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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.

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