| PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS | 31) 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. 9656/1998 (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. 9656/1998 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, TIS and Cloud Co 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 Visão Prev Sociedade de Previdência Complementar (“Visão Prev”) and Fundação Sistel de Seguridade Social (“Sistel”). 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, as it only 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, 2021 and 2020, 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 July 31, 2021, 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 August 31, 2021, both plans projected for December 31, 2021. For comparative exercises, 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. 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. 9656/1998 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, 2021, projected for December 31, 2021 and the registration of the participants with a base date of July 31, 2020, projected for December 31, 2020. 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 11). Even considering the distribution of the reserve approved by PREVIC, PBS-A still has assets in excess of actuarial obligations as of December 31, 2021 and 2020. 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 the defined benefit retirement, 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 Application Lifecycle Management (“ALM”) 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 In 2021, the Visão Telefônica and Visão Multi plans, due to their similarity, are now shown together under the name Visão. The Company and its subsidiaries sponsor defined contribution plans with defined benefit components (hybrid plans) and pension benefits, 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$54,592 on December 31, 2021 (R$40,983 on December 31, 2020). 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) 12.31.21 12.31.20 Post-retirement Post-retirement Post-retirement Post-retirement pension plans health plans Total pension plans health plans Total Present value of DB plan obligations 2,066,175 1,401,044 3,467,219 2,238,700 1,863,359 4,102,059 Fair value of plan assets 3,310,273 860,165 4,170,438 3,411,297 1,004,048 4,415,345 Net liabilities (assets) (1,244,098) 540,879 (703,219) (1,172,597) 859,311 (313,286) Asset limitation 1,217,739 40,146 1,257,885 1,081,325 21,480 1,102,805 Current assets (90,538) — (90,538) (82,935) — (82,935) Non-current assets (4,613) — (4,613) (82,127) — (82,127) Current liabilities 7,146 12,800 19,946 6,475 15,680 22,155 Non-current liabilities 61,646 568,225 629,871 67,315 865,111 932,426 c.3.2) Total expenses recognized in the statement of income 2021 2020 2019 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 2,184 21,361 23,545 3,036 26,576 29,612 3,155 16,293 19,448 Net interest on net actuarial assets/liabilities (7,062) 70,436 63,374 (10,385) 82,151 71,766 5,713 56,612 62,325 Total (4,878) 91,797 86,919 (7,349) 108,727 101,378 8,868 72,905 81,773 c.3.3) Amounts recognized in other comprehensive income (loss) 2021 2020 2019 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) (70,083) (399,872) (469,955) 114,556 (256,010) (141,454) (188,889) 412,416 223,527 Asset limitation effect 56,024 17,008 73,032 (128,320) (40,137) (168,457) (24,297) 2,430 (21,867) Total (14,059) (382,864) (396,923) (13,764) (296,147) (309,911) (213,186) 414,846 201,660 c.3.4) Changes in amount net of liability (asset) of defined benefit, net 12.31.21 12.31.20 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 (91,272) 880,791 789,519 (138,745) 1,072,873 934,128 Expenses (4,878) 91,797 86,919 (7,349) 108,727 101,378 Sponsor contributions (8,071) (8,699) (16,770) (8,229) (4,662) (12,891) Amounts recognized in OCI (14,059) (382,864) (396,923) (13,764) (296,147) (309,911) Distribution of reserves 91,921 — 91,921 76,815 — 76,815 Net defined benefit liability (asset) at the end of the year (26,359) 581,025 554,666 (91,272) 880,791 789,519 Actuarial assets per balance sheet (95,151) — (95,151) (165,062) — (165,062) Actuarial liabilities per balance sheet 68,792 581,025 649,817 73,790 880,791 954,581 c.3.5) Changes in defined benefit liability 12.31.21 12.31.20 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 2,238,700 1,863,359 4,102,059 2,429,478 2,016,614 4,446,092 Current service costs 2,184 21,361 23,545 3,036 26,576 29,612 Interest on actuarial liabilities 160,140 144,463 304,603 167,991 150,510 318,501 Benefits paid (175,863) (52,570) (228,433) (171,177) (48,101) (219,278) Member contributions paid 336 — 336 346 — 346 Actuarial losses (gains) adjusted by experience 176,664 (316,034) (139,370) (70,783) (33,088) (103,871) Actuarial losses (gains) adjusted by demographic assumptions — — — (8,378) (52,071) (60,449) Actuarial losses (gains) adjusted by financial assumptions (335,986) (259,535) (595,521) (111,813) (197,081) (308,894) Defined benefit liability at the end of the year 2,066,175 1,401,044 3,467,219 2,238,700 1,863,359 4,102,059 c.3.6) Changes in the fair value of plan assets 12.31.21 12.31.20 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 3,411,297 1,004,048 4,415,345 3,696,914 1,001,112 4,698,026 Benefits paid (169,257) (43,912) (213,169) (164,587) (43,477) (208,064) Participants contributions paid 336 — 336 346 — 346 Sponsor contributions paid 1,465 40 1,505 1,638 38 1,676 Interest income on plan assets 247,591 75,686 323,277 259,331 72,604 331,935 Return on plan assets excluding interest income (89,238) (175,697) (264,935) (305,530) (26,229) (331,759) Distribution of reserves (91,921) — (91,921) (76,815) — (76,815) Fair value of plan assets at the end of the year 3,310,273 860,165 4,170,438 3,411,297 1,004,048 4,415,345 c.3.7) Changes in asset limitation 12.31.21 12.31.20 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 1,081,325 21,480 1,102,805 1,128,691 57,371 1,186,062 Interest on the asset limitation 80,390 1,658 82,048 80,954 4,246 85,200 Changes in the assets limitation, except interest 56,024 17,008 73,032 (128,320) (40,137) (168,457) Asset Limitation at the end of the year 1,217,739 40,146 1,257,885 1,081,325 21,480 1,102,805 c.3.8) Results projected for 2022 Post-retirement Post-retirement pension plans health plans Total Current service cost 1,857 13,667 15,524 Net interest on net defined benefit liability/asset (2,466) 51,628 49,162 Total (609) 65,295 64,686 c.3.9) Sponsoring company contributions projected for 2022 Post-retirement Post-retirement pension plans health plans Total Sponsor contributions 1,660 — 1,660 Benefits paid directly by the sponsor 7,092 12,807 19,899 Total 8,752 12,807 21,559 c.3.10) Average weighted duration of defined benefit liability Post- Post- retirement retirement pension plans health plans In 2021 8.4 years 14.3 years In 2020 7.9 years 16.3 years c.3.11) Actuarial assumptions 12.31.21 Post-retirement pension plans Post-retirement health plans Discount rate to present value of defined benefit liability Visão Multi: 8.6% Visão Telefônica: 8.56% PBS-A, Telefônica BD and CTB: 8.61% PAMA and PCE: 8.74% Lei 9.656/98: 8.78% Future salary growth rate CTB e PBS-A: N/A Visão Telefônica: 4.5% Visão Multi: 6.09% Telefônica BD: 4.32% N/A Medical expense growth rate N/A 6.35% Nominal annual adjustment rate of pension benefits 3.25% N/A Medical service eligibility age N/A Female participants: 59 years Male participants: 63 years Estimated retirement age PBS-A, CTB and Telefônica BD: 57 years Visão: 60 years Female participants: 59 years Male participants: 63 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 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 Light-Forte Turnover PBS-A, CTB and Telefônica BD: N/A PAMA and PCE: N/A Law No. 9656/1998: Turnover experience in VISÃO plans (2015 to 2017) Further to the assumptions stated above, other assumptions common to all plans were adopted in 2021 as follows: (i) Long-term inflation rate 3.25%; and (ii) Annual increase in the use of medical services according to age: 4.0%. 12.31.20 Post-retirement pension plans Post-retirement health plans Discount rate to present value of defined benefit liability Visão: 6.4% / PBS-A: 7.4% / Telefônica BD: 7.7% / CTB: 7.0% PAMA and PCE: 7.7% / Law 9.656/1998: 7.9% Future salary growth rate CTB and PBS-A: N/A / Visão telefônica: 4.8% / Visão Multi: 6.4% / Telefônica BD: 4.6% N/A Medical expense growth rate N/A 6.6% Nominal annual adjustment rate of pension benefits 3.5% N/A Medical service eligibility age N/A Female participants: 59 years Male participants: 63 years Estimated retirement age PBS-A, CTB and Telefônica BD: 57 years Visão: 60 years Female participants: 59 years Male participants: 63 years Mortality table for nondisabled individuals PBS-A, CTB and Telefônica BD: AT-2000 Basic segregated by gender, down-rated by 10% Visão: AT-2000 Basic segregated by gender, down-rated 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: PAMA and PCE: RP-2000 Disabled Male, down-rated by 40% Law 9.656/98: RP-2000 Disabled Male, down-rated by Disability table Telefônica BD: Light-Forte PBS-A and CTB: N/A Visão Telefônica: Álvaro Vindas, down-rated by Light-Forte Turnover PBS-A, CTB and Telefônica BD: N/A Visão: Turnover experience in VISÃO plans (2015 to 2017) PAMA and PCE: N/A Law No. 9656/1998: Turnover experience in VISÃO plans (2015 to 2017) 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%. 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- Post- retirement retirement pension plans health plans Total Defined benefit liability, based on current actuarial assumptions 2,066,175 1,401,044 3,467,219 Defined benefit liability, based on prior-year actuarial assumptions 2,402,161 1,660,579 4,062,740 Difference from change in actuarial assumptions (335,986) (259,535) (595,521) 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 2,066,175 1,401,044 3,467,219 Defined benefit liability, discounted to present value considering a rate increased by 0.5% 1,988,887 1,312,447 3,301,334 Defined benefit liability, discounted to present value considering a rate decreased by 0.5% 2,149,286 1,499,717 3,649,003 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 2,066,175 1,401,044 3,467,219 Defined benefit liability, projected by the current medical cost growth considering a rate increased by 1% 2,066,175 1,606,733 3,672,908 Defined benefit liability, projected by the current medical cost growth considering a rate decreased by 1% 2,066,175 1,232,625 3,298,800 c.3.14) Allocation of plan assets 12.31.21 12.31.20 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) 2,756,822 799,953 2,878,204 938,986 Treasury Financial Letter 222,907 59,352 183,744 65,062 Repurchase operations 136,725 — 171,534 — Debentures 29,278 — 22,104 — Financial Letter 883 — 15,099 — FIDC shares / Others 20,919 — 22,815 — National Treasury Notes (LTN) 23,379 860 167 — Variable income investments Investments linked to funds and market indexes 5,667 — 5,678 — Investments in other sectors — — 286 — Real estate investments 91,845 — 90,325 — Loans to participants 20,496 — 19,374 — Structured and overseas investments 1,352 — 1,967 — Total 3,310,273 860,165 3,411,297 1,004,048 |
