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(13) Provisions for pensions and other post-employment benefits

Most employees in the LANXESS Group are entitled to retirement benefits on the basis of statutory regulations or contractual agreements. These are provided through both defined-contribution and defined-benefit plans.

In the case of defined-contribution plans, the company pays contributions into separate pension funds. These contributions are included in the respective functional cost items as expenses for the year, and thus in the operating result. Once the contributions have been paid, the company normally has no further payment obligations. In 2012 these expenses totaled €54 million (2011: €38 million).

The pension plan financed through the Bayer Pensionskasse is also reflected in the consolidated financial statements as a defined-contribution plan. The above amounts include contributions of €28 million (2011: €21 million) to this pension fund.

The Bayer Pensionskasse is a legally independent private insurance company and is therefore subject to the German Insurance Supervision Act. The obligation of the plan sponsors is not confined to payment of the contributions for the respective fiscal year. Therefore the Bayer Pensionskasse is a defined-benefit plan sponsored by multiple employers and would normally have to be accounted for proportionately as a defined-benefit plan.

The Bayer Pensionskasse is financed not on the principle of coverage for individual benefit entitlements, but on the actuarial equivalence principle, based on totals for the whole plan. This means that the sum of existing plan assets and the present value of future contributions must be at least equal to the present value of the future benefits payable under the plan. The LANXESS Group is therefore exposed to the actuarial risks of the other plan sponsors of the Bayer Pensionskasse and thus has no consistent or reliable basis for allocating the benefit obligation, plan assets and costs to account for the Bayer Pensionskasse as a defined-benefit plan in accordance with IAS 19. There is no information available on over- or underfunding that could be used to estimate any impact on future contributions. The Bayer Pensionskasse is therefore accounted for as a defined-contribution plan and not as a defined-benefit plan.

The Bayer Pensionskasse assumes any pension adjustments in accordance with Section 16 of the German Occupational Pensions Improvement Act (BetrAVG) insofar as the necessary funds are made available to it. Pension adjustments not expected to be assumed by the Bayer Pensionskasse are accounted for by LANXESS as a separate defined-benefit plan.

Pension plans based on statutory regulations mainly comprise an obligation to pay a lump sum when employment ends. The amount depends principally on years of service and final salary.

Pension plans based on contractual agreements generally comprise lifelong benefits payable in the event of death or disability or when the employee reaches a certain age. Benefits are normally based on employees’ salaries and years of service.

Alongside retirement benefits, pension and other post-employment benefit obligations include the obligation of Group companies in the Americas to reimburse healthcare costs to retirees.

Benefit entitlements are financed either internally through provisions or externally through legally independent pension funds. The pension commitments in Germany are partly covered by the LANXESS Pension Trust e.V., Leverkusen, Germany (CTA).

The provisions for pensions and other post-employment benefits recognized in the statement of financial position reflect the present value of the defined-benefit obligation at year end, taking into account expected future benefit increases, less the year-end fair value of external plan assets adjusted for unrecognized past service cost, unrealizable plan assets and minimum funding requirements. The defined-benefit obligation is measured regularly – at least every three years – by an independent actuary using the projected unit credit method. Comprehensive actuarial valuations are generally undertaken annually for all major pension plans. The discount rates used to compute present value normally correspond to the yields on high-quality corporate bonds with the same maturities.

Total expenses for defined-benefit plans in 2012 amounted to €54 million (2011: €47 million). Expenses for pension payments, and the effect of plan curtailments, settlements and divestments totaling €37 million (2011: €38 million), are recognized in the operating result. The interest cost pertaining to pension entitlements earned in prior years and the expected return on plan assets totaled €17 million (2011: €9 million). This amount was reflected in the financial result.

The costs for the plans comprise the following:

Costs for Defined-Benefit Plans
         
€ million Pension obligations Other post-employment benefit obligations
         
  2011 2012 2011 2012
         
Current service cost 22 26 7 11
Past service cost 1 0 0 0
Interest cost 89 94 7 7
Expected return on plan assets (87) (84) 0 0
Actuarial gains/losses 0 1
Plan curtailments, settlements and divestments 8 (1) 0
  33 35 14 19
 

The reconciliation of the defined-benefit obligation to the net amounts of assets and provisions recognized in the statement of financial position is as follows:

Reconciliation to Net Recognized Liability as of Dec. 31
         
€ million Pension obligations Other post-employment benefit obligations
         
  2011 2012 2011 2012
         
Defined benefit obligation (funded) 1,347 1,579 6 8
External plan assets (1,156) (1,146) (4) (4)
Underfunding 191 433 2 4
Defined benefit obligation (unfunded) 187 275 120 117
Unrecognized past service cost (1) (1) 0 0
Effects of asset ceiling and minimum funding requirements 95
Net recognized liability 472 707 122 121
Amounts recognized in the statement of financial position        
Receivables from pension obligations (85) (64)
Provisions for pensions and other post-employment benefits 557 771 122 121
Net recognized liability 472 707 122 121
 

The net recognized liability is reflected in the following items in the statement of financial position:

Net Recognized Liability as of Dec. 31
     
€ million 2011 2012
     
Provisions for pensions and other post-employment benefits 679 892
Other non-current assets (85) (64)
Net recognized liability 594 828
 

The defined-benefit obligation and plan assets changed as follows in 2012:

Change in Defined-Benefit Obligation as of Dec. 31
         
€ million Pension obligations Other post-employment benefit obligations
         
  2011 2012 2011 2012
         
Defined-benefit obligation        
Benefit obligation at beginning of year 1,419 1,534 125 126
Current service cost 22 26 7 11
Past service cost 1
Interest cost 89 94 7 7
Employee contributions 2 2
Plan settlements (34) (4)
Actuarial gains/losses 137 307 1 (4)
Benefits paid (74) (69) (13) (12)
Acquisitions/divestments 0 4
Plan curtailments 0 0 0
Exchange differences (28) (40) (1) (3)
Benefit obligation at end of year 1,534 1,854 126 125
 
Change in Plan Assets as of Dec. 31
         
€ million Pension obligations Other post-employment benefit obligations
         
  2011 2012 2011 2012
         
Fair value of plan assets        
Plan assets at beginning of year 1,105 1,156 3 4
Expected return on plan assets 87 84 0 0
Actuarial gains/losses 52 (15) 0 0
Acquisitions/divestments 0 1
Plan settlements (42) (3)
Employer contributions 48 20 1 1
Employee contributions 2 2
Benefits paid (57) (51) 0 (1)
Exchange differences (39) (48) 0 0
Plan assets at end of year 1,156 1,146 4 4
 

Employer contributions contain both allocations to externally financed pension obligations where LANXESS is eligible for reimbursement of pension payments and externally financed pension obligations where subsequent pension payments will be made directly out of external pension assets.

Allocations to external financing where subsequent pension payments are made directly out of external pension assets totaled €21 million in 2012 (2011: €19 million). In addition, in 2011 allocations of €30 million were made to external financing where LANXESS can claim reimbursement of payments made (CTA).

It is not possible to reliably estimate the employer contributions to defined-benefit plans in the next fiscal year. These depend mainly on future decisions by the company’s management and the regulatory environment in each country.

The following table shows the actuarial gains and losses recognized outside profit or loss as a component of other comprehensive income, the effects of the asset ceiling recognized in other comprehensive income, and the minimum funding requirements:

Amounts Recognized in Other Comprehensive Income
         
€ million Pension obligations Other post-employment benefit obligations
         
  2011 2012 2011 2012
         
Actuarial gains/losses (85) (322) (1) 5
Effects of asset ceiling and minimum funding requirements (10) 95
  (95) (227) (1) 5
 

The accumulated actuarial gains and losses recognized in other comprehensive income in 2012 or earlier periods amounted to minus €693 million (2011: minus €385 million).

The actuarial gains and losses are assigned to the following categories:

Categories of Actuarial Gains/Losses as of Dec. 31
                     
€ million Pension obligations Other post-employment benefit obligations
                     
  2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
                     
Difference between expected and actual return on plan assets (50) 15 5 52 (15) 0 0 0 0 0
Experience adjustments (26) 36 (54) (39) (17) 0 (2) 4 4 5
Adjustments for changes in valuation assumptions 90 (81) (134) (98) (290) 6 (6) (6) (5) (1)
Net actuarial gain/loss for the year 14 (30) (183) (85) (322) 6 (8) (2) (1) 4
 

Experience adjustments represent changes in benefit obligations arising from differences between actuarial assumptions and actual developments during the year. By contrast, adjustments for changes in valuation assumptions reflect differences in the benefit obligation resulting from differences in the assumptions made at the start and end of the year.

The increase in the adjustments for changes in valuation assumptions is primarily due to the decline in discount rates in the principal countries in which LANXESS has pension obligations.

The actual return on external plan assets in 2012 amounted to €69 million (2011: €139 million).

The following weighted parameters were used to calculate benefit expense and obligations:

Assumptions as of Dec. 31
         
% Pension obligations Other post-employment benefit obligations
         
  2011 2012 2011 2012
         
Discount rate 6.2 5.1 5.7 4.9
Expected salary increases 3.6 3.6 3.8 3.7
Expected pension increases 2.1 2.4
Expected return on plan assets 7.8 7.0 5.8 5.6
Expected increase in the cost of medical care 8.4 7.9
Expected long-term increase in the cost of medical care 5.5 5.3
 

The discount rate is weighted on the basis of the benefit obligation for each pension plan at year end, including all plans in the calculation. By contrast, the weighting of the percentage for the expected return on plan assets only includes pension plans with plan assets. The weighting is based on the plan assets at year end. The weighted valuation assumptions also reflect country-specific differences.

The Heubeck mortality tables 2005 G form the biometric basis for the computation of pension obligations in Germany. Current national biometric assumptions are used to compute benefit obligations at other Group companies. Employee turnover rates are estimated on the basis of age and gender.

The data selection criteria used to derive the discount rate for pension obligations in Germany and the extrapolation method were revised because the data basis for high-quality corporate bonds with an equivalent maturity had been eroded by rating downgrades. In future, the discount rate will be derived from high-quality corporate bonds which have been awarded an AA rating by at least one of the three major rating agencies. The discount rate derived in this way is 25 basis points above the discount rate that would have been obtained using the previous selection criteria and the previous extrapolation process, and the increase in the present value of the defined-benefit pension obligation as of the closing date is reduced by €48 million. This has the opposite effect on benefit expense for subsequent years, but the effect is negligible both in individual years and in aggregate.

The discount rate used to calculate the present value of pensions and other post-employment benefit obligations is derived from the yield on high-quality corporate bonds with the same maturity. An increase of 0.5 percentage point in the discount rate would reduce pension obligations by €141 million (2011: €105 million) and other post-employment benefit obligations by €6 million (2011: €6 million). A decrease of 0.5 percentage point in the discount rate would increase pension obligations by €156 million (2011: €111 million) and other post-employment benefit obligations by €6 million (2011: €6 million).

The long-term cost increase for medical care is expected to take place within about eleven years.

Assuming all other parameters remain unchanged, a one percentage point increase or decrease in the assumptions relating to the expected long-term increase in medical costs would raise or reduce the present value of the defined-benefit obligation by €8 million (2011: €9 million). The costs for healthcare plans would not materially increase or decrease.

The plan assets now comprise:

Breakdown of Plan Assets as of Dec. 31
     
% of plan assets 2011 2012
     
Fixed-income securities 58.1 61.0
Equity instruments 25.7 26.7
Real estate 2.0 2.3
Other 14.2 10.0
  100.0 100.0
 

The expected return on each category of plan assets was calculated on the basis of generally available and internal capital market reports and forecasts. The expected return on fixed-income securities is based on the maturity of the portfolio and the yields on the closing date. The expected return on equity instruments reflects the long-term return expectations for the underlying equity portfolio.

The table below shows the defined-benefit obligation and plan assets at the end of each year:

Funded Status as of Dec. 31
           
€ million 2008 2009 2010 2011 2012
           
Defined benefit obligation 1,049 1,231 1,544 1,660 1,979
External plan assets (668) (879) (1,108) (1,160) (1,150)
Underfunding 381 352 436 500 829
 

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