| PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS | 30) PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS
a) Accounting policy
The Company and its subsidiaries individually sponsor pension funds of post-retirement benefits for active and retired employees, in addition to a multisponsor supplementary retirement plan and health care plan for former employees. Contributions are determined on an actuarial basis and recorded on an accrual basis. Liabilities relating to defined benefit plans are determined based on actuarial evaluations at each year-end, in order to ensure that sufficient reserves have been set up for both current and future commitments.
Actuarial liabilities related to defined benefit plans were calculated using the projected unit credit method. Actuarial gains and losses are recognized immediately in equity (in other comprehensive income).
For plans with defined contribution characteristics, the obligation is limited to the contributions payable, which are recognized in the P&L in the respective accrual periods.
The asset or liability related to defined benefit plan to be recognized in the financial statements corresponds to the present value of the obligation for the defined benefit (using a discount rate based on long-term National Treasury Notes - “NTNs”), less the fair value of plan assets that will be used to settle the obligations. Plan assets are assets held by a privately held supplementary pension plan entity. Plan assets are not available to the Company’s creditors or those of its subsidiaries and cannot be paid directly to the Company or its subsidiaries. The fair value is based on information on market prices and, in the case of securities quoted, on the purchase price disclosed. The value of any defined benefit asset then recognized is limited to the present value of any economic benefits available as a reduction in future plan contribution from the Company.
Actuarial costs recognized in the statement of income are limited to the service cost and cost of interest on the defined benefit plan obligation. Any changes in the measurement of plan assets and obligations are initially recognized in other comprehensive income, and immediately reclassified to retained earnings in P&L.
The Company and its subsidiaries manage and individually sponsors a health care plan for retired employees and former employees with fixed contributions to the plan, in accordance with Law No. 9656/98 (which provides for private health care and health insurance plans). As provided for in Articles 30 and 31 of said law, participants shall have the right to the health care plan in which they participated while they were active employees.
b) Critical estimates and judgments
The cost of pension plans with defined benefits and other post-employment health care benefits and the present value of the pension obligation are determined using actuarial valuation methods. Actuarial valuation involves use of assumptions about discount rates, future salary increases, mortality rates and future increases in pension and annuity benefits. The obligation for defined benefits is highly sensitive to changes in these assumptions. All assumptions are reviewed on an annual basis.
The mortality rate is based on publicly available mortality tables in the country. Future salary increases, and pension increases are based on expected future inflation rates for the country.
c) Information on pension plans and other post-employment benefits
The plans sponsored by the Company and its subsidiaries and the related benefit types are as follows:
Plan
Type
Entity
Sponsor
PBS-A
Defined benefit (DB)
Sistel
Telefônica Brasil, jointly with other telecoms resulting from privatization of the Sistema Telebrás
PAMA / PCE
Defined benefit (DB)
Sistel
Telefônica Brasil, jointly with other telecoms resulting from privatization of the Sistema Telebrás
Healthcare - Law No. 9656/98
Defined benefit (DB)
Telefônica Brasil
Telefônica Brasil, Terra Networks, TGLog and TIS
CTB
Defined benefit (DB)
Telefônica Brasil
Telefônica Brasil
Telefônica BD
Defined benefit (DB)
VisãoPrev
Telefônica Brasil
VISÃO
Defined contribution (DC) / Hybrid
VisãoPrev
Telefônica Brasil, Terra Networks, TGLog and TIS
The Company has participation in the decisions that directly affect the governance of the plans, with members nominated for both the Deliberative Council and the Fiscal Council of the administrators Sistel and Visão Prev.
The defined benefit obligation is made up of different components, according to the pension characteristic of each plan, and may include the actuarial liabilities of supplementary pension liabilities, health care benefits to retirees and dependents or compensation for death or disability of members. This liability is exposed to economic and demographic risks, such as: (i) increases in medical costs that could impact the cost of health care plans; (ii) salary growth; (iii) long-term inflation rate; (iv) nominal discount rate; and (v) life expectancy of members and pensioners.
The fair value of plan assets is primarily comprised of fixed income investments (NTN's, LFT’s, LTN's, repurchase agreements, CDBs, debentures, letters of guarantee and FIDC shares) and equity investments (highly liquid, well regarded, large company shares and investments in market indices).
Due to the concentration of fixed income and floating rate investments plan assets are mainly exposed to the risks inherent in the financial market and economic environment such as: (i) market risk in the economic sectors where variable income investments are concentrated; (ii) risk events that impact the economic environment and market indices where variable income investments are concentrated; and (iii) the long-term inflation rate that may erode the profitability of fixed income investments at fixed rates.
The companies that administer post-employment benefits plans sponsored by the Company (Visão Prev and Sistel) seek to meet the flows of assets and liabilities through the acquisition of fixed income securities and other long-term assets.
With the exception of the Companhia Telefônica Brasileira ("CTB") and the healthcare plan under Law No. 9656/98, generally all benefit plans that have funds constituted present a surplus position. The economic benefit recorded in the Company's assets or that of its subsidiaries does not reflect the total surplus determined in these plans. The economic benefit stated under assets considers only the portion of the surplus which presents a real possibility of recovery. The means of plan surplus recovery is solely through reductions in future contributions and given that not all plans currently receive enough contributions for full recovery of surpluses, the economic benefit recorded under assets is limited to the total possible recovery amount in accordance with projected future contributions.
The position of plan assets is on December 31, 2020 and 2019, respectively, and plan assets were apportioned based on the Company’s actuarial liabilities in relation to the total actuarial liabilities of the plan.
The actuarial gains and losses generated in each year are immediately recognized in equity (in other comprehensive income).
The following is a summary of the pension plans and other post-employment benefits:
c.1) Post-Employment Health Benefits Plans
The actuarial valuation made for the PAMA health plan used the registration of the participants with a base date of August 31, 2020, while the actuarial valuation made for the health plan Law No. 9,656/98 used the registration of the participants with a base date of September 30, 2020, both plans projected for December 31, 2020. For comparative exercises, the actuarial valuation made for the PAMA health plan and health plan Law No. 9,656/98 used the registration of the participants with a base date of December 31, 2019, both plans projected for December 31, 2019.
c.1.1) Healthcare Plan to Retirees and Special Coverage Program (PAMA and PAMA-PCE)
The Company, together with other companies of the former Telebrás System, at shared cost, sponsor health care plans (PAMA and PAMA-PCE) to retirees. These plans are managed by Fundação Sistel and are closed plans, not admitting new members.
Contributions to the plans are determined based on actuarial valuations prepared by independent actuaries, in accordance with the rules in force in Brazil. The funding procedure is the capitalization method and the sponsor’s contribution are at the fixed percentage of payroll of employees covered by the Telefônica BD plan.
c.1.2) Health care plan – Law No. 9656/98
The Company manages and together with its subsidiaries sponsors a health care plan to retired employees and former employees with fixed contributions to the plan, in accordance with Law No. 9656/98.
As provided for in Articles 30 and 31 of said law, participants shall have the right to the health care plan in which they participated while they were active employees. Benefitted participants are classified as (i) retirees and their dependents; and (ii) dismissed employees and their dependents.
Retirees and dismissed employees, in order to keep their right to the benefits, must make contributions to the plan in accordance with the contribution tables by age bracket established by carriers and/or insurance companies.
c.2) Post-employment Social Security Plans
The actuarial valuation made for the pension plan (CTB, PBS-A, Telefônica BD and Visão Plans) used the registration of the participants with a base date of July 31, 2020, projected for December 31, 2020 and the registration of the participants with a base date of July 31, 2019, projected for December 31, 2019.
They include the PBS Assisted Plans (“PBS-A"), CTB, Telefônica DB and Visão.
c.2.1) PBS Assisted Plan (PBS-A)
The PBS-A plan is a defined benefit private pension plan managed by Sistel and sponsored by the Company jointly with the other telecommunications companies originating in the privatization of the Telebrás System. The plan is subject to funding by sponsors in the case of any asset insufficiency to ensure pension supplementation of participants in the future.
The PBS-A plan comprises assisted participants of the Sistel Benefit Plan who were already retirees on January 31, 2000, from all the participating sponsors, with joint liability of all sponsors to the plan and Sistel.
According to PREVIC Ordinance No. 1,061, of December 5, 2019, published in the DOU on December 9, 2019, Sistel approved the distribution of part of its surplus, in the form of PBS-A's special reserve, with reversal of values to sponsors and improvement of benefits, in the form of temporary income, to those assisted.
The participation corresponding to the Company in the distribution of this reserve was calculated in the amount of R$215,328, with expected distribution in the form of 36 monthly payments, corrected by the plan's income (Note 10).
Even considering the distribution of the reserve approved by PREVIC, PBS-A still has assets in excess of actuarial obligations as of December 31, 2020 and 2019. These surpluses were not recognized due to the lack of legal provision for their reimbursement and, as they are not a contributory plan, no deduction is possible in future contributions.
c.2.2) CTB Plan
Contributions to the CTB plan are determined based on actuarial valuations prepared by independent actuaries, in accordance with the rules in force in Brazil. The funding procedure is the capitalization method and the sponsor’s contribution are a fixed percentage of payroll of employees covered by the plan.
The Company also individually manages and sponsors the CTB plan, originally provided to former employees of CTB who were in the Company in 1977, with whom an individual retirement concession agreement was executed to encourage their resignation. This is an informal pension supplementation benefit paid to former employees directly by the Company. These plans are closed, and no other members are admitted .
c.2.3) Telefônica DB Plan
The Company individually sponsors a defined benefit retirement plan, the Telefônica DB plan.
In order to improve allocation of Telefônica DB plan assets and analyze the coverage ratio of plan obligations in future years, a stochastic ALM study was prepared by Visão Prev and Willis Towers Watson. This ALM study aimed at projecting the ratio between coverage of liabilities (solvency ratio) and the risk of mismatching measured by the standard deviation of the solvency ratio. The study concluded that the plan presents sustainable projection of their coverage ratio with the current investments’ portfolio.
At the time of the concession, a benefit is calculated, which will be paid in a lifelong form and updated by inflation. This plan is not open to new accessions.
The contributions are defined according to the costing plan, which is calculated considering financial, demographic and economic hypotheses in order to accumulate enough resources to pay the benefits to the participants who are already receiving them, and to the new pensions.
c.2.4) VISÃO Plans
The Visão Telefônica and Visão Multi plans will hereinafter be shown jointly under the name VISÃO, due to their similarity.
The Company and its subsidiaries sponsor defined contribution pension plans with defined benefit components (hybrid plans), i.e. the VISÃO Plans, managed by Visão Prev. The contribution is attributed to each subsidiary in the economic and demographic proportion of its respective obligation to the plan.
The contributions made by the Company and subsidiaries related to defined contribution plans totaled R$40,983 on December 31, 2020 (R$27,963 on December 31, 2019).
The contributions to the Visão Telefônica and Visão Multi plans are: (i) basic and additional contribution, with contributions made by the participant and sponsor; and (ii) additional, sporadic and specific contribution, with contributions made only by the participant.
In addition, the participant has the possibility to choose one of five investment profiles to apply to their balance, and they are: Super Conservative, Conservative, Moderate, Aggressive and Aggressive Fixed Income Long-Term.
c.3) Consolidated information on pension plans and other post-employment benefits
c.3.1) Reconciliation of net liabilities (assets):
12.31.20
12.31.19
Post-retirement
Post-retirement
Post-retirement
Post-retirement
pension plans
health plans
Total
pension plans
health plans
Total
Present value of DB plan obligations
2,238,700
1,863,359
4,102,059
2,429,478
2,016,614
4,446,092
Fair value of plan assets
3,411,297
1,004,048
4,415,345
3,696,914
1,001,112
4,698,026
Net liabilities (assets)
(1,172,597)
859,311
(313,286)
(1,267,436)
1,015,502
(251,934)
Asset limitation
1,081,325
21,480
1,102,805
1,128,691
57,371
1,186,062
Current assets
(82,935)
—
(82,935)
(71,776)
—
(71,776)
Non-current assets
(82,127)
—
(82,127)
(149,163)
—
(149,163)
Current liabilities
6,475
15,680
22,155
6,937
18,620
25,557
Non-current liabilities
67,315
865,111
932,426
75,257
1,054,253
1,129,510
c.3.2) Total expenses recognized in the statement of income:
2020
2019
2018
Post-
Post-
Post-
Post-
Post-
Post-
retirement
retirement
retirement
retirement
retirement
retirement
pension plans
health plans
Total
pension plans
health plans
Total
pension plans
health plans
Total
Current service cost
3,036
26,576
29,612
3,155
16,293
19,448
2,931
13,722
16,653
Net interest on net actuarial assets/liabilities
(10,385)
82,151
71,766
5,713
56,612
62,325
6,074
45,892
51,966
Total
(7,349)
108,727
101,378
8,868
72,905
81,773
9,005
59,614
68,619
c.3.3) Amounts recognized in other comprehensive income (loss)
2020
2019
2018
Post-
Post-
Post-
Post-
Post-
Post-
retirement
retirement
retirement
retirement
retirement
retirement
pension plans
health plans
Total
pension plans
health plans
Total
pension plans
health plans
Total
Actuarial (losses) gains
114,556
(256,010)
(141,454)
(188,889)
412,416
223,527
(186,170)
184,527
(1,643)
Asset limitation effect
(128,320)
(40,137)
(168,457)
(24,297)
2,430
(21,867)
188,259
(93,125)
95,134
Total
(13,764)
(296,147)
(309,911)
(213,186)
414,846
201,660
2,089
91,402
93,491
c.3.4) Changes in amount net of liability (asset) of defined benefit, net
12.31.20
12.31.19
Post-retirement
Post-retirement
Post-retirement
Post-retirement
pension plans
health plans
Total
pension plans
health plans
Total
Net defined benefit liability (asset) at the beginning of the year
(138,745)
1,072,873
934,128
68,368
600,113
668,481
Business combinations
—
—
—
—
1,994
1,994
Expenses
(7,349)
108,727
101,378
8,868
72,905
81,773
Sponsor contributions
(8,229)
(4,662)
(12,891)
(8,776)
(16,985)
(25,761)
Amounts recognized in OCI
(13,764)
(296,147)
(309,911)
(213,186)
414,846
201,660
Distribution of reserves
76,815
—
76,815
5,981
—
5,981
Net defined benefit liability (asset) at the end of the year
(91,272)
880,791
789,519
(138,745)
1,072,873
934,128
Actuarial assets per balance sheet
(165,062)
—
(165,062)
(220,939)
—
(220,939)
Actuarial liabilities per balance sheet
73,790
880,791
954,581
82,194
1,072,873
1,155,067
c.3.5) Changes in defined benefit liability
12.31.20
12.31.19
Post-retirement
Post-retirement
Post-retirement
Post-retirement
pension plans
health plans
Total
pension plans
health plans
Total
Defined benefit liability at the beginning of the year
2,429,478
2,016,614
4,446,092
2,011,355
1,313,157
3,324,512
Liability assumed after acquisition of company
—
—
0
—
1,994
1,994
Current service costs
3,036
26,576
29,612
3,155
16,293
19,448
Interest on actuarial liabilities
167,991
150,510
318,501
175,695
121,088
296,783
Benefits paid
(171,177)
(48,101)
(219,278)
(165,929)
(53,724)
(219,653)
Member contributions paid
346
—
346
323
—
323
Actuarial losses (gains) adjusted by experience
(70,783)
(33,088)
(103,871)
93,699
226,928
320,627
Actuarial losses (gains) adjusted by demographic assumptions
(8,378)
(52,071)
(60,449)
—
(44,249)
(44,249)
Actuarial losses (gains) adjusted by financial assumptions
(111,813)
(197,081)
(308,894)
311,180
435,127
746,307
Defined benefit liability at the end of the year
2,238,700
1,863,359
4,102,059
2,429,478
2,016,614
4,446,092
c.3.6) Changes in the fair value of plan assets
12.31.20
12.31.19
Post-retirement
Post-retirement
Post-retirement
Post-retirement
pension plans
health plans
Total
pension plans
health plans
Total
Fair value of plan assets at the beginning of the year
3,696,914
1,001,112
4,698,026
2,999,669
763,325
3,762,994
Benefits paid
(164,587)
(43,477)
(208,064)
(159,001)
(36,774)
(195,775)
Participants contributions paid
346
—
346
323
—
323
Sponsor contributions paid
1,638
38
1,676
1,848
35
1,883
Interest income on plan assets
259,331
72,604
331,935
266,287
69,137
335,424
Return on plan assets excluding interest income
(305,530)
(26,229)
(331,759)
593,769
205,389
799,158
Distribution of reserves
(76,815)
—
(76,815)
(5,981)
—
(5,981)
Fair value of plan assets at the end of the year
3,411,297
1,004,048
4,415,345
3,696,914
1,001,112
4,698,026
c.3.7) Changes in asset limitation
12.31.20
12.31.19
Post-retirement
Post-retirement
Post-retirement
Post-retirement
pension plans
health plans
Total
pension plans
health plans
Total
Asset Limitation at the beginning of the year
1,128,691
57,371
1,186,062
1,056,682
50,281
1,106,963
Interest on the asset limitation
80,954
4,246
85,200
96,306
4,661
100,967
Changes in the assets limitation, except interest
(128,320)
(40,137)
(168,457)
(24,297)
2,429
(21,868)
Asset Limitation at the end of the year
1,081,325
21,480
1,102,805
1,128,691
57,371
1,186,062
c.3.8) Results projected for 2021
Post-retirement
Post-retirement
pension plans
health plans
Total
Current service cost
2,183
21,361
23,544
Net interest on net defined benefit liability/asset
7,062
70,436
77,498
Total
9,245
91,797
101,042
c.3.9) Sponsoring company contributions projected for 2021
Post-retirement
Post-retirement
pension plans
health plans
Total
Sponsor contributions
1,670
6,475
8,145
Benefits paid directly by the sponsor
—
15,686
15,686
Total
1,670
22,161
23,831
c.3.10) Average weighted duration of defined benefit liability
Post-retirement
Post-retirement
pension plans
health plans
In 2020
7.9
years
16.3
years
In 2019
8.3
years
18.1
years
c.3.11) Actuarial assumptions
12.31.20
Post-retirement pension plans
Post-retirement health plans
Discount rate to present value of defined benefit liability
Visão: 6.4% /
PAMA and PCE: 7.7% / Law 9.656/98: 7.9%
Future salary growth rate
CTB and PBS-A: N/A /
N/A
Medical expense growth rate
N/A
Nominal annual adjustment rate of pension benefits
N/A
Medical service eligibility age
N/A
Female participants: 59 years
Estimated retirement age
PBS-A, CTB and Telefônica BD: 57 years
Female participants: 59 years
Mortality table for nondisabled individuals
PBS-A, CTB and Telefônica BD: AT-2000 Basic segregated by
AT-2000 Basic segregated by gender, down-rated by 10%
Mortality table for disabled individuals
PBS-A, CTB and Telefônica BD: RP-2000 Disabled Male, down-rated by 60% Visão: N/A
PAMA and PCE: RP-2000 Disabled Male, down-rated by 40% Law 9.656/98: RP-2000 Disabled Male, down-rated by 60%
Disability table
Telefônica BD: Light-Forte PBS-A and CTB: N/A Visão Telefônica: Álvaro Vindas, down-rated by 50% Visão: Light-Fraca, down rated by 50%
Light-Forte
Turnover
PBS-A, CTB and Telefônica BD: N/A
PAMA and PCE: N/A
Further to the assumptions stated above, other assumptions common to all plans were adopted in 2020 as follows: (i) Long-term inflation rate 3.5%; and (ii) Annual increase in the use of medical services according to age: 4.0%.
12.31.19
Post-retirement pension plans
Post-retirement health plans
Discount rate to present value of defined benefit liability
Visão: 6.6% / PBS-A and Telefônica BD: 7.2% / CTB: 7.0%
PAMA and PCE: 7.4% / Law 9.656/98: 7.5%
Future salary growth rate
CTB and PBS-A: N/A / Visão and Telefônica BD: 5.5%
N/A
Medical expense growth rate
N/A
Nominal annual adjustment rate of pension benefits
N/A
Medical service eligibility age
N/A
Female participants: 59 years
Estimated retirement age
PBS-A, CTB and Telefônica BD: 57 years
Female participants: 59 years
Mortality table for nondisabled individuals
PBS-A, CTB and Telefônica BD: AT-2000 Basic segregated by
AT-2000 Basic segregated by gender, down-rated by 10%
Mortality table for disabled individuals
PBS-A, CTB and Telefônica BD: RP-2000 Disabled Female, down-rated by 40% Visão: N/A
RP-2000 Disabled Female, down-rated by 40%
Disability table
Telefônica BD: Light-Forte / PBS-A and CTB: N/A / Visão: Light-Fraca, down rated by 30%
Light-Forte
Turnover
PBS-A, CTB and Telefônica BD: N/A
PAMA and PCE: N/A
Further to the assumptions stated above, other assumptions common to all plans were adopted in 2019 as follows: (i) Long-term inflation rate 3.8%; and (ii) Annual increase in the use of medical services according to age: 4.0%.
c.3.12) Changes in actuarial assumptions in relation to the prior year
In order to adjust some actuarial assumptions to the economic and demographic reality, a study was conducted for the plans administered by Visão Prev and Sistel, which adopted the definition of the assumptions in their Deliberative Councils.
The main economic and financial assumptions that have changed in relation to the previous fiscal year and that interfere with the defined benefit liability are: (i) rates for discount to present value of the defined benefit liability; (ii) long-term inflation rate; (iii) rate of future wage growth; (iv) rate of growth of medical costs; and (v) annual nominal index of adjustment of social security benefits.
The impacts on the plans’ defined benefit liabilities due to the new definition of the actuarial assumptions are as follows:
Post-retirement
Post-retirement
pension plans
health plans
Total
Defined benefit liability, based on current actuarial assumptions
2,238,700
1,863,359
4,102,059
Defined benefit liability, based on prior-year actuarial assumptions
2,358,891
2,112,510
4,471,401
Difference from change in actuarial assumptions
(120,191)
(249,151)
(369,342)
c.3.13) Sensitivity analysis for actuarial assumptions
The Company believes that the significant actuarial assumptions with reasonable likelihood of variation due to financial and economic scenarios, which could significantly change the amount of the defined benefit obligation, are the discount rate used to adjust the defined benefit liability to present value and the rate of growth of medical costs.
Sensitivity analysis of the defined benefit liability for scenarios involving a 0.5% increase and a 0.5% decrease in the discount rate used to discount the defined benefit liability to present value is as follows:
Post-retirement
Post-retirement
pension plans
health plans
Total
Defined benefit liability, discounted to present value at current rate
2,238,700
1,863,359
4,102,059
Defined benefit liability, discounted to present value considering a rate increased by 0.5%
2,152,416
1,729,350
3,881,766
Defined benefit liability, discounted to present value considering a rate decreased by 0.5%
2,332,035
2,012,077
4,344,112
The following is a sensitivity analysis of the defined benefit obligation for scenarios of 1% increase and 1% reduction in the rate of growth of medical costs:
Post-retirement
Post-retirement
pension plans
health plans
Total
Defined benefit liability, projected by the current medical cost growth rate
2,238,700
1,863,359
4,102,059
Defined benefit liability, projected by the current medical cost growth considering a rate increased by 1%
2,238,700
2,176,479
4,415,179
Defined benefit liability, projected by the current medical cost growth considering a rate decreased by 1%
2,238,700
1,611,501
3,850,201
c.3.14) Allocation of plan assets
12.31.20
12.31.19
Post-retirement
Post-retirement
Post-retirement
Post-retirement
pension plans
health plans
pension plans
health plans
Investments with market value quoted in active market:
Fixed income investments
National Treasury Note (NTN)
2,878,204
938,986
3,067,926
940,144
Treasury Financial Letter
183,744
65,062
270,676
60,968
Repurchase operations
171,534
—
172,895
—
Debentures
22,104
—
16,818
—
Treasury Financial Letter (LFT)
15,099
—
14,238
—
FIDC shares / Others
22,815
—
24,517
—
National Treasury Notes (LTN)
167
—
282
—
Variable income investments
Investments linked to funds and market indexes
5,678
—
6,265
—
Investments in other sectors
286
—
622
—
Real estate investments
90,325
—
100,701
—
Loans to participants
19,374
—
19,870
—
Structured and overseas investments
1,967
—
2,104
—
Total
3,411,297
1,004,048
3,696,914
1,001,112 |
