Employee benefit obligations / Borrowings from banks and other financial institutions

23. Employee benefit obligations

Employee benefit obligations include:

(in thousands of euros)

 

12/31/2008

12/31/2007

Pension funds:

- funded

157,368

118,234

- unfunded

88,752

88,050

Employees' leaving indemnity (Italian companies)

56,783

74,559

Medical care plans

18,442

21,839

Other benefits

45,190

46,460

 

366,535

349,142

PENSION FUNDS

The composition of pension funds at December 31, 2008 is as follows:

(in thousands of euros)

 

12/31/2008

 

Germany

Total unfunded pension funds

USA

UK

Other countries

Total funded pension funds

Funded

      

Present value of funded obligations

-

-

128,035

598,155

2,615

728,805

Fair value of plan assets

-

-

(73,780)

(495,549)

(2,108)

(571,437)

Unfunded

      

Present value of unfunded obligations

88,752

88,752

-

-

-

-

Net liability in the balance sheet

88,752

88,752

54,255

102,606

507

157,368

of which:

- Tyre

83,310

83,310

54,255

62,157

507

116,919

- Real Estate

5,442

5,442

- Other

40,449

40,449

The composition of pension funds at December 31, 2007 was 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

88,050

88,050

19,660

98,059

515

118,234

of which:

- Tyre

87,269

87,269

19,660

65,278

515

85,453

- Real Estate

781

781

- Other

32,781

32,781

The principal features of the pension plans in existence at December 31, 2008 are as follows:

  • Germany - Tyre sector: 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 – Tyre sector: 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 movements during the year in the present value of the liabilities for pension funds (funded and unfunded) are as follows:

(in thousands of euros)

 

12/31/2008

12/31/2007

Beginning balance

1,113,853

1,193,755

Exchange differences

(207,553)

(99,276)

Change in the scope of consolidation

3,986

-

Movements through the income statement:

- current service cost

4,669

5,110

- interest cost

57,672

58,488

Actuarial (gains) losses recognized in equity

(111,992)

7,230

Employee contribution

1,323

1,620

Benefits paid

(48,146)

(53,760)

Other

3,745

686

Closing balance

817,557

1,113,853

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

(in thousands of euros)

 

12/31/2008

12/31/2007

Beginning balance

(907,569)

(937,597)

Exchange differences

187,355

85,947

Movements through the income statement:

- expected return of plan assets

(64,529)

(67,042)

Actuarial (gains) losses recognized in equity

195,456

(3,030)

Employer contribution

(22,453)

(31,288)

Employee contribution

(1,323)

(1,620)

Benefits paid

40,978

47,004

Other

648

57

Closing balance

(571,437)

(907,569)

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 rate of return with the addition of an adequate premium for the risk.

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

 

12/31/2008

12/31/2007

 

UK

USA

Other
countries

UK

USA

Other
countries

Shares

64%

70%

82%

68%

Bonds

33%

25%

14%

29%

Deposits

1%

3%

Other

3%

5%

100%

3%

100%

 

100%

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 2008 - (gain)/loss

26,027

134,370

(51)

160,346

Effective return 2007 - (gain)/loss

(7,666)

(60,473)

251

(67,888)

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

(in thousands of euros)

 

12/31/2008

12/31/2007

Current service costs

4,669

5,110

Interest cost

57,672

58,488

Expected return on plan assets

(64,529)

(67,042)

 

(2,188)

(3,444)

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

The contributions which are expected to be paid for pension funds during 2009 amount to Euros 23,337 thousand.

EMPLOYEES’ LEAVING INDEMNITY

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

(in thousands of euros)

 

12/31/2008

12/31/2007

Beginning balance

74,559

96,824

Discontinued operations

(12,846)

-

Change in the scope of consolidation

-

(5,491)

Movements through the income statement (excluding curtailment)

3,565

8,270

Curtailment

-

(5,186)

Actuarial (gains) losses recognized in equity

1,959

(5,358)

Payments / advances

(10,798)

(14,467)

Other

344

(33)

Ending balance

56,783

74,559

of which:

- Tyre

37,194

38,912

- Broadband

651

1,128

- Real Estate

7,327

21,283

- Other

11,611

13,236

Discontinued operations refer to the deconsolidation of the Integra FM B.V. group (formerly Pirelli RE Integrated Facility Management B.V.) and PGT Photonics S.p.A., after the stakes held in these companies were sold to third parties.

The movements through the income statement during 2008 relate only to the interest expense accrued on employees’ leaving indemnity at December 31, 2007. Following the leaving indemnity reform introduced by Italian Budget Law 2007, employees’ leaving indemnity was in fact transformed into a defined contribution plan.

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 12/31/2008

18,442

Liability in the balance sheet at 12/31/2007

21,839

The medical care plan in existence in the United States (Tyre sector) 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 movements during the year in the liabilities recognized in the financial statements for medical care plans are the following:

(in thousands of euros)

 

12/31/2008

12/31/2007

Beginning balance

21,839

28,362

Exchange differences

1,333

(3,081)

Moviments through the income statement:

- current service cost

7

7

- interest cost

1,217

1,366

Actuarial (gains) losses recognized in equity

(1,109)

(1,355)

Benefits paid

(1,591)

(1,863)

Other

(3,254)

(1,597)

Ending balance

18,442

21,839

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

 

12/31/2008

12/31/2007

12/31/2008

12/31/2007

Effect on current service cost and interest cost

55

55

(54)

(52)

Effect on liabilities recognized in the balance sheet

933

849

(908)

(805)

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

(in thousands of euros)

 

12/31/2008

12/31/2007

Current service costs

7

7

Interest cost

1,217

1,366

 

1,224

1,373

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

OTHER INFORMATION

Net actuarial losses referring to 2008 recognized directly in equity amount to Euros 85,058 thousand (net gains of Euros 2,589 thousand in 2007).

The cumulative amount at December 31, 2008, equal to a net loss of Euros 150,460 thousand (net loss of Euros 64,326 thousand in 2007), is made up as follows:

(in thousands of euros)

 

Italy

Germany

USA

UK

Other countries

Total

Pension funds

-

8,670

(44,445)

(124,439)

(1,151)

(161,365)

Medical care plans

-

-

214

-

-

214

Employees' leaving indemnity

10,691

-

-

-

-

10,691

Total actuarial gains (losses)
recognized in equity

10,691

8,670

(44,231)

(124,439)

(1,151)

(150,460)

The breakdown of the cumulative amount at December 31, 2007 by country was 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 main actuarial assumptions used at December 31, 2008 and also to determine the estimated cost for the year 2009 are as follows:

 

Italy

Germany

Netherlands

UK

USA

Discount rate

5.70% *

5.70% *

5.70% *

6.20%-6.40% *

6.25% *

Inflation rate

2.00% *

2.00% *

2.00% *

2.70% *

- *

Expected return on plan assets

- *

- *

- *

6.65% *

7.75% *

Expected remuneration increase rate

3.5% - 4.5% *

2.50% *

2.00% *

3.15% *

- *

Medical care cost trend rate - initial

- *

- *

- *

- *

8.50% *

Medical care cost trend rate - final

- *

- *

- *

- *

4.50% *

* Indicators are only valid for companies with less than 50 employees.

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

 

Italy

Germany

Netherlands

UK

USA

Discount rate

5.50% *

5.50% *

5.50% *

5.60% *

6.00% *

Inflation rate

2.00% *

2.00% *

2.00% *

3.15% *

- *

Expected return on plan assets

- *

- *

- *

7.78% *

7.67% *

Expected remuneration increase rate

3.5% - 4.5% *

2.50% *

2.00% *

3.15% *

- *

Medical care cost trend rate - initial

- *

- *

- *

- *

9.00% *

Medical care cost trend rate - final

- *

- *

- *

- *

4.50% *

* Indicators are only valid for companies with less than 50 employees.

The discount rates are used in the measurement of the obligation and the financial component of the net current expense. The Group has chosen such rates based on the yield curves of fixed-rate securities (corporate bonds) of leading companies (with an AA+ rating) at the measurement date of the plans.

The medical care cost trend rate represents the expected increase in medical care costs. The rate is determined on the basis of the specific experience of the sector and the various trends, including specific inflation projections in the health care sector.

The initial rate used represents a trend for a short-term period based on recent experience and the prevailing market conditions. The final rate used is an assumption of the long-term period which takes into account, among other things, inflation in the costs of health care on the basis of the general inflation trend, incremental medical inflation, technologies, new drugs, average age of the population and a different mix of medical services. The change in the average trend in the rate of growth of medical care costs in 2008 was determined based on the recent change in medical care costs.

The expected return on plan assets reflects the estimates on the medium- and long-term return performance of the pension fund assets for the entire duration of the obligation. The expected return is set for each class of assets (equity shares, bonds, cash and real estate) and is net of expected administrative costs. The historical trend and the correlation of returns, the estimate on future trends and other relevant financial factors are analyzed in order to check reasonableness and consistency.

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

(in thousands of euros)

 

12/31/2008

12/31/2007

12/31/2006

12/31/2005

Adjustments to plan liabilities - (gains)/losses

(9,553)

16,097

(7,527)

46,038

Adjustments to plans assets - (gains)/losses

224,875

(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.

24. Borrowings from banks and other financial institutions

Borrowings from banks and other financial institutions are analyzed as follows:

(in thousands of euros)

 

12/31/2008

12/31/2007

 

Total

Non-current

Current

Total

Non-current

Current

Bonds

150,000

-

150,000

650,000

150,000

500,000

Borrowings from banks

1,780,681

1,279,470

501,211

872,768

653,714

219,054

Borrowing from other financial institutions

66,401

64,739

1,662

69,433

67,936

1,497

Finance lease payables

41,099

30,340

10,759

35,652

32,271

3,381

Financial accrued liabilities
and deferred income

19,268

510

18,758

17,693

420

17,273

Other financial payables

13,859

688

13,171

14,411

955

13,456

 

2,071,308

1,375,747

695,561

1,659,957

905,296

754,661

These payables are secured by real guarantees (liens and mortgages) for Euros 19,107 thousand (Euros 179,380 thousand at December 31, 2007).

If the negative fair value change of derivatives hedging the exchange rates of financial payables (classified in “Derivative financial instruments”) of Euros 43 million is added to the total, the gross payable is equal to Euros 2,114 million, reported in the net financial position.

The carrying amount of current payables is regarded as approximating fair value.

The current payables include the current portion of long-term financial payables of Euros 414,330 thousand (Euros 531,200 thousand at December 31, 2007).

The fair value of non-current payables, compared to the carrying amount, is as follows:

(in thousands of euros)

 

12/31/2008

12/31/2007

 

Carrying amount

Fair value

Carrying amount

Fair value

Non-current financial payables

1,375,747

1,383,316

905,296

901,692

At December 31, 2008, the breakdown of payables by interest rate and currency of origin is as follows:

(in thousands of euros)

 

Fixed rate

Floating rate

Total

EUR

301,418

228,896

530,314

USD

1,902

-

1,902

BRL (Brazilian real)

88,872

-

88,872

CNY (Chinese renminbi)

37,737

26,326

64,063

Other currencies

10,310

100

10,410

Current payables

440,239

63%

255,322

37%

695,561

EUR

313,321

989,192

1,302,513

USD

23,711

-

23,711

BRL (Brazilian real)

-

17,909

17,909

CNY (Chinese renminbi)

-

31,614

31,614

Non-current payables

337,032

24%

1,038,715

76%

1,375,747

 

777,271

38%

1,294,037

62%

2,071,308

The percentage of floating-rate payables at December 31, 2008 increased compared to the prior year mainly as a result of repayments of fixed-rate bond issues (Euros 500,000 thousand) in October 2008. However, the intention is to bring the fixed/floating ratio in line with the Group’s policies which call for an objective 60/40 proportion for fixed-/floating-rate payables.

At December 31, 2007, the situation was as follows:

(in thousands of euros)

 

Fixed rate

Floating rate

Total

EUR

541,682

103,843

645,525

USD

19,970

-

19,970

BRL (Brazilian real)

30,754

-

30,754

CNY (Chinese renminbi)

58,112

-

58,112

Other currencies

300

-

300

Current payables

650,818

86%

103,843

14%

754,661

EUR

485,671

370,683

856,354

USD

23,532

-

23,532

BRL (Brazilian real)

10,085

15,227

25,312

EGP (Egyptian pound)

98

-

98

Non-current payables

519,386

57%

385,910

43%

905,296

 

1,170,204

70%

489,753

30%

1,659,957

The fixed-rate payables above include payables denominated by contract at fixed rates and payables denominated by contract at floating rates hedged by derivatives.

The Group’s exposure to interest rate changes on financial payables in terms of either the type of rate or the date of resetting the rate can be summarized as follow:

(in thousands of euros)

 

12/31/2008

12/312007

 

Total

Fixed rate

Floating rate

Total

Fixed rate

Floating rate

Up to 6 months

850,480

378,539

471,941

756,652

266,899

489,753

Between 6 and 12 months

61,700

61,700

-

500,367

500,367

-

Between 1 and 5 years

1,151,637

329,541

822,096

394,745

394,745

-

Beyond 5 years

7,491

7,491

-

8,193

8,193

-

 

2,071,308

777,271

1,294,037

1,659,957

1,170,204

489,753

Bonds refer to those issued in 1999 by Pirelli & C. S.p.A. for Euros 150,000 thousand at a fixed rate of 5.125 percent, maturing April 7, 2009.

The reduction from 2007 is due to the repayment of the bonds issued on October 21, 1998 by Pirelli & C. S.p.A. for Euros 500,000 thousand at a fixed rate of 4.875 percent and repaid in a one-off payment at maturity on October 21, 2008.

The bonds are not covered by financial covenants or clauses which could cause the early repayment of the bonds due to events other than insolvency.

With regard to negative pledge clauses, there is a commitment on the bonds requiring that real guarantees are not to be provided on the Relevant Debt (bonds and similar securities destined for listing) with the exception for real guarantees on existing debt.

With regard to the existence of financial covenants on credit lines drawn down (included in payables to banks) the following financing lines should be noted, all of which are revolving lines:

Corporate:

  • Barclays Capital, BNP Paribas, HSBC Bank plc, J.P. Morgan plc, The Royal Bank of Scotland plc (as the Mandated Lead Arrangers), for Euros 800,000 thousand, drawn down for Euros 100,000 thousand, expiring December 2011 for Euros 155,000 thousand and December 2012 for Euros 645,000 thousand, for which Pirelli & C must maintain a specific level of consolidated debt and a specific ratio between consolidated net debt and gross operating profit. These parameters are complied with at December 31, 2008.

As far as negative pledges are concerned, real guarantees must not granted above the ceiling of Euros 75,000 thousand, relating to the Relevant Debt (bonds and similar destined for listing), with the exception for real guarantees on existing debt or debt which replaces it, to be provided by law, relating to export and project finance arrangements and low-rate financing;

Tyre:

  • syndicated line (granted to Pirelli Tyre S.p.A. and Pirelli International Limited), in which 12 banks participate for a total of Euros 675,000 thousand, drawn down for Euros 600,000 thousand, expiring February 2012, carries no financial covenants. There is a negative pledge clause not to grant real guarantees, beyond a set ceiling defined as the higher of Euros 100,000 thousand and 3 percent of total assets (as defined in the consolidated financial statements of Pirelli Tyre S.p.A.), relating to the Relevant Debt (bonds and similar destined for listing) with the exception for real guarantees on existing debt or debt which replaces it, to be provided by law, relating to export and project finance arrangements and low-rate financing;

Real Estate:

  • The Royal Bank of Scotland plc, for Euros 50,000 thousand, completely drawn down, expiring December 2009, for which Pirelli & C. Real Estate S.p.A. must maintain, in reference to the consolidated financial statements, a specific amount of net tangible assets (defined as the difference between total equity and the amount resulting from the sum of intangible assets and any asset balance between deferred tax assets and liabilities);
  • West LB AG, for Euros 50,000 thousand, fully drawn down, expiring May 2011, for which Pirelli & C. Real Estate S.p.A. must maintain a specific level of consolidated equity;
  • Unicredit Corporate Banking S.p.A., for Euros 100,000 thousand, fully drawn down, expiring January 2010, which can be renewed for another 18 months, for which Pirelli & C. Real Estate S.p.A. must maintain a specific level of consolidated equity.

As for the financing lines granted to Pirelli Real Estate, the fact of considering the capital increase described in the report on operations and previously announced to the financial community brings the balance sheet requirement and conventional requirement of net tangible assets, which can be influenced by the group’s performance in the absence of the above capital increase, above the minimum contractually agreed levels.

On the other credit lines, Pirelli Real Estate is not required to comply with any covenants.

The other financial payables in existence are not covered by financial covenants or clauses which could cause their early repayment due to events other than insolvency.

There are no significant negative pledge clauses.

In addition to liquidity and securities held for trading of Euros 369,705 thousand, at December 31, 2008 the Group has unused committed credit lines for Euros 785,000 thousand (Euros 2,672,000 thousand at December 31, 2007). Expiration dates are the following:

(in thousands of euros)

2010

10,000

2011

136,000

2012

639,000

 

785,000

As for finance lease payables, reference should be made to Note 8.1 “Finance leases”.