Galenica - Annual report 2021

23. Employee benefit plans

The vast majority of the Galenica employees work in Switzerland and participate in the Galenica Pension Fund, which is financed by the employers and the employees. This plan is legally separate from Galenica and qualifies as a defined benefit plan. The pension plan covers the risks of the economic consequences of old age, disability and death in accordance with the Swiss Federal Occupational Retirement, Survivors and Disability Pension Plans Act (BVG/LPP). The pension plan is structured in the legal form of a foundation. All actuarial risks are borne by the foundation and regularly assessed by the Board of Trustees based on an annual actuarial appraisal prepared in accordance with BVG/LPP. The company's liabilities are limited to contributions that are based on a percentage of the insured salary under the Swiss law. Only in cases of a funded status that is significantly below a funded status of 100% as per the BVG/LPP law can Galenica be required to pay additional contributions. The calculations made in these appraisals do not apply the projected unit credit method required by IFRS. If the calculations made in accordance with the provisions of BVG/LPP reveal a funded status of less than 100%, suitable restructuring measures need to be introduced. The Board of Trustees consists of employee and employer representatives.

The defined benefit plan is funded. Plan assets are managed separately from Galenica's assets by the independent pension fund.

The most recent actuarial valuation was prepared as at 31 December 2021. The pension fund assets are invested in accordance with local investment guidelines. Galenica pays its contributions to the pension fund in accordance with the regulations defined by the fund.

The final funded status pursuant to BVG/LPP is not available until the first quarter of the subsequent year. The projected funded status as at 31 December 2021 for Galenica Pension Fund is 125.1% unaudited) and as at 31 December 2020 117.2% (final).

Defined benefit plans and long-service awards

			2021			2020
in thousand CHF	Defined benefit plans	Long-service awards 1)	Total	Defined benefit plans	Long-service awards 1)	Total
Plan assets measured at fair value	1,143,224	–	1,143,224	1,018,461	–	1,018,461
Present value of defined benefit obligation	–1,085,962	–16,229	–1,102,191	–1,060,947	–14,924	–1,075,871
Net carrying amount recognised in employee benefit liabilities	57,262	–16,229	41,033	–42,486	–14,924	–57,411
of which recognised in assets	67,000	–	67,000	–	–	–
of which recognised in liabilities	–9,738	–16,229	–25,967	–42,486	–14,924	–57,411

1) Long-service awards relate to provisions for jubilee payments

Change in present value of defined benefit obligation

			2021			2020
in thousand CHF	Defined benefit plans	Long-service awards	Total	Defined benefit plans	Long-service awards	Total
1 January	–1,060,947	–14,924	–1,075,871	–1,016,989	–13,715	–1,030,704
Current service cost	–30,995	–1,519	–32,514	–30,050	–1,364	–31,414
Past service cost	968	–	968	48,256	–1,003	47,253
Interest on defined benefit obligation	–519	–8	–527	–1,488	–20	–1,507
Actuarial gain/(loss)	1,107	–1,152	–45	–65,354	–275	–65,629
Employee contributions	–16,938	–	–16,938	–16,387	–	–16,387
Benefits/awards paid	30,627	1,374	32,001	21,063	1,452	22,515
Change in scope of consolidation	–9,265	–	–9,265	–	–	–
31 December	–1,085,962	–16,229	–1,102,191	–1,060,947	–14,924	–1,075,871

Change in fair value of plan assets

in thousand CHF	2021	2020
1 January	1,018,461	977,673
Interest on plan assets	509	1,458
Remeasurement gain/(loss)	105,896	20,336
Employee contributions	16,938	16,387
Employer contributions	26,115	24,710
Benefits paid	–30,627	–21,063
Administration cost	–1,053	–1,040
Change in scope of consolidation	6,986	–
31 December	1,143,224	1,018,461

Net defined benefit cost

in thousand CHF	2021	2020
Current service cost	30,995	30,050
Past service cost	–968	–48,256
Net interest on net defined benefit liability	10	29
Administration cost	1,053	1,040
Net defined benefit cost	31,090	–17,138

In 2020, the trustees of the Galenica Pension Fund passed resolutions to make forward-looking modifications with a view to safeguarding the settlement of obligations towards insured members by reducing the conversion rate starting from 1 January 2022. These modifications lead to a decrease in the present value of the defined benefit obligation. The resulting negative past service cost led to a non-recurring decrease in personnel costs of CHF 48.3 million on the date the resolution was passed.

Remeasurement of net defined benefit liability

in thousand CHF	2021	2020
Actuarial gain/(loss) due to:
– Changes in demographic assumptions	–10,108	–16
– Changes in financial assumptions	49,946	–16,726
– Experience adjustments	–38,732	–48,612
Remeasurement of plan assets	105,896	20,336
Remeasurement of net defined benefit liability recognised in other comprehensive income	107,003	–45,018

Change in assumption and in estimate

The experience adjustments of CHF -38.7 million (previous year: CHF -48.6 million) were the result of various elements not expected in the prior year mainly a higher interest credited to the member's accounts, an overall increase of the population and other items as determined by the external actuary.

During 2021, Galenica conducted a review of actuarial valuation parameters, including employee turnover rates and mortality tables.

Considering actual historical patterns with turnover rates at approximate 100% of BVG 2020 tables in the retail business (previous year: 125% BVG 2015) and 60% of BVG 2020 tables in the non-retail business (previous year: 125% BVG 2015), Galenica used these increased rates for its 2021 valuation. Furthermore the mortality table was changed from BVG 2015 GT (CMI), 1.5% to BVG 2020 GT (CMI), 1.5%. This resulted in an increase of the defined benefit obligation of CHF 10.1 million, which was recognised in other comprehensive income.

The increase of the discount rate from 0.05% to 0.35% resulted in a decrease of the defined benefit obligation of CHF 49.9 million.

Investment structure of plan assets

in thousand CHF		2021		2020
Cash and cash equivalents	8,503	0.7%	6,860	0.7%
Debt instruments	191,285	16.7%	175,843	17.3%
Equity instruments	517,892	45.3%	448,563	44.0%
Real estate	256,809	22.5%	238,632	23.4%
Other investments	168,735	14.8%	148,563	14.6%
Fair value of plan assets	1,143,224	100.0%	1,018,461	100.0%
Current return on plan assets		10.4%		2.2%

The Board of Trustees is responsible for investing the plan assets. It defines the investment strategy and determines the long-term target asset structure (investment policy), taking into account the legal requirements, objectives set, the benefit obligations and the foundations' risk capacity. The Board of Trustees delegates implementation of the investment policy in accordance with the investment strategy to an investment committee, which also comprises trustees from the Board of Trustees and a general manager. Plan assets are managed by external asset managers in line with the investment strategy.

Cash and cash equivalents are deposited with financial institutions with a credit rating of A or above.

Debt instruments (e.g. bonds) have a credit rating of at least BBB and quoted prices in active markets (level 1 of the fair value hierarchy). They can be investments in funds and direct investments.

Equity instruments are investments in equity funds. These generally have quoted prices in active markets (level 1 of the fair value hierarchy). Since the change in investment strategy in 2021, there are no more direct investments in equity instruments. Therefore all shares of Galenica Ltd. were sold in 2021 (previous year: fair value of CHF 10.7 million).

Real estate relates to both residential property and offices. These can be investments in quoted real estate funds (level 1 of the fair value hierarchy) or direct investments (level 3 of the fair value hierarchy). If real estate is held directly, it is valued by an independent expert.

Other investments consist of hedge funds, insurance linked securities (ILS), infrastructures, senior loans, private equity and receivables. There are receivables from Group companies amounted to CHF 34.2 million (previous year: CHF 33.5 million). Investments in hedge funds are classified as alternative investments. They are primarily used for risk management purposes. In most cases, quoted prices in an active market are not available for hedge funds investments (level 2 or level 3 of the fair value hierarchy).

The use of derivative financial instruments is only permitted if sufficient liquidity or underlying investments are available. Leverage and short selling are not permitted.

The pension funds manage the assets of 5,377 active members (previous year: 5,315) and 896 pensioners (previous year: 860).

Galenica does not use any pension fund assets.

Basis for measurement

	2021	2020
Discount rate	0.35%	0.05%
Salary development	1.00%	1.00%
Pension development	0.00%	0.00%
Mortality (mortality tables)	BVG 2020 GT (CMI), 1.5%	BVG 2015 GT (CMI), 1.5%
Turnover	BVG 2020 (60% –100%)	BVG 2015 (100% –125%)

Sensitivity analysis

The discount rate, future salary development and mortality were identified as key actuarial assumptions. Changes in these assumptions would affect the defined benefit obligation (DBO) as follows:

Sensitivity analysis

		2021		2020
in thousand CHF	Variations in assumptions	Impact on DBO	Variations in assumptions	Impact on DBO
Discount rate	+0.25%	–39,043	+0.25%	–37,336
	-0.25%	41,236	-0.25%	40,519
Salary development	+0.25%	3,260	+0.25%	3,251
	-0.25%	–3,260	-0.25%	–2,230
Mortality	+1 year	32,388	+1 year	31,640
	-1 year	–32,423	-1 year	–32,688

The sensitivity analysis assumes potential changes in the above parameters as at year-end. Every change in a key actuarial assumption is analysed separately. Interdependencies were not taken into account.

The pension obligations have an average duration of 16.5 years (previous year: 15.9 years).

Cash outflows for pension payments and other obligations can be budgeted reliably. The benefit plans collect regular contribution payments. Furthermore, the investment strategies safeguard liquidity at all times.

The employer contributions to the pension fund are estimated at CHF 29.2 million for 2022.

Accounting principles employee benefit plans

Galenica's defined benefit obligation (DBO) is assessed annually by independent pension actuaries using the projected unit credit method. This method considers employees' service in the periods prior to the reporting date and their future expected salary development. In addition, actuaries make use of statistical data such as employee turnover and mortality to calculate the defined benefit obligation.

Any deficit or surplus in funded defined benefit plans (when the fair value of plan assets falls short of or exceeds the present value of the defined benefit obligation) is recorded as a net defined benefit liability or asset. Galenica only recognises a net defined benefit asset if it has the ability to use the surplus to generate future economic benefits that will be available to Galenica in the form of a reduction in future contributions. If Galenica does not have the ability to use the surplus or it will not generate any future economic benefit, Galenica does not recognise an asset, but instead discloses the effect of this asset ceiling in the notes.

The components of defined benefit cost are service cost, net interest on the net defined benefit asset or liability and remeasurements of the net defined benefit asset or liability.

Service cost is a component of personnel costs and comprises current service cost, past service cost (including gains and losses from plan amendments) and gains and losses from plan settlements.

Net interest is determined by multiplying the net defined benefit liability or asset by a discount rate at the beginning of the reporting period. Net interest is included in the financial result.

Actuarial gains and losses result from changes in actuarial assumptions and differences between actuarial assumptions and actual outcomes. Actuarial gains and losses resulting from remeasuring the defined benefit plans are recognised immediately in comprehensive income as remeasurements of the net defined benefit liability or asset. This includes any differences in the return on plan assets (excluding interest, based on the discount rate). Remeasurements of the net defined benefit liability or asset are not reclassified through profit or loss at any point in time.

Galenica rewards employees for long service with jubilee benefits. These long-term benefits to employees are also measured using the projected unit credit method and included in employee benefit liabilities. These obligations are unfunded. Changes in obligations are recognised in profit or loss in personnel costs and interest expense as part of the financial expense, in line with the defined benefit plans.