20 – Provisions for pensions and similar obligations

In addition to state pension plans, most employees are entitled to Company pension benefits from either defined contribution or defined benefit plans. Benefits generally depend on years of service, contributions or compensation, and take into consideration the legal framework of labor, tax and social security laws of the countries where the companies are located. To limit the risks of changing market conditions as well as demographic developments, employees have been almost exclusively offered defined contribution plans in recent years.

For BASF SE and German Group companies, a basic level of benefits is provided by BASF Pensionskasse VVaG, a legally independent funded plan which is financed by contributions of employees and the employer and the return on its assets. BASF SE will ensure the necessary contributions to adequately finance the benefits promised by BASF Pensionskasse VVaG. Some of the benefits financed via the BASF Pensionskasse VVaG are subject to adjustments that must be borne by the companies to the extent that these cannot be borne by BASF Pensionskasse VVaG due to the regulations imposed by the German supervisory authority. Additional occupational pension commitments at German Group companies are financed almost exclusively via pension provisions.

In the case of non-German subsidiaries, defined pension benefits are covered in some cases by pension provisions, but mainly by external insurance companies or pension funds.

The measurement date for the pension plans is set as December 31. The most recent actuarial mortality tables are used, which in Germany are derived from the BASF Group population.

The valuations using the projected unit credit method per IAS 19 were carried out under the following assumptions:

The assumptions used to ascertain the defined benefit obligation as of December 31 are used in the following year to determine the expenses for pension plans.

Similar obligations for North American Group companies from assuming health care and life insurance costs for retired employees and their dependents were measured using actuarial principles and are included in the overall value. The assumed rate of increase in health care costs is 8% per year (2010: 8%) until 2012, followed by a straight-line reduction until a rate of increase of 5% per year is reached by 2018 (2010: 5%). A change in the underlying rate of increase in health care costs by one percentage point would have the following effects:

The assumptions regarding the overall expected long-term rate of return are based on forecasts of expected individual asset class returns and the desired portfolio structure. The forecasts are based on long-term historical average returns and take into consideration the current yield level and the inflation trend. In 2011, the discount rate used in this calculation was adjusted to account for developments in the capital markets.

The target asset allocation has been defined by using asset liability studies and is reviewed regularly. Accordingly, plan assets are aligned with long-term pension liabilities, taking into consideration investment risks and adherence to government regulations. The existing portfolio structure is oriented towards the target asset allocation. In addition, current market assessments are taken into consideration. In order to mitigate risks and maximize returns, a widely spread global portfolio of individual asset classes is held.

The actual return on plan assets amounted to €490 million in 2011 and €1,334 million in 2010. On December 31, 2011, plan assets contained securities issued by BASF Group companies with a market value of €27 million (December 31, 2010: €14 million). The market value of the properties of legally independent pension funds rented to BASF Group companies amounted to €48 million on December 31, 2011, and €49 million on December 31, 2010.

In 2010, BASF Pensionskasse was granted profit participation capital of €80 million to strengthen its financing. This does not represent a plan asset. No material transactions took place between the legally independent pension funds and BASF Group companies in 2011.

Actuarial gains and losses are recognized directly in retained earnings in the reporting period in which they occur. Past service costs are amortized over the average service period of the entitled employees until the benefits become vested. Actuarial losses of €792 million in 2011 and €372 million in 2010 were recognized directly in retained earnings. Since the introduction of this accounting policy in 2004, total actuarial losses of €2,972 million have been recognized directly in retained earnings, not taking deferred taxes into account.

The shift between plans with partial and full funding is caused by updated actuarial assumptions used to determine the defined benefit obligation and by the lower than expected plan assets.

In 2011, contributions to public pension plans were €550 million (2010: €473 million).

The estimated contribution payments for defined benefit plans for 2012 are €174 million.