Pensions and postretirement benefits

Defined-benefit plans

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 plans. The benefits provided by these plans are based on employees’ years of service and compensation levels. The measurement date for all defined-benefit plans is December 31.

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

Change in accounting policy

As a result of the change in the pension accounting policy by adopting the option available under IAS 19 paragraph 93A, previously unrecognized actuarial gains and losses are recognized in full and recorded in the Statement of recognized income and expenses (Sorie). IFRIC 14, which was early adopted on January 1, 2008, clarified the extent to which a defined benefit asset could be recognized in the financial statements. The combined impact of these two changes in accounting policy at January 1, 2006, reduced the overall net pension liability recognized in the financial statements by EUR 1,216 million (pre-tax).

Summary of pre-tax costs for pensions and other post retirement benefits

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.

Movement in plan assets:

The unrecognized net assets in 2008 are primarily related to the capped prepaid pension asset in the Netherlands, in 2007 primarily to the capped prepaid in Brazil.

The classification of the net balance is as follows:

Cumulative amount of actuarial (gains) and losses recognized in the statement of recognized income and expense (pre tax):

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 the 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 Company's pension plan asset allocation in other countries at December 31, 2007 and December 31, 2008 is shown in the table below. This table also shows the target allocation for 2009:

Plan assets include property occupied by the Philips Group with a fair value of EUR 12 million (2007: EUR 12 million).

Pension expense of defined-benefit plans recognized in the income statement:

Amounts recognized in the Statement of recognized income and expenses (Sorie):

The pension expense of defined-benefit plans is recognized in the following line items:

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

Philips expects considerable cash outflows in relation to employee benefits which are estimated to amount to EUR 414 million in 2009, 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.

Expected returns per asset class are based on the assumption that asset valuations tend to return to their respective long-term equilibria. The Expected Return on Assets for any funded plan equals the average of the expected returns per asset class weighted by their portfolio weights in accordance with the fund's strategic asset allocation.

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 years ended December 31:

Defined-benefit plans: other postretirement benefits

In addition to providing pension benefits, the Company provides other postretirement benefits, primarily retiree healthcare benefits, in certain countries. The Company funds those other postretirement benefit plans as claims are incurred.

Movements in the net liability for other defined-benefit obligations:

Cumulative amount of actuarial (gains) and losses recognized in the statement of recognized income and expense (pre tax):

Other postretirement benefit expense recognized in the income statement:

Amounts recognized in the Statement of recognized income and expenses (Sorie):

The expense for other postretirement benefits is recognized in the following line items in the income statement:

The weighted average assumptions used to calculate the postretirement benefit obligations other than pensions as of December 31 were as follows:

The weighted average assumptions used to calculate the net cost for years ended December 31:

Assumed healthcare cost trend rates at December 31:

Sensitivity analysis

Assumed healthcare trend rates have a significant effect on the amounts reported for the healthcare plans. A one percentage-point change in assumed healthcare cost trend rates would have the following effects as at December 31, 2008: