with the addition of an adequate premium for the risk.

The composition of the funded pension plan assets is presented in the following table:

(in %)

12/31/2007

12/31/2006

UK

USA

Other
countries

UK

USA

Shares

82%

68%

82%

68%

Bonds

14%

29%

15%

29%

Deposits

1%

3%

1%

3%

Other

3%

100%

2%

100%

100%

100%

100%

100%

The effective return of pension plan assets is as follows:

(in thousands of Euros)

USA

UK

Other countries

Total

Effective return 2006

10,931

80,175

91,106

Effective return 2007

7,666

60,473

(251)

67,888

The costs recognized in the income statement for pension funds are as follows:

(in thousands of Euros)

12/31/2007

12/31/2006

Current service costs

5,110

4,713

Interest cost

58,488

56,250

Expected return on plan assets

(67,042)

(58,374)

(3,444)

2,589

The amounts recognized in the income statement are included in “Personnel costs” (Note 31).

The contributions expected to be paid for pension funds during 2008 amount to Euros 27,737 thousand.

Employees’ leaving indemnity

The changes during the year in employees’ leaving indemnity are as follows:

(in thousands of Euros)

12/31/2007

12/31/2006

Beginning balance

96,824

100,099

Change in the scope of consolidation

(5,491)

2,497

Movements through the income statement (excluding curtailment)

8,270

14,979

Curtailment

(5,186)

Actuarial (gains) losses recognized in equity

(5,358)

(4,122)

Payments / advances

(14,467)

(16,711)

Other

(33)

82

Closing balance

74,559

96,824

of which:

- Tyre

38,912

46,738

- Broadband

1,128

1,204

- Real Estate

21,283

19,452

- Other

13,236

29,430

The Italian Finance Bill 2007 and the relative decrees implementing it introduced changes regarding employees’ leaving indemnity which include allowing the employee to choose the destination of his/her indemnity accruing from January 1, 2007. During the first half of 2007, the employees had to choose whether to direct the future flows of the indemnity to pre-chosen pension schemes or to keep them with the company (in which case, the company will pay the employees’ leaving indemnity contributions to a treasury account set up at INPS).

The employees’ leaving indemnity accruing from January 1, 2007 has been considered as a defined contribution plan in the financial statements at December 31, 2007 regardless of whether the option chosen was the supplementary pension scheme or the treasury fund with INPS. The indemnity accrued up to December 31, 2006 will remain a defined benefit plan and will consequently be subjected to periodical actuarial calculations.

IAS 19 states that when the terms of a defined benefit plan are amended such that a material element of the future service by current employees will no longer qualify for benefits, the company must recognize any changes in the present value of the obligations caused by this event (curtailment) when it arises in the income statement.

The curtailment can thus be defined as the difference between the liability for employees’ leaving indemnity calculated before the change in the law, that is, considering the component relating to future accruals, and that resulting after the event, which excludes the component relating to future accruals.

The economic effect of the curtailment on the financial statements at December 31, 2007 is a gain of Euros 5,186 thousand and has been calculated through a full evaluation of the provision for employees’ leaving indemnity.

Movements through the income statement are recorded in “Personnel costs” (Note 31).

Medical care plans

The composition of medical care plans is as follows:

(in thousands of Euros)

USA

Liability in the balance sheet at December 31, 2007

21,839

Liability in the balance sheet at December 31, 2006

28,362

The medical care plan in existence in the Tyre subsidiary in the United States covers white-collars and blue-collars, in service and retired.

The plan is structured according to “pre-medicare” and “post-medicare”, with the latter referring to participants over the age of 65.

Contributions are paid in both by the employer and the employee.

The changes during the year in the liabilities recognized in the financial statements for medical care plans are the following:

(in thousands of Euros)

12/31/2007

12/31/2006

Beginning balance

28,362

33,386

Exchange differences

(3,081)

(3,552)

Movements through the income statement

1,373

1,535

Actuarial (gains) losses recognized in equity

(1,355)

(995)

Benefits paid

(1,863)

(1,906)

Other

(1,597)

(106)

Closing balance

21,839

28,362

The effect of a one percentage point increase or decrease in the estimated rates for the costs of medical care is as follows:

(in thousands of Euros)

1% increase

1% decrease

12/31/2007

12/31/2006

12/31/2007

12/31/2006

- Effect on current service cost and interest cost

55

65

(52)

(63)

- Effect on liabilities recognized in the balance sheet

849

1,126

(805)

(1,068)

The costs recognized in the income statement relating to medical care plans are as follows:

(in thousands of Euros)

12/31/2007

12/31/2006

Current service costs

7

8

Interest cost

1,366

1,527

1,373

1,535

The amounts recognized in the income statement are included in “Personnel costs” (Note 31).

Other information

Net actuarial gains referring to 2007 recognized directly in equity amount to Euros 2,589 thousand (net gains of Euros 51,081 thousand in 2006).

The cumulative amount at December 31, 2007, equal to a net loss of Euros 64,326 thousand (net loss of Euros 65,286 thousand at December 31, 2006), is made up as follows:

(in thousands of Euros)

Italy

Germany

USA

UK

Other
countries

Total

Pension funds

-

5,916

(10,607)

(72,315)

(515)

(77,521)

Medical care plans

-

-

(894)

-

-

(894)

Employees' leaving indemnity

14,089

-

-

-

-

14,089

Total actuarial gains (losses)
recognized in equity

14,089

5,916

(11,501)

(72,315)

(515)

(64,326)

The breakdown of the cumulative amount at December 31, 2006 by country is as follows:

(in thousands of Euros)

Italy

Germany

USA

UK

Total

Pension funds

-

(4,845)

(11,749)

(56,706)

(73,300)

Medical care plans

-

-

(1,912)

-

(1,912)

Employees' leaving indemnity

9,926

-

-

-

9,926

Total actuarial gains (losses)
recognized in equity

9,926

(4,845)

(13,661)

(56,706)

(65,286)

The main actuarial assumptions used at December 31, 2007 and also to determine the estimated
cost for the year 2008 are as follows:

actuarial assumptions - 2007

Italy

Germany

Netherlands

UK

USA

Discount rate

5.50%

5.50%

5.50%

5.60%

6.0%

Inflation rate

2.0%

2.0%

2.0%

3.15%

-

Expected return on plan assets

-

-

-

7.78%

7.67%

Expected remuneration increase rate

-

2.50%

2.0%

3.15%

-

Medical care cost trend rate - initial

-

-

-

-

9.0%

Medical care cost trend rate - final

-

-

-

-

4.5%

The main actuarial assumptions used at December 31, 2006 and also to determine the estimated
cost for the year 2007 are as follows:

actuarial assumptions - 2006

Italy

Germany

UK

USA

Discount rate

4.50%

4.50%

5.10%

5.75%

Inflation rate

2.0%

2.0%

2.80%

-

Expected return on plan assets

-

-

7.31%

7.5%

Expected remuneration increase rate

2% - 4.30%

2.50%

2.80%

-

Medical care cost trend rate - initial

-

-

-

9.0%

Medical care cost trend rate - final

-

-

-

4.5%

The adjustments based on historical experience made to defined benefit plans are the following:

(in thousands of Euros)

12/31/2007

12/31/2006

12/31/2005

Adjustments to plan liabilities - (gains) losses

16,097

(7,527)

46,038

Adjustments to plan assets - (gains) losses

(744)

(32,733)

(75,756)

The adjustments to liabilities represent the change in the actuarial liability that is not generated
by changes in the actuarial assumptions. These typically include changes in the demographic and remuneration structure. Experience adjustments do not include changes in the plan regulations (“past service cost”).

The adjustments to assets represent the difference between the effective return of the assets and the expected return at the start of the year.