Galenica - Geschäftsbericht 2022

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 2022. 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 2022 for Galenica Pension Fund is 108.3% (unaudited) and as at 31 December 2021 125.1% (final).

Defined benefit plans and long-service awards

			2022			2021
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	1,044,124	–	1,044,124	1,143,224	–	1,143,224
Present value of defined benefit obligation	–975,824	–14,988	–990,812	–1,085,962	–16,229	–1,102,191
Surplus / (deficit)	68,299	–14,988	53,311	57,262	–16,229	41,033
Effect of asset ceiling	–69,941	–	–69,941	–	–	–
Net carrying amount recognised in employee benefit liabilities	–1,642	–14,988	–16,630	57,262	–16,229	41,033
of which recognised in assets	183	–	183	67,000	–	67,000
of which recognised in liabilities	–1,825	–14,988	–16,813	–9,738	–16,229	–25,967

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

Change in present value of defined benefit obligation

			2022			2021
in thousand CHF	Defined benefit plans	Long-service awards	Total	Defined benefit plans	Long-service awards	Total
1 January	–1,085,962	–16,229	–1,102,191	–1,060,947	–14,924	–1,075,871
Current service cost	–31,804	–1,725	–33,529	–30,995	–1,519	–32,514
Past service cost	–85	–	–85	968	–	968
Interest on defined benefit obligation	–3,709	–59	–3,768	–519	–8	–527
Actuarial gain/(loss)	169,856	1,512	171,368	1,107	–1,152	–45
Employee contributions	–19,662	–	–19,662	–16,938	–	–16,938
Benefits/awards paid	–310	1,587	1,277	30,627	1,374	32,001
Change in scope of consolidation	–4,148	–74	–4,222	–9,265	–	–9,265
31 December	–975,824	–14,988	–990,812	–1,085,962	–16,229	–1,102,191

Change in fair value of plan assets

in thousand CHF	2022	2021
1 January	1,143,224	1,018,461
Interest on plan assets	3,992	509
Remeasurement gain/(loss)	–155,683	105,896
Employee contributions	19,662	16,938
Employer contributions	29,791	26,115
Net benefits paid	310	–30,627
Administration cost	–999	–1,053
Change in scope of consolidation	3,826	6,986
31 December	1,044,124	1,143,224

Net defined benefit cost

in thousand CHF	2022	2021
Current service cost	31,804	30,995
Past service cost	85	–968
Net interest on net defined benefit liability	–283	10
Administration cost	999	1,053
Net defined benefit cost	32,605	31,090

Remeasurement of net defined benefit liability

in thousand CHF	2022	2021
Actuarial gain/(loss) due to:
– Changes in demographic assumptions	–	–10,108
– Changes in financial assumptions	190,663	49,946
– Experience adjustments	–20,807	–38,732
Remeasurement of plan assets	–155,683	105,896
Effect in the change of asset ceiling	–69,941	–
Remeasurement of net defined benefit liability recognised in other comprehensive income	–55,768	107,003

Change in assumption and in estimate

The experience adjustments of CHF -20.8 million (previous year: CHF -38.7 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 calculated by the external actuary.

The increase of the discount rate from 0.35% to 2.10% (previous year: from 0.05% to 0.35%) resulted in a decrease of the defined benefit obligation of CHF 190.7 million (previous year: CHF 49.9 million). The increase of the discount rate resulted in an actuarial gain (change in financial assumptions) and an asset ceiling.

Asset ceiling

in thousand CHF	2022	2021
1 January	–	–
Change in the asset ceiling (recognised in other comprehensive income)	–69,941	–
31 December	–69,941	–

Investment structure of plan assets

in thousand CHF		2022		2021
Cash and cash equivalents	5,312	0.5%	8,503	0.7%
Debt instruments	204,473	19.6%	191,285	16.7%
Equity instruments	424,749	40.7%	517,892	45.3%
Real estate	264,509	25.3%	256,809	22.5%
Other investments	145,081	13.9%	168,735	14.8%
Fair value of plan assets	1,044,124	100.0%	1,143,224	100.0%
Current return on plan assets		–13.2%		10.4%

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).

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 11.2 million (previous year: CHF 34.2 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 5,629 active members (previous year: 5,377) and 950 pensioners (previous year: 896).

Galenica does not use any pension fund assets.

Basis for measurement

	2022	2021
Discount rate	2.10%	0.35%
Salary development	2.25%	1.00%
Pension development	0.00%	0.00%
Mortality (mortality tables)	BVG 2020 GT (CMI), 1.5%	BVG 2020 GT (CMI), 1.5%
Turnover	BVG 2020 (60% –100%)	BVG 2020 (60% –100%)

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

		2022		2021
in thousand CHF	Variations in assumptions	Impact on DBO	Variations in assumptions	Impact on DBO
Discount rate	+0.25%	–28,301	+0.25%	–39,043
	-0.25%	30,258	-0.25%	41,236
Salary development	+0.25%	2,914	+0.25%	3,260
	-0.25%	–2,913	-0.25%	–3,260
Mortality	+1 year	21,281	+1 year	32,388
	-1 year	–21,921	-1 year	–32,423

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 14.4 years (previous year: 16.5 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 31.2 million for 2023.

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.