Pensions

Employee pension plans have been established in many countries in accordance with the legal requirements, customs and the local situation in the countries involved. The majority of employees in Europe and North America are covered by defined-benefit pension plans. The benefits provided by these plans are based on employees’ years of service and compensation levels. The measurement date for all defined-benefit pension plans is December 31.

The Company's contributions to the funding of defined-benefit plans are determined based upon various factors, including funded status, legal and tax considerations as well as local customs.

The Company funds certain defined-benefit pension plans as claims are incurred. The projected and accumulated benefit obligations for both unfunded defined-benefit pension plans and funded defined-benefit plans with accumulated benefit obligations in excess of the fair values of their plan assets, are presented in the table below. It also provides the respective aggregates of these fair values:

The table below provides a summary of the changes in the projected benefit obligations for defined-benefit pension plans and the fair value of their assets for 2008 and 2007. It also provides a reconciliation of the funded status of these plans to the amounts recognized in the consolidated balance sheets.

The weighted averages of the assumptions used to calculate the projected benefit obligations as of December 31 were as follows:

The weighted averages of the assumptions used to calculate the net periodic pension cost for the years ended December 31 were as follows:

The components of net periodic pension costs and amounts recognized in Other comprehensive income were as follows:

The Company also sponsors defined-contribution and similar types of plans for a significant number of salaried employees. The total cost of these plans amounted to EUR 96 million (2007: EUR 84 million, 2006: EUR 80 million). In 2008, the defined-contribution cost includes contributions to multi-employer plans of EUR 4 million (2007: EUR 4 million, 2006: EUR 4 million).

Cash flows

The Company expects considerable cash outflows in relation to employee benefits which are estimated to amount to EUR 414 million in 2009 (2008 actual: EUR 379 million), consisting of EUR 248 million employer contributions to defined-benefit pension plans, EUR 100 million employer contributions to defined-contribution pension plans, and EUR 66 million expected cash outflows in relation to unfunded pension plans. The employer contributions to defined-benefit pension plans are expected to amount to EUR 180 million for the Netherlands and EUR 68 million for other countries.

Estimated future pension benefit payments

The following benefit payments are expected:

Plan assets: investment policies/strategies

Investment policies are reviewed at least once per year. The resulting investment plans determine the strategic asset allocations, the constraints on any tactical deviation from such strategic allocations, and the constraints on amongst others geographical allocations and credit risk, and will be reflected in the investment guidelines to the respective investment managers. In order to keep the investment strategies in balance with pension obligations, asset-liability reviews are carried out at least once every three years. Generally, plan assets are invested in global equity and debt markets (with the exception of debt or equity instruments that have been issued by the Company or any of its subsidiaries) and property. Derivatives of equity and debt instruments may be used to realize swift changes in investment portfolios, to hedge against unfavorable market developments or to fine tune any matching of assets and liabilities.

Plan assets in the Netherlands

The Company’s pension plan asset allocation in the Netherlands at December 31, 2007 and 2008 was as follows:

The objective of the Matching portfolio is to match the interest rate sensitivity of the plan's real pension liabilities. The Matching portfolio is mainly invested in euro-denominated government bonds and investment grade debt securities and derivatives. Leverage or gearing is not permitted. The size of the Matching portfolio is supposed to be at least 70% of the fair value of the plan's real pension obligations (on the assumption of 2% inflation). The objective of the Return portfolio is to maximize returns within well-specified risk constraints. The long-term rate of return on total plan assets is expected to be 5.95% per annum, based on expected long-term returns on equity securities, debt securities, real estate and other investments of 8.3%, 4.0%, 6.5% and 5.0%, respectively.

Philips Pension Fund in the Netherlands

On November 13, 2007, various officials, on behalf of the Public Prosecutor’s office in The Netherlands, visited a number of offices of the Philips Pension Fund and the Company in relation to a widespread investigation into potential fraud in the real estate sector. The Company was notified that one former employee and one employee of an affiliate of the Company had been detained. This affiliate, Philips Real Estate Investment Management BV, managed the real estate portfolio of the Philips Pension Fund between 2002 and 2007. The investigation by the public prosecutor is concerned with the potential involvement of (former) employees of a number of Dutch companies with respect to fraud in the context of certain real estate transactions. Neither Philips Pension Fund nor any Philips entity is a suspect in this investigation. The Philips Pension Fund and Philips are cooperating with the authorities and have also started their own investigation. The investigators expect to finalize their report in early 2009. Formal notifications of suspected fraud have been filed with the public prosecutor against the (former) employees concerned and with our insurers. If any losses have been suffered, action will be taken to recover such losses from the responsible individuals or legal entities. At this time it is not possible to assess the outcome of this matter nor the potential consequences. At present it is management's assessment that this matter will not cause a decline in plan assets or an increase in pension costs in any material respect.

Plan assets in other countries

The pension plan asset allocations in other countries at December 31, 2007 and December 31, 2008 are shown in the table below. This table also shows the target allocation for 2009.

SFAS No. 158

In September 2006, SFAS No. 158 was issued. This statement requires an employer to recognize the funded status of a benefit plan - measured as the difference between plan assets at fair value and the benefit obligation - in the balance sheet.The offset of recognizing the funded status is recorded in accumulated other comprehensive income (within stockholders' equity). Additionally, the additional minimum pension liability and related intangible assets are derecognized upon adoption of this standard. The incremental effect of applying FASB Statement No. 158 on Accumulated other comprehensive income as of December 31, 2006, amounted to a decrease of EUR 477 million.