22 – Provisions for pensions and similar obligations

In addition to state pension plans, most employees are granted 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 financial market conditions as well as demographic developments, employees have been almost exclusively offered defined contribution plans for future years of service in recent years.

The Group Pension Committee monitors the risks of all pension plans of the Group. In this connection, it issues guidelines regarding the governance and risk management of pension plans, particularly with regard to the funding of the pension plans and the portfolio structure of the existing plan assets. The organization, responsibilities, strategy, implementation and reporting requirements are documented for the units involved.

Economic and legal environment of the plans

In some countries – especially in Germany, the United Kingdom, Switzerland and Belgium – there are pension obligations subject to government supervision or similar legal restrictions. For example, there are minimum funding requirements to cover pension obligations, which are based on actuarial assumptions that may differ from those in IAS 19. Furthermore, there are restrictions in qualitative and quantitative terms relating to parts of the plan assets for the investment in certain asset categories. This could result in fluctuating employer contributions, financing requirements and the assumption of obligations in favor of the pension funds to comply with the regulatory requirements.

The obligations and the plan assets used to fund the obligations are exposed to demographic, legal and economic risks. Economic risks are primarily due to unforeseen developments on commodity and capital markets. They affect, for example, pension adjustments based on the level of inflation in Germany and in the United Kingdom, as well as the impact of the discount rate on the amount of the defined benefit obligation. In previous years, measures taken to close plans with defined benefits for future service, especially benefits based on final pay promises and the assumption of healthcare costs for former employees, however, led to a reduction in risk with regard to future benefit levels.

The strategy of the BASF Group with regard to financing pension commitments is aligned with country-specific supervisory and tax regulations.

Description of the defined benefit plans

Germany

Description of the defined benefit plans Germany 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 as well as the return on plan assets. BASF SE ensures 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 its member companies to the extent that these cannot be borne by BASF Pensionskasse VVaG due to the regulations imposed by the German supervisory authority. In 2004, the basic benefits plan at BASF was closed for newly hired employees at German BASF companies and replaced by a defined contribution plan. At BASF SE, occupational pension promises that exceed the basic level of benefits are financed under a contractual trust arrangement by BASF Pensionstreuhand e.V.; at German Group companies, these benefits are almost exclusively financed via pension provisions. The benefits are largely based on cash balance plans. Furthermore, employees are given the option of participating in various deferred compensation schemes.

United States

Employees are granted benefits based on defined contribution plans.

Since 2010, the existing defined benefit plans were closed to further increases in benefits based on future years of service, and benefits earned in the past have been frozen. There is no entitlement to pension adjustments to compensate for cost-of-living increases.

The legal and regulatory frameworks governing the plans are based on the U.S. Employee Retirement Income Security Act (ERISA), which requires the plan sponsor to ensure a minimum funding level. Any employer contributions necessary to meet the minimum funding level would be based on the results of an actuarial valuation. Furthermore, there are unfunded pension plans that are not subject to ERISA.

Additional similar obligations arise from plans which assume the healthcare costs and life insurance premiums of retired employees and their dependents. Such plans are closed to new entrants since 2007. In addition, the amount of the benefits for such plans is frozen.

Switzerland

The employees of the BASF Group in Switzerland receive a company pension, which is financed through a pension fund by employer and employee contributions as well as the return on assets. The pension plan is accounted for as a defined benefit plan, as the obligatory minimum pension guaranteed by law according to the Swiss law “Berufliche Vorsorge (BVG)” is included in the scheme. All benefits vest immediately.

According to government regulations, the employer is obligated to make contributions, so that the pension fund is able to grant minimum benefits guaranteed by law. The pension fund is managed by a board, where employer and employees are equally represented, that steers and monitors the benefit plan and assets.

United Kingdom

United Kingdom Employees are granted benefits based on a defined contribution plan.

A part of the workforce received benefit increases depending on service period in connection with a career average plan until December 31, 2015. The BASF Group maintains defined benefit plans in the United Kingdom, which were closed for further increases in benefit from future years of service. Adjustments to compensate for increases in the cost of living until the beginning of retirement are legally required for beneficiaries of defined benefit plans.

The financing of the pension plans is determined by the provisions of the regulatory authority for pensions and the relevant social and labor law requirements. The defined benefit plans are administered by a trust company, whose Board of Trustees, according to the trustee agreement and law, represents the interests of the beneficiaries and ensures that the benefits can be paid in the future. The required funding is determined using technical valuations according to local regulations every three years.

Other countries

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

Actuarial assumptions

The valuation of the defined benefit obligation is largely based on the following assumptions:

Assumptions used to determine the defined benefit obligation as of December 31

 

 

Germany

United States

Switzerland

United Kingdom

 

 

2016

2015

2016

2015

2016

2015

2016

2015

Discount rate

 

1.80

2.50

4.00

4.20

0.60

0.80

2.80

4.00

Projected pension increase

 

1.50

1.50

3.10

2.90

Assumptions used to determine expenses for pension benefits in the respective business year

 

 

Germany

United States

Switzerland

United Kingdom

 

 

2016

2015

2016

2015

2016

2015

2016

2015

Discount rate

 

2.50

2.40

4.20

3.90

0.80

1.00

4.00

3.70

Projected pension increase

 

1.50

1.75

2.90

2.90

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.

A Group-wide, uniform procedure is used to determine the discount rates used for the valuation of material pension obligations of the BASF Group. Accordingly, the discount rates were derived from the yields on corporate bonds in the respective currency zones with an issuing volume of more than 100 million units of the respective currency with a minimum rating of AA– up to AA+ from one of the three rating agencies: Fitch, Moody’s, or Standard & Poor’s.

The valuation of the defined benefit obligation is generally made using the most recent actuarial mortality tables as of December 31 of the respective business year, which in Germany and the United States are derived from the BASF Group population and were last updated for the pension obligations in Germany in 2015 and for the pension obligations in the United States in 2014.

Actuarial mortality tables (significant countries) as of Dec. 31, 2016

Germany

 

Heubeck Richttafeln 2005G (modified)

United States

 

RP-2014 (modified) with MP-2014 generational projection

Switzerland

 

BVG 2015 generation

United Kingdom

 

S1PxA (standard actuarial mortality tables for self-administered plans (SAPS))

Sensitivity analysis

A change in the material actuarial assumptions would have the following effects on the defined benefit obligation:

Sensitivity of the defined benefit obligation as of December 31 (million €)

 

 

Increase by 0.5 percentage points

Decrease by 0.5 percentage points

 

 

2016

2015

2016

2015

Discount rate

 

(1,990)

(1,750)

2,270

2,000

Projected pension increase

 

1,175

1,120

(1,110)

(930)

An alternative valuation of the defined benefit obligation was conducted in order to determine how changes in the underlying assumptions would influence the amount of the defined benefit obligation. A linear extrapolation of these amounts based on alternative changes in the assumptions as well as an addition of combined changes in the individual assumptions is not possible.

Explanation of the amounts in the statement of income and balance sheet

Composition of expenses for pension benefits (million €)

 

 

2016

2015

Expenses for defined benefit plans

 

346

385

Expenses for defined contribution plans

 

281

273

Expenses for pension benefits (recognized in income from operations)

 

627

658

 

 

 

 

Net interest expenses from underfunded pension plans and similar obligations

 

183

196

Net interest income from overfunded pension plans

 

(5)

(3)

Interest cost for the asset ceiling

 

Expenses for pension benefits (recognized in the financial result)

 

178

193

The net interest on the defined benefit liability is recognized in the financial result. This results from the difference between the interest cost of the defined benefit obligation and the standardized return on plan assets as well as the interest cost for the asset ceiling. The expected contribution payments and benefits paid over the course of the business year are considered in the determination of net interest.

Net interest expense of the respective business year is based on the discount rate and the defined benefit obligation at the beginning of the year. The net interest expense from underfunded pension plans and similar obligations decreased compared with the previous year, as a result of the reduced net defined benefit liability as of December 31, 2015.

Development of defined benefit obligation (million €)

 

 

2016

2015

Defined benefit obligation as of January 1

 

24,861

25,474

Current service cost

 

360

397

Interest cost

 

671

680

Benefits paid

 

(1,024)

(1,006)

Participants’ contributions

 

49

53

Actuarial gains/losses

 

 

 

for adjustments relating to financial assumptions

 

2,571

(868)

adjustments relating to demographic assumptions

 

(20)

(135)

experience adjustments

 

66

(103)

Effects from acquisitions and divestitures

 

148

(313)

Past service cost

 

(14)

(48)

Plan settlements

 

Other changes

 

(2)

(65)

Currency effects

 

(63)

795

Defined benefit obligation as of December 31

 

27,603

24,861

As of December 31, 2016, the weighted average duration of the defined benefit obligation amounted to 15.7 years (previous year: 15.3 years). The significant decline in the discount rate led to an increase in the weighted average duration of the defined benefit obligations.

Development of plan assets (million €)

 

 

2016

2015

Plan assets as of January 1

 

18,681

18,252

Standardized return on plan assets

 

492

487

Deviation between actual and standardized return on plan assets

 

775

(145)

Employer contributions

 

207

284

Participants’ contributions

 

49

53

Benefits paid

 

(627)

(630)

Effects from acquisitions and divestitures

 

64

(165)

Past service cost

 

(36)

Plan settlements

 

Other changes

 

(20)

(39)

Currency effects

 

(161)

620

Plan assets as of December 31

 

19,460

18,681

The standardized return on plan assets is calculated by multiplying plan assets at the beginning of the year with the discount rate used for existing defined benefit obligation at the beginning of the year, taking into account benefit and contribution payments expected to be made during the year.

The expected contribution payments for 2017 amount to approximately €700 million.

Development of the net defined benefit liability (million €)

 

 

2016

2015

Net defined benefit liability as of January 1

 

(6,180)

(7,222)

Current service cost

 

(360)

(397)

Interest cost

 

(671)

(680)

Standardized return on plan assets

 

492

487

Deviation between actual and standardized return on plan assets

 

775

(145)

Actuarial gains/losses of the defined benefit obligation

 

(2,617)

1,106

Benefits paid by unfunded plans

 

397

376

Employer contributions

 

207

284

Effects from acquisitions and divestitures

 

(84)

148

Past service cost

 

14

12

Other changes

 

(18)

26

Currency effects

 

(98)

(175)

Net defined benefit liability as of December 31

 

(8,143)

(6,180)

Thereof defined benefit assets

 

66

133

provisions for pensions and similar obligations

 

(8,209)

(6,313)

Regional allocation of defined benefit plans as of December 31 (million €)

 

 

Pension obligations

Plan assets

Net defined benefit liability

 

 

2016

2015

2016

2015

2016

2015

Germany

 

18,242

16,029

12,282

11,671

(5,960)

(4,358)

United States

 

4,524

4,356

2,806

2,717

(1,718)

(1,639)

Switzerland

 

2,272

2,108

1,974

1,939

(298)

(169)

United Kingdom

 

1,909

1,780

1,898

1,890

(11)

110

Other

 

656

588

500

464

(156)

(124)

Total

 

27,603

24,861

19,460

18,681

(8,143)

(6,180)

Explanations regarding plan assets

The target asset allocation has been defined by using asset liability studies and is reviewed regularly. Accordingly, plan assets are aligned with the long-term development of the obligations, taking into consideration the risks associated with the specific asset classes and the regulations relating to the investment of plan assets. 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.

Liability-driven investment (LDI) techniques, such as hedging the risk of changes in interest rates and inflation, are used in some pension plans, especially in the U.K. and U.S. plans.

Structure of plan assets (%)

 

 

2016

2015

Equities

 

28

26

Debt instruments

 

53

54

Thereof for government debtors

 

16

15

for other debtors

 

37

39

Real estate

 

4

4

Alternative investments

 

15

15

Cash and cash equivalents

 

1

Total

 

100

100

The asset class debt instruments comprises promissory notes and debentures (Pfandbriefe) in addition to corporate and government bonds. Government bonds primarily concern bonds from those countries enjoying the highest credit ratings, such as the United States, United Kingdom, Germany and Switzerland. Corporate bonds mainly comprise investment-grade bonds, whereby particular high-yield bonds are also held to a limited extent. In connection with the ongoing monitoring of default risk based on a given risk budget and on the continuous observation of the development of the creditworthiness of issuers, an adjustment of plan asset allocation to a revised market assessment may be made, if necessary. Alternative investments largely comprise investments in private equity, absolute return funds and senior secured loans.

Almost all of the equities are priced on active markets. The category debt instruments includes promissory notes and debentures (Pfandbriefe), which were acquired through private placements with a market value in the amount of €853 million as of December 31, 2016, and €1,072 million as of December 31, 2015. For such securities, especially those held by domestic pension plans, there is no active market. The capital market compensates for this lack of fungibility with yield premiums depending on the maturity. With only a few exceptions, there is no active market for plan assets in real estate and alternative investments.

Plan assets contained securities issued by BASF Group companies with a market value of €16 million on December 31, 2016 and €11 million on December 31, 2015. The market value of the properties of legally independent pension funds rented to BASF Group companies amounted to €117 million on December 31, 2016, and €151 million on December 31, 2015.

Since 2010 there has been an agreement between BASF SE and BASF Pensionskasse about the granting of profit participation capital with a nominal value of €80 million, which is used to strengthen the financing of the BASF Pensionskasse. No material transactions beyond this took place between the legally independent pension funds and BASF Group companies in 2016.

The funding of the plans was as follows:

Current funding situation of the pension plans as of December 31 (million €)

 

 

2016

2015

 

 

Defined benefit obligation

Plan assets

Defined benefit obligation

Plan assets

Unfunded pension plans

 

2,869

2,611

Funded pension plans

 

24,734

19,460

22,250

18,681

Total

 

27,603

19,460

24,861

18,681

Defined contribution plans and government pensions

The contributions to defined-contribution plans contained in income from operations amounted to €281 million in 2016 and €273 million in 2015.

Contributions to government pension plans were €590 million in 2016 and €609 million in 2015.