25. Provisions for employee benefits

Group companies provide post-employment benefi ts for their active employees and for retirees, either directly or by contributing to independently administered funds. The way these benefi ts are provided varies according to the legal, fi scal and economic conditions of each country in which the Group operates, the benefi ts generally being based on the employees’ remuneration and years of service.

Group companies provide post-employment benefi ts under defi ned contribution and defi ned benefi t plans. In the case of defi ned contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the Group has no further payment obligations. The entity recognizes the contribution cost when the employee has rendered his service and includes this cost by function in Cost of sales, Selling, general and administrative costs and Research and development costs. In 2014, these expenses , inclusive of social security contributions, totaled $698 million ($644 million in 2013).

Defi ned benefi t plans may be unfunded, or they may be wholly or partly funded by contributions made by an entity, and sometimes by its employees, into an entity, or fund, that is legally separate from the employer from which the employee benefi ts are paid. Benefi ts are generally payable under these plans after the completion of employment. The plans are classifi ed by the Group on the basis of the type of benefi t provided as follows: Healthcare plans, Pension plans and Other post-employment benefi ts.

Healthcare plans

The item Healthcare plans comprises obligations for healthcare and insurance plans granted to employees of the Group working in the United States and Canada (relating to Agricultural Equipment and Construction Equipment). These plans generally cover employees retiring on or after reaching the age of 55 who have had at least 10 years of service. CNH Industrial United States salaried and non-represented hourly employees and Canadian employees hired after January 1, 2001 and January 1, 2002, respectively, are not eligible for postretirement healthcare and life insurance benefi ts under the CNH Industrial plans. These benefi ts may be subject to deductibles, co-payment provisions and other limitations, and CNH Industrial has reserved the right to change or terminate these benefi ts, subject to the provisions of any collective bargaining agreement. Until December 31, 2006 these plans were fully unfunded; starting in 2007, the Group began making contributions on a voluntary basis to a separate and independently managed fund established to fi nance the North American healthcare plans.

Pension plans

The item Pension plans consists principally of the obligations of companies operating in the United States, in the United Kingdom and in Germany (towards certain employees and former employees of the Group).

Under these plans, a contribution is generally made to a separate fund (trust) which independently administers the plan assets. The Group’s funding policy is to contribute amounts to the plan equal to the amounts required to satisfy the minimum funding requirements prescribed by the laws and regulations of each individual country. Prudently the Group makes discretionary contributions in addition to the funding requirements. If these funds are overfunded, that is if they present a surplus compared to the requirements of law, the Group companies concerned could not be required to contribute to the plan in respect of a minimum performance requirement as long as the fund is in surplus.

The investment strategy varies by country depending on the circumstances of the underlying plan. Typically, less mature plan benefi t obligations are funded by using more equity securities as they are expected to achieve long-term growth while exceeding infl ation. More mature plan benefi t obligations are funded using more fi xed income securities as they are expected to produce current income with limited volatility. Risk management practices include the use of multiple asset classes and investment managers within each asset class for diversifi cation purposes.

Specific guidelines for each asset class and investment manager are implemented and monitored.

Other post-employment benefits

The item Other post-employment benefi ts mainly includes loyalty bonuses, which are due to employees who reach a specifi ed seniority and are generally settled when an employee leaves the company as well as the Italian employee leaving entitlements (TFR) for those benefi ts accruing up to December 31, 2006 as, after the legislation changes occurred in 2007, this scheme is classifi ed as a defi ned contribution plan.

Schemes included in this item are unfunded.

Provisions for employee benefi ts at December 31, 2014 and 2013 are as follows:

($ million)At December 31, 2014At December 31, 2013
Post-employment  benefits:    
Healthcare plans 1,136 1,010
Pension plans 958 848
Other 449 498
Total Post-employment benefits 2,543 2,356
Other provisions for employees 210 266
Other long-term employee benefits 78 91
Total Provision for employee benefits 2,831 2,713
Defined benefit plan assets 20 44
Total Defined benefit plan assets 20 44

The item Other provisions for employees consists of the best estimate at the balance sheet date of short-term employee benefi ts payable by the Group within twelve months from the end of the period in which the employees render the related service.

The item Other long-term employee benefi ts consists of the Group’s obligation for those benefi ts generally payable during employment on reaching a certain level of seniority in the company or when a specifi ed event occurs, and refl ects the probability of payment and the length of time over which this will be made.

In 2014 and in 2013 changes in Other provisions for employees and in Other long-term employee benefi ts are as follows:

($ million)At
December
31, 2013
ProvisionUtilizationChange in the scope
of consolidation and
other changes
At
December
31, 2014
Other provisions for employees 266 186 (230) (12) 210
Other long-term employee benefi ts 91 16 (10) (19) 78
Total 357 202 (240) (31) 288

($ million)At
December
31, 2012
ProvisionUtilizationChange in the scope
of consolidation and
other changes
At
December
31, 2013
Other provisions for employees 317 238 (274) (15) 266
Other long-term employee benefi ts 94 6 (12) 3 91
Total 411 244 (286) (12) 357

Post-employment benefi ts are calculated on the basis of the following main assumptions:

 Assumptions used to determine funded status at year-end
 At December 31, 2014At December 31, 2013
(in %)Healthcare
plans
Pension plans           OtherHealthcare
plans
Pension plans           Other
Weighted-average discount rates 3.96 3.21 1.81 4.67 4.05 2.97
Weighted-average rate of compensation increase 3.00 3.11 2.27 3.42 3.35 2.63
Weighted-average, initial healthcare cost trend rate 7.23 n/a n/a 8.19 n/a n/a
Weighted-average, ultimate healthcare cost trend rate 5.00 n/a n/a 5.00 n/a n/a

 Assumptions used to determine expense at year-end
 At December 31, 2014At December 31, 2013
(in %)Healthcare
plans
Pension plans           OtherHealthcare
plans
Pension plans           Other
Weighted-average discount rates 4.67 4.05 2.97 3.79 3.75 3.30
Weighted-average rate of compensation increase 3.42 3.35 2.64 3.42 2.99 2.75
Weighted-average, initial healthcare cost trend rate 8.19 n/a n/a 7.04 n/a n/a
Weighted-average, ultimate healthcare cost trend rate 5.00 n/a n/a 5.00 n/a n/a

The weighted-average discount rates are used in measurements of pension and postretirement benefi t obligations and net interest on the net defi ned benefi t liability/asset. The weighted-average discount rates are based on a benefi t cash fl ow-matching approach and represent the rates at which the benefi t obligations could effectively be settled as of the measurement date. The benefi t cash fl ow-matching approach involves analyzing Group’s projected cash flows against a high quality bond yield curve, mainly calculated using a wide population of AA-graded corporate bonds subject to minimum amounts outstanding and meeting other defi ned selection criteria. The discount rates for the Group’s remaining obligations are based on benchmark yield data of high-quality fi xed income investments for which the timing and amounts of payments approximate the timing and amounts of projected benefi t payments.

The weighted-average healthcare trend rate represents the rate at which healthcare costs are assumed to increase. Rates are determined based on CNH Industrial’s specifi c experience, consultation with actuaries and outside consultants, and various trend factors including general and healthcare sector-specifi c infl ation projections from the United States Department of Health and Human Services Health Care Financing Administration for CNH Industrial’s U.S. assumptions. The weighted-average initial trend is a short-term assumption based on recent experience and prevailing market conditions. The weighted-average ultimate trend is a long-term assumption of healthcare cost infl ation based on general infl ation, incremental medical infl ation, technology, new medicine, government cost-shifting, utilization changes, aging population, and a changing mix of medical services. CNH Industrial expects to achieve the ultimate healthcare cost trend rate in 2017 and 2018 for US and Canada plans, respectively.

In October 2014, the Society of Actuaries (“SOA”) in the United States issued an updated mortality table (“RP-2014”) and mortality improvement scale (“MP-2014”). Accordingly, CNH Industrial reviewed the historical mortality experience and demographic characteristics of its U.S. Pension and Healthcare plan participants and has decided to adopt variants of the Blue Collar tables of RP-2014, set back to 2006, as the based mortality tables, and Male Scale BB as opposed to MP-2014 as the mortality improvement scale. CNH Industrial management believes the new mortality assumptions most appropriately represent its plan’s experience and characteristics. The adoption of the new mortality assumptions resulted in a total increase of $69 million to the Group’s benefi t obligations at December 31, 2014, of which, $37 million was related to Pension plans and $32 million to Healthcare plans.

Assumed discount rates and healthcare cost trend rates have a signifi cant effect on the amount recognized in the 2014 fi nancial statements.

A one percentage point change in assumed discount rates would have the following effects:

($ million)One percentage point increaseOne percentage point decrease
Effect on healthcare defi ned benefi t obligation at December 31, 2014 (142) 163
Effect on pension plans defi ned benefi t obligation at December 31, 2014 (426) 511

A one percentage point change in assumed healthcare cost trend rates would have the following effects:

($ million)One percentage point increaseOne percentage point decrease
Effect on healthcare defi ned benefi t obligation at December 31, 2014 181 (152)

The amounts recognized in the statement of fi nancial position for post-employment benefi ts at December 31, 2014 and 2013 are as follows:

 Healthcare plansPension plansOther
 At December 31,At December 31,At December 31,
($ million) 2014 2013 2014 2013 2014 2013
Present value of obligations 1,243 1,108 3,621 3,445 449 498
Less: Fair value of plan assets (107) (98) (2,689) (2,669) - -
Deficit/(surplus) 1,136 1,010 932 776 449 498
Effect of the asset ceiling - - 6 28 - -
Net liability/(Net asset) 1,136 1,010 938 804 449 498
Reimbursement rights - - 1 - - -
Amounts at year-end:            
Liabilities 1,136 1,010 958 848 449 498
Assets - - (20) (44) - -
Net liability 1,136 1,010 938 804 449 498

Changes in the present value of post-employment obligations in 2014 and 2013 are as follows:

($ million)Healthcare plans  Pension plans Other
 201420132014201320142013
Present value of obligation at the beginning of the year 1,108 1,191 3,445 3,458 498 496
Current service cost 9 9 25 27 12 13
Interest expense 51 43 134 126 8 10
Other costs - - 4 4 - -
Contribution by plan participants 9 7 3 3 - -
Remeasurements:            
Actuarial losses/(gains) from changes in demographic assumptions 31 2 60 7 - (1)
Actuarial losses/(gains) from changes in financial assumptions 136 (59) 363 (51) 48 12
Other remeasurements (17) (16) 4 15 1 3
Total  remeasurements 150 (73) 427 (29) 49 14
Exchange rate differences (5) (3) (177) 55 (60) 22
Benefits paid (78) (78) (200) (199) (31) (36)
Past service cost (12) - 1 - (24) -
Change in scope of consolidation - - - - - -
Curtailments - - - - - -
Settlements - - (41) - - -
Other changes 11 12 - - (3) (21)
Present value of obligation at the end of the year 1,243 1,108 3,621 3,445 449 498

Net benefit cost/(income) recognized during 2014 and 2013 is as follows:

Healthcare plans  Pension plans Other
($ million)201420132014201320142013
Service cost:          
Current service cost 9 9 25 27 12 13
Past service cost and (gain)/loss from curtailments and settlements (12) - (3) - (24) -
Total Service cost (3) 9 22 27 (12) 13
Net interest expense 46 40 24 29 8 10
Other costs - - 4 4 - -
Net benefit cost/(income) recognized to profit or loss 43 49 50 60 (4) 23
Remeasurements:            
Return on plan assets (6) (6) (180) (84) - -
Actuarial losses/(gains) from changes in demographic assumptions 31 2 60 7 - (1)
Actuarial losses/(gains) from changes in financial assumptions 136 (58) 363 (51) 48 12
Other remeasurements (17) (16) 4 15 1 3
Total  remeasurements 144 (78) 247 (113) 49 14
Exchange rate differences (5) (3) (78) 32 (60) 22
Net benefit cost/(income) recognized to other comprehensive income 139 (81) 169 (81) (11) 36
Total net benefit cost/(income) recognized during the year 182 (32) 219 (21) (15) 59

Changes in the effects of the asset ceiling for 2014 and 2013 are as follows:

 Healthcare plansPension plans
($ million)2014201320142013
Effect of the asset ceiling at the beginning of the year - - 28 9
Other comprehensive (income)/loss - - (23) 23
Other increase/(decrease) - - 1 (4)
Effect of the asset ceiling at the end of the year - - 6 28

Plan assets do not include treasury shares of CNH Industrial N.V. or properties occupied by Group companies. The fair value of the plan assets at December 31, 2014 may be disaggregated by asset class and level as follows. Fair value levels presented below are described in the “Signifi cant accounting policies – Fair value measurement” section of these Notes.

 At December 31, 2014
 Healthcare plansPension plans
($ million)Level 1Level 2Level 3TotalLevel 1  Level 2Level 3Total
Equity securities:                
U.S. equities – Large cap - - - - - - - -
U.S. equities – Mid cap - - - - - - - -
U.S. equities – Small cap - - - - - - - -
Non-U.S. equities 15 - - 15 - - - -
Total equity securities 15 - - 15 - - - -
Fixed income securities:                
U.S. government bonds 5 5 - 10 331 5 - 336
Non-U.S. government bonds - 25 - 25 - 509 - 509
U.S. corporate bonds - 2 - 2 17 663 - 680
Non-U.S. corporate bonds - 6 - 6 - 110 - 110
Mortgage backed securities - 1 - 1 - - - -
Other fi xed income securities - 5 - 5 - 26 - 26
Total fi xed income securities 5 44 - 49 348 1,313 - 1,661
Other types of investments:                
Mutual funds (1) - - - - - 556 - 556
Investment funds - - - - - - - -
Insurance contracts - - - - - - 128 128
Derivatives - Credit contracts - - - - 4 - - 4
Real estate - - - - - - - -
Other (2) - 40 - 40 - 310 - 310
Total other types of investments - 40 - 40 4 866 128 998
Cash and cash equivalents - 3 - 3 - 30 - 30
Total 20 87 - 107 352 2,209 128 2,689

(1) This category includes mutual funds which primarily invest in non-U.S. equities and non-U.S. corporate bonds.

(2) This category includes one commingle fund, which invests in both U.S. and non-U.S. equity securities.

The fair value of the plan assets at December 31, 2013 may be disaggregated by asset class and level as follows. Fair value levels presented below are described in the Signifi cant accounting policies – Fair value measurement section of these Notes.

 At December 31, 2014
 Healthcare plansPension plans
($ million)Level 1Level 2Level 3TotalLevel 1  Level 2Level 3Total
Equity securities:                
U.S. equities – Large cap - - - - 113 - - 113
U.S. equities – Mid cap - - - - 36 - - 36
U.S. equities – Small cap - - - - 45 - - 45
Non-U.S. equities 15 - - 15 94 - - 94
Total equity securities 15 - - 15 288 - - 288
Fixed income securities:                
U.S. government bonds - - - - 345 - - 345
Non-U.S. government bonds - - - - 101 382 - 483
U.S. corporate bonds - - - - - 323 - 323
Non-U.S. corporate bonds - - - - 1 109 - 110
Mortgage backed securities - - - - - 9 - 9
Other fi xed income securities - - - - 37 38 - 75
Total fi xed income securities - - - - 484 861 - 1,345
Other types of investments:                
Mutual funds (1) - - - - - 708 - 708
Investment funds - - - - - - - -
Insurance contracts - - - - 1 - 33 34
Derivatives - Credit contracts - - - - - 14 - 14
Real estate - - - - 35 - - 35
Other (2) - 83 - 83 - 184 - 184
Total other types of investments - 83 - 83 36 906 33 975
Cash and cash equivalents - - - - 32 29 - 61
Total 15 83 - 98 840 1,796 33 2,669

(1) This category includes mutual funds which primarily invest in non-U.S. equities and non-U.S. corporate bonds.

(2) This category includes primarily commingled funds, which invest in equities.

The best estimate of expected contribution to pension and healthcare plans for 2015 is as follows:

($ million)2015
Pension plans 28
Healthcare plans -
Total expected contribution 28

The best estimate of expected benefit payments in 2015 and in the following ten years is as follows:

($ million)201520162017201820192020 to
2025
Total
Post-employment  benefits:              
Healthcare plans 72 72 73 72 71 335 695
Pension plans 192 191 191 189 194 977 1,934
Other 33 27 30 36 32 151 309
Total Post-employment benefits 297 290 294 297 297 1,463 2,938
Other long-term employee benefits 6 6 6 7 7 30 62
Total 303 296 300 304 304 1,493 3,000

Potential outfl ows in the years after 2015 are subject to a number of uncertainties, including future asset performance and changes in assumptions.

The weighted average durations of post-employment benefi ts obligations are as follows:

 N° of years
Healthcare plans 12
Pension plans 13
Other 9