Financial Statements
25. Provisions for pensions and other post-employment benefits
The provisions for pensions and other post-employment benefits in Germany and other countries as of the closing date were as shown in the following table:
| Provisions for Pensions and Other Post-Employment Benefits | [Table 4.63] |
|---|
| |
Pensions | Other post-employment benefits |
Total |
| | Dec. 31, 2009 | Dec. 31, 2010 | Dec. 31, 2009 | Dec. 31, 2010 | Dec. 31, 2009 | Dec. 31, 2010 |
| | € million | € million | € million | € million | € million | € million |
| Germany | 4,866 | 5,632 | 71 | 67 | 4,937 | 5,699 |
| Other countries | 1,130 | 1,143 | 450 | 463 | 1,580 | 1,606 |
| Total | 5,996 | 6,775 | 521 | 530 | 6,517 | 7,305 |
The expenses for defined benefit pension plans and other post-employment benefit obligations were comprised as follows:
| Expenses for Defined Benefit Pension Plans | [Table 4.64] |
|---|
| | Germany | Other countries | Total |
| | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 |
| | € million | € million | € million | € million | € million | € million |
| Current service cost | 108 | 144 | 47 | 49 | 155 | 193 |
| Past service cost | (14) | (2) | (2) | - | (16) | (2) |
| Interest cost | 611 | 593 | 240 | 257 | 851 | 850 |
| Expected return on plan assets | (300) | (305) | (200) | (248) | (500) | (553) |
| Plan curtailments | - | - | 2 | 2 | 2 | 2 |
| Plan settlements | - | - | (1) | - | (1) | - |
| Total | 405 | 430 | 86 | 60 | 491 | 490 |
| Expenses for Other Post-Employment Benefit Obligations | [Table 4.65] |
|---|
| | Germany | Other countries | Total |
| | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 |
| | € million | € million | € million | € million | € million | € million |
| Current service cost | 6 | 11 | 18 | 22 | 24 | 33 |
| Past service cost | - | - | 1 | - | 1 | - |
| Interest cost | 3 | 8 | 47 | 49 | 50 | 57 |
| Expected return on plan assets | - | - | (21) | (26) | (21) | (26) |
| Plan curtailments | - | - | (1) | 2 | (1) | 2 |
| Plan settlements | - | - | - | - | - | - |
| Total | 9 | 19 | 44 | 47 | 53 | 66 |
The unfunded and funded defined benefit obligations developed as follows:
Click on the table to enlarge.
Of the defined benefit obligation for pensions, €5,487 million (2009: €5,006 million) related to unfunded benefit obligations and €11,346 million (2009: €10,104 million) to funded benefit obligations. Of the defined benefit obligation for other post-employment benefits, €190 million (2009: €176 million) related to unfunded benefit obligations and €676 million (2009: €645 million) to funded benefit obligations.
Total overfunding of individual funded pension plans amounted to €92 million (2009: €111 million), underfunding to €1,291 million (2009: €986 million). Individual funded plans for other post-employment benefits were underfunded by a total of €337 million (2009: €341 million). Other unfunded post-employment benefit obligations related mainly to early retirement benefits in Germany.
The Bayer Group has set up funded pension plans for its employees in many countries. Since the legal and tax requirements and economic conditions may vary considerably between countries, assets are managed according to country-specific principles. For plan assets, stress scenarios are simulated and other risk analyses (such as value at risk) undertaken with the aid of risk management systems. Other determinants are risk diversification, portfolio efficiency and a country-specific and global balance of opportunity and risk designed primarily to ensure the payment of all future benefits.
Bayer-Pensionskasse VVaG (Bayer-Pensionskasse) in Germany is by far the most significant of the pension funds. This legally independent fund is a private insurance company and is therefore subject to the German Law on the Supervision of Private Insurance Companies. Under the German law on secondary liability, Bayer guarantees the pension entitlements of employees who are members of benefit plans in Germany. Bayer-Pensionskasse is classified as a defined benefit plan for IFRS purposes.
The investment policy of Bayer-Pensionskasse is geared to compliance with regulatory provisions and to the risk structure resulting from its obligations. In light of capital market movements, Bayer-Pensionskasse has therefore developed a strategic target investment portfolio aligned to its risk structure. Its investment strategy is focused primarily on stringently managing downside risks rather than on maximizing absolute returns. It is anticipated that with this investment policy, Bayer-Pensionskasse can generate a return that enables it to meet its long-term commitments.
A large proportion of the benefit obligations of Bayer Schering Pharma AG, Berlin, Germany, which was acquired in 2006, is covered by Schering Altersversorgung Treuhand Verein. Here too, the investment strategy is geared to the structure of the corresponding obligations. It permits the use of derivatives. Nearly all currency risks are fully hedged.
For plan assets in other countries as well, the key investment strategy criteria are the structure of the benefit obligations and the risk profile.
The weighted parameters used to value the plan assets to cover pensions and other post-employment benefit obligations were allocated as follows at year end:
| Plan Assets to Cover Pension Obligations as of December 31 | [Table 4.67] |
|---|
| | Germany | Other countries |
| | 2009 | 2010 | 2009 | 2010 |
| | % | % | % | % |
| Equity securities | 19.54 | 19.42 | 42.60 | 39.11 |
| Debt securities | 59.97 | 59.82 | 46.61 | 48.97 |
| Real estate and special real estate funds | 9.08 | 8.29 | 1.43 | 1.74 |
| Other | 11.41 | 12.47 | 9.36 | 10.18 |
| Total | 100.00 | 100.00 | 100.00 | 100.00 |
| Plan Assets to Cover Other Post-Employment Benefit Obligations as of December 31 | [Table 4.68] |
|---|
| | Germany | Other countries |
| | 2009 | 2010 | 2009 | 2010 |
| | % | % | % | % |
| Equity securities | - | - | 45.20 | 36.60 |
| Debt securities | - | - | 35.18 | 40.03 |
| Real estate and special real estate funds | - | - | - | - |
| Other | - | - | 19.62 | 23.37 |
| Total | - | - | 100.00 | 100.00 |
The fair value of the plan assets included real estate leased by Bayer, recognized at a fair value of €74 million (2009: €78 million), and Bayer shares held through investment funds, recognized at their market value of €24 million (2009: €30 million). The other plan assets principally comprise mortgage loans granted, other receivables, fixed-term deposits and cash and cash equivalents.
The following weighted parameters were used to value the pension obligations as of December 31 and the expense for pensions and other post-employment benefits in the respective year:
| Parameters for Benefit Obligations | [Table 4.69] |
|---|
| | Germany | Other countries | Total |
| | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 |
| | % | % | % | % | % | % |
| Pension obligations | | | | | | |
| Discount rate | 5.50 | 4.90 | 5.90 | 5.40 | 5.60 | 5.05 |
| Projected future remuneration increases | 2.50 | 3.00 | 4.15 | 4.25 | 2.95 | 3.35 |
| Projected future benefit increases | 1.75 | 1.75 | 3.50 | 3.50 | 2.25 | 2.25 |
Other post-employment
benefit obligations |
|
|
|
|
|
|
| Discount rate | 3.10 | 3.10 | 6.20 | 5.70 | 5.95 | 5.50 |
| Parameters for Benefit Expense | [Table 4.70] |
|---|
| | Germany | Other countries | Total |
| | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 |
| | % | % | % | % | % | % |
| Pension obligations | | | | | | |
| Discount rate | 6.00 | 5.50 | 6.30 | 5.90 | 6.10 | 5.60 |
| Projected future remuneration increases | 3.00 | 2.50 | 4.00 | 4.15 | 3.25 | 2.95 |
| Projected future benefit increases | 2.00 | 1.75 | 2.95 | 3.50 | 2.25 | 2.25 |
| Expected return on plan assets | 5.00 | 4.60 | 7.50 | 7.25 | 5.85 | 5.60 |
Other post-employment
benefit obligations |
|
|
|
|
|
|
| Discount rate | 6.40 | 3.10 | 6.45 | 6.20 | 6.45 | 5.95 |
| Expected return on plan assets | - | - | 8.25 | 7.95 | 8.25 | 7.95 |
The discount rate for pension obligations in other countries was influenced mainly by the rates of 5.2% (2009: 5.8%) and 5.5% (2009: 5.7%) applicable for the United States and the United Kingdom, respectively.
Altering individual parameters by 0.5 percentage points while leaving the other parameters unchanged would have impacted pension and other post-employment benefit obligations as of year end 2010 as follows:
| Sensitivity of Benefit Obligations | [Table 4.71] |
|---|
| | Germany | Other countries | Total |
| | 0.5 per-
centage point
increase | 0.5 per-
centage point decrease | 0.5 per-
centage point increase | 0.5 per-
centage point decrease | 0.5 per-
centage point increase | 0.5 per-
centage point decrease |
| | € million | € million | € million | € million | € million | € million |
| Pension obligations | | | | | | |
| Change in discount rate | (787) | 885 | (299) | 333 | (1,086) | 1,218 |
| Change in projected future remuneration increases |
57 |
(55) |
39 |
(37) |
96 |
(92) |
| Change in projected future benefit increases |
568 |
(524) |
93 |
(77) |
661 |
(601) |
Other post-employment
benefit obligations |
|
|
|
|
|
|
| Change in discount rate | (1) | 1 | (43) | 47 | (44) | 48 |
Altering individual parameters by 0.5 percentage points while leaving the other parameters unchanged would impact benefit expense in 2011 as follows:
| Sensitivity of Benefit Expense | [Table 4.72] |
|---|
| | Germany | Other countries | Total |
| | 0.5 per-
centage point increase | 0.5 per-
centage point decrease | 0.5 per-
centage point increase | 0.5 per-
centage point decrease | 0.5 per-
centage point increase | 0.5 per-
centage point decrease |
| | € million | € million | € million | € million | € million | € million |
| Pension obligations | | | | | | |
| Change in discount rate | (4) | 4 | (14) | 14 | (18) | 18 |
| Change in projected future remuneration increases |
6 |
(6) |
5 |
(4) |
11 |
(10) |
| Change in projected future benefit increases |
35 |
(32) |
4 |
(2) |
39 |
(34) |
Change in expected
return on plan assets |
(31) |
31 |
(19) |
19 |
(50) |
50 |
Other post-employment
benefit obligations |
|
|
|
|
|
|
| Change in discount rate | - | - | - | - | - | - |
Change in expected
return on plan assets |
- |
- |
(2) |
2 |
(2) |
2 |
Provisions are also set up for the obligations, mainly of U.S. subsidiaries, to provide post-employment benefits in the form of health care cost payments to retirees. The valuation of health care costs was based on the assumption that they will increase at a rate of 9% (assumption in 2009: 10%), which should gradually decline to 5% by 2018 (assumption in 2009: 5% by 2017). The following table shows the impact on other post-employment benefit obligations and total benefit expense of a one-percentage-point change in the assumed cost increase rates:
| Sensitivity to Health Care Cost Increases | [Table 4.73] |
|---|
| | Increase
of one
percentage point | Decrease
of one
percentage point |
| | € million | € million |
| Impact on other post-employment benefit obligations | 86 | (73) |
| Impact on benefit expense | 8 | (7) |
The following payments were made in 2010 and 2009, and are expected to be made in 2011, for employer contributions to funded and unfunded pension plans that provide pensions and other post-employment benefits:
| Employer Contributions Paid or Expected | [Table 4.74] |
|---|
| | Germany | Other countries |
| | 2009
| 2010
| 2011 expected | 2009
| 2010
| 2011 expected |
| | € million | € million | € million | € million | € million | € million |
| Pension obligations | 303 | 510 | 395 | 141 | 276 | 412 |
Other post-employment
benefit obligations |
47 |
23 |
24 |
45 |
9 |
19 |
| Total | 350 | 533 | 419 | 186 | 285 | 431 |
Pensions and other post-employment benefits payable in the future are estimated as follows:
| Future Benefit Obligations | [Table 4.75] |
|---|
| | Germany | Other countries | Total |
| | Pension
obligations
| Other post-
employment benefit
obligations | Pension
obligations
| Other post-
employment benefit
obligations | Pension
obligations
| Other post-
employment benefit
obligations |
| | € million | € million | € million | € million | € million | € million |
| 2011 | 627 | 24 | 238 | 44 | 865 | 68 |
| 2012 | 640 | 17 | 235 | 45 | 875 | 62 |
| 2013 | 643 | 8 | 238 | 47 | 881 | 55 |
| 2014 | 649 | 6 | 248 | 50 | 897 | 56 |
| 2015 | 657 | 4 | 257 | 52 | 914 | 56 |
| 2016 -2020 | 3,499 | 8 | 1,468 | 292 | 4,967 | 300 |
The actuarial gains and losses related to defined benefit obligations and plan assets, reflected in the statement of changes in equity and recognized in the statement of comprehensive income, were as follows:
Click on the table to enlarge.
In Germany, no unrealized gains/losses exist in relation to other post-employment benefit obligations.