Volvo Group's post-employment benefits, such as pensions, healthcare and other benefits are mainly settled by means of regular payments to independent authorities or bodies that assume pension obligations and administer pensions through defined-contribution plans.

The remaining post-employment benefits are defined-benefit plans; that is, the obligations remain within the Volvo Group or are secured by proprietary pension foundations. The Volvo Group’s defined-benefit plans relate mainly to subsidiaries in the U.S. and comprise both pensions and other benefits, such as healthcare. Other large-scale defined-benefit plans apply to salaried employees in Sweden (mainly through the Swedish ITP pension plan) and employees in France and Great Britain.

Accounting policy

Sources of estimation uncertainty

The following tables disclose information about defined-benefit plans in the Volvo Group. Volvo recognizes the difference between the obligations and the plan assets adjusted for unrecognized actuarial gains and losses in the balance sheet. The information refers to assumptions applied for actuarial calculations, periodical costs and the value of obligations and plan assets at year-end. The tables also include a reconciliation of obligations and plan assets during the year and the difference between fair values and carrying amounts at the balance-sheet date.
Summary of provision for    
post-employment benefits 2012 2011
Obligations (42,472) (40,358)
Fair value of plan assets 24,618 23,873
Funded status (17,854) (16,485)
     
Unrecognized actuarial (gains) and losses 13,633 11,939
Unrecognized past service costs 248 222
Net provisions for post-employment benefits (3,973) (4,324)
     
Whereof related to Assets held for sale - 64
Net provision for post-employment benefits excluding Assets held for sale (3,973) (4,388)
Assumptions applied for Dec 31, Dec 31,
actuarial calculations, % 2012 2011
Sweden    
Discount rate1) 3.25 3.50
Expected return on plan assets2) 6.00 6.00
Expected salary increase 3.00 3.00
Inflation 1.50 1.50
     
United States    
Discount rate1), 3) 1.75-3.75 3.00-4.75
Expected return on plan assets2) 7.65 7.65
Expected salary increase 3.50 3.00
Inflation 2.00 2.00
     
France    
Discount rate1) 3.75 4.50
Expected salary increase 3.00 3.00
Inflation 1.50 1.50
     
Great Britain    
Discount rate1) 4.25-4.60 4.75-5.00
Expected return on plan assets2) 3.30-4.20 3.60-4.50
Expected salary increases 3.20-3.30 3.30-3.40
Inflation 2.70 3.20

1) The discount rate for each country is determined by reference to market yields on high-quality corporate bonds. In countries where there is no functioning market in such bonds, the market yields on government bonds are used. The discount rate for the Swedish pension obligation is determined by reference to mortgage bonds.
2) Applicable in the subsequent accounting period. These assumptions reflect the expected long-term return rate on plan assets, based upon historical yield rates for different categories of investments and weighted in accordance with the foundation's investment policy. The expected return has been calculated net of administrative expenses and applicable taxes.
3) For all plans except one the discount rate used is within the range 3.00-3.75% (4.25-4.75).

Pension costs 2012 2011
Current year service costs 1,071 867
Interest costs 1,415 1,448
Expected return on plan assets (1,437) (1,405)
Actuarial gains and losses1) 654 326
Past service costs    
– Unvested 9 9
– Vested 3 60
Curtailments and settlements 35 50
Termination benefits 20 84
Pension costs for the period, defined-benefit plans 1,770 1,439
     
Pension costs for defined-contribution plans 2,356 2,032
Total pension costs for the period 4,126 3,471

1) For each plan, actuarial gains and losses are recognized as income or expense when the accumulated amount exceeds the so called corridor. The income or expenses are then recognized over the expected average remaining service period of the employees.   

Costs for the period, post-employment benefits other than pensions 2012 2011
Current year service costs 141 85
Interest costs 142 148
Expected return on plan assets (2) -
Actuarial gains and losses1) 19 9
Past service costs    
– Unvested 4 5
– Vested 1 -
Curtailments and settlements 6 (35)
Termination benefits 6 25
Total costs for the period, post-employment benefits other than pensions 317 237

1) For each plan, actuarial gains and losses are reported as income or expense when the accumulated amount exceed the so called corridor. The income or expenses are then recognized over the expected average remaining service period of the employees.

An increase of one percentage point per year in healthcare costs would increase the accumulated post-employment benefit obligation as of December 31, 2012 by approximately 166, and the post-employment benefit expense for the period by approximately 8. A decrease of one percentage point would decrease the accumulated value of obligations by approximately 141 and reduce costs for the period by approximately 6. Calculations made as of December 31, 2012 show an annual increase of 8% in the weighted average per capita costs of covered health care benefits. It is assumed that the percentage will decline gradually to 4.5% until 2029 and subsequently remain at that level.
        Great US    
Obligations in Sweden US France Britain Other Other  
defined-benefit plans Pensions Pensions Pensions Pensions benefits plans Total
Obligations at January 1, 2011 9,144 12,998 1,605 4,226 3,441 4,707 36,121
Acquisitions, divestments and other changes (1) (2) 1 (2) (59) (3) (66)
Current year service costs 246 295 52 31 74 255 953
Interest costs 435 582 70 226 144 145 1,602
Past service costs              
– Unvested 4 9 1 14
– Vested 40 18 58
Termination benefits 77 (1) 26 102
Curtailments and settlements (8) (1) (69) (44) (7) (129)
Employee contributions 12 4 16
Actuarial (gains) and losses 2,434 925 136 52 115 39 3,701
Exchange rate translation 301 (12) 54 66 58 467
Benefits paid (315) (782) (86) (161) (169) (968) (2,481)
Obligations as of December 31, 2011 12,012 14,360 1,765 4,369 3,577 4,275 40,358
               
of which              
Funded defined-benefit plans 11,624 13,925 4,369 1,817 31,735
               
Acquisitions, divestments and other changes (1,362) (9) 84 0 (3) (45) (1,335)
Current year service costs 442 299 59 22 131 259 1,212
Interest costs 419 576 78 215 138 131 1,557
Past service costs - - - - - - -
– Unvested - - 1 - - (1) 0
– Vested - - - - 1 - 1
Termination benefits 21 - - - - 11 32
Curtailments and settlements (7) (1) - - 2 (122) (128)
Employee contributions - - 1 10 - 3 14
Actuarial (gains) and losses 1,315 1,546 169 390 312 382 4,114
Exchange rate translation - (879) (67) (81) (237) (298) (1,562)
Benefits paid (330) (763) (88) (185) (184) (241) (1,791)
Obligations as of December 31, 2012 12,510 15,129 2,002 4,740 3,737 4,354 42,472
               
of which              
Funded defined-benefit plans 10,934  14,645  4,740   - 2,675  33,000 
Fair value       Great US    
of plan assets in Sweden US France Britain Other Other  
funded plans Pensions Pensions Pensions Pensions benefits plans Total
Plan assets at January 1, 2011 7,078 9,535 4,393 24 1,924 22,954
Acquisitions, divestments and other changes 3 8 - - - 6 17
Expected return on plan assets 426 683 - 204 - 92 1,405
Actuarial gains and (losses) (681) (628) - 81 - (96) (1,324)
Employer contributions 756 829 - 91 - 410 2,086
Employee contributions - - - 12 - 7 19
Exchange rate translation - 178 - 60 - (18) 220
Benefits paid (2) (763) - (161) - (578) (1,504)
Plan assets as of December 31, 2011 7,580 9,842 - 4,680 24 1,747 23,873
               
Acquisitions, divestments and other changes (938) 1 6 - - (25) (956)
Expected return on plan assets 440 733 - 188 - 78 1,439
Actuarial gains and (losses) 133 391 - 147 - 27 698
Employer contributions 25 1,022 - 87 139 209 1,482
Employee contributions - - - 10 - 18 28
Exchange rate translation - (624) - (86) (1) (39) (750)
Benefits paid (1) (773) - (189) (139) (94) (1,196)
Plan assets as of December 31, 2012 7,239 10,592 6 4,837 23 1,921 24,618
Net provisions for       Great US    
post-employment Sweden US France Britain Other Other  
benefits Pensions Pensions Pensions Pensions benefits plans Total
Funded status at December 31, 2011 (4,432) (4,518) (1,765) 311 (3,553) (2,528) (16,485)
Unrecognized actuarial (gains) and losses 4,569 5,509 333 341 434 753 11,939
Unrecognized past service costs - (54) 276 - - - 222
Net provisions for post-employment benefits as of December 31, 2011 137 937 (1,156) 652 (3,119) (1,775) (4,324)
               
Whereof related to Assets held for sale1) 77 - - - - (13) 64
Net provision for post-employment benefits excluding Assets held for sale 60 937 (1,156) 652 (3,119) (1,762) (4,388)
               
of which reported as              
Prepaid pensions 60 1,381 - 652 102 82 2,277
Provisions for post-employment benefits - (444) (1,156) - (3,221) (1,844) (6,665)
               
Funded status as of December 31, 2012 (5,271) (4,537) (1,996) 97 (3,714) (2,433) (17,854)
Unrecognized actuarial (gains) and losses 5,049 5,984 478 572 638 912 13,633
Unrecognized past service costs - (44) 257 (5) (2) 42 248
Net provisions for post-employment benefits as of December 31, 2012 (222) 1,403 (1,261) 664 (3,078) (1,479) (3,973)
               
of which reported as              
Prepaid pensions 57 1,818 - 670 89 90 2,724
Provisions for post-employment benefits (279) (415) (1,261) (6) (3,167) (1,569) (6,697)

1) As of December 31, 2011 pension obligation amounted to 1,394, plan assets amounted to 926 and unrecognized actuarial losses amounted to 532 in regards to Assets held for sale.

Plan assets by category 2011
Plan assets by category 2012

Actual return on plan assets amounted to 2,124 (81).

Actuarial gains and losses 2012 2011
Experience-based adjustments in obligations (412) (3,492)
Experience-based adjustments in plan assets 698 (1,324)
Effects of changes in actuarial assumptions (3,702) (209)
Actuarial gains and (losses), net (3,416) (5,025)

The Volvo Group’s pension foundation in Sweden was formed in 1996 to secure obligations relating to retirement pensions for salaried employees in Sweden in accordance with the ITP plan (a Swedish individual pension plan). Plan assets amounting to 2,456 were contributed to the foundation at its formation, corresponding to the value of the pension obligations at that time. Since its formation, net contributions of 2,253, whereof 25 during 2012, have been made to the foundation. The plan assets in the Volvo Group’s Swedish pension foundation are invested in Swedish and foreign stocks and mutual funds, and in interest-bearing securities, in accordance with a distribution that is determined by the foundation’s Board of Directors. As of December 31, 2012, the fair value of the foundation's plan assets amounted to 7,217 (7,554), of which 31% (31) was invested in shares or mutual funds. At the same date, retirement pension obligations attributable to the ITP plan amounted to 12,140 (11,624).

Swedish companies can secure new pension obligations through balance-sheet provisions or pension-fund contributions. Furthermore, a credit insurance policy must be taken out for the value of the obligations. In addition to benefits relating to retirement pensions, the ITP plan also includes, for example, a collective family pension, which the Volvo Group finances through an insurance policy with the Alecta insurance company. According to an interpretation from the Swedish Financial Reporting Board, this is a multi-employer defined-benefit plan. For fiscal year 2012, the Volvo Group did not have access to information from Alecta that would have enabled this plan to be reported as a defined-benefit plan. Accordingly, the plan has been recognized as a defined-contribution plan. Alecta's funding ratio is 129% (113).

Volvo Group’s subsidiaries in the United States mainly secure their pension obligations through transfer of funds to pension plans. At the end of 2012, the total value of pension obligations secured by pension plans of this type amounted to 14,645 (13,925). At the same point in time, the total value of the plan assets in these plans amounted to 10,592 (9,842), of which 54% (54) was invested in shares or mutual funds. The regulations for securing pension obligations stipulate certain minimum levels concerning the ratio between the value of the plan assets and the value of the obligations. During 2012, Volvo Group contributed 1,022 (829) to the American pension plans.

During 2012, the Volvo Group has made extra contributions to the pension plans in Great Britain in the amount of 87 (91).

In 2013, the Volvo Group estimates to transfer an amount of about SEK 1 billion to pension plans.