✓ audited

21 – 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 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 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. At BASF SE, occupational pension commitments 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. 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 in accordance with IAS 19 were carried out under the following assumptions:

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Assumptions used to determine the defined benefit obligation as of December 31
(weighted average in %)

 

Germany

 

Foreign

 

2012

2011

 

2012

2011

Discount rate

3.50

5.00

 

3.46

4.34

Projected increase in wages and salaries

2.75

2.75

 

3.51

3.71

Projected pension increase

2.00

2.00

 

0.63

0.70

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Assumptions used to determine expenses for pension plans (weighted average in %)

 

Germany

 

Foreign

 

2012

2011

 

2012

2011

Discount rate

5.00

5.00

 

4.34

4.74

Projected increase in wages and salaries

2.75

2.75

 

3.71

3.79

Projected pension increase

2.00

1.75

 

0.70

1.00

Expected return on plan assets

5.28

5.28

 

5.66

5.49

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 8.0% per year (2011: 8.0%) until 2012, followed by a straight-line reduction until a rate of increase of 5.0% is reached in 2018 (2011: 5.0%). A change in the underlying rate of increase in health care costs by one percentage point would have the following effects:

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Sensitivity of health care costs (million €)

 

Increase by one percentage point

Decrease by one percentage point

Accumulated post-employment benefit obligation

12

(11)

Effect on pension cost

1

(2)

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 2012, 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.

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Portfolio structure of plan assets (%)

 

Target allocation

 

Share of plan assets

 

2013

 

2012

2011

Shares

27

 

29

28

Bonds

61

 

61

63

Property

5

 

4

4

Other

7

 

6

5

Total

100

 

100

100

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Development of defined benefit obligation (million €)

 

2012

2011

Defined benefit obligation as of January 1

18,613

17,695

Service cost

259

250

Interest cost

853

832

Benefits paid

(931)

(914)

Participants’ contributions

56

55

Actuarial gains/losses

3,539

464

Plan amendments and other changes

(210)

5

Exchange differences

(58)

226

Defined benefit obligation as of December 31

22,121

18,613

The actuarial losses of €3,539 million in the pension obligations are due to the considerable reduction in the average weighted discount rate necessitated by the development of the capital markets.

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Development of plan assets (million €)

 

2012

2011

Plan assets as of January 1

15,572

15,226

Expected return on plan assets

819

818

Actuarial gains/losses

726

(328)

Employer contributions

270

180

Participants’ contributions

56

55

Benefits paid

(584)

(560)

Other changes

(101)

2

Exchange differences

(19)

179

Plan assets as of December 31

16,739

15,572

The actual return on plan assets amounted to €1,545 million in 2012, and €490 million in 2011. On December 31, 2012, plan assets contained securities issued by BASF Group companies with a market value of €21 million (December 31, 2011: €27 million). The market value of the properties of legally independent pension funds rented to BASF Group companies amounted to €57 million on December 31, 2012, and €48 million on December 31, 2011.

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 latter’s financing. No material transactions took place between the legally independent pension funds and BASF Group companies in 2012.

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Reconciliation of funded status to provisions for pensions and similar obligations (million €)

 

2012

2011

Plan assets as of December 31

16,739

15,572

Less defined benefit obligation as of December 31

22,121

18,613

Funded status

(5,382)

(3,041)

Unrecognized past service cost

(35)

(19)

Asset ceiling in accordance with IAS 19.58

(1)

Net obligation recognized on the balance sheet

(5,417)

(3,061)

Thereof defined benefit assets

43

128

provisions for pensions and similar obligations

(5,460)

(3,189)

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 €2,813 million in 2012 and €792 million in 2011 were recognized directly in retained earnings. Since the introduction of this accounting policy in 2004, total actuarial losses of €5,785 million have been recognized directly in retained earnings, not taking deferred taxes into account.

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Current funding situation of the pension plans (million €)

 

2012

 

2011

 

Defined benefit obligation

Plan assets

 

Defined benefit obligation

Plan assets

Unfunded pension plans

2,438

 

2,157

Partially funded pension plans

17,926

14,939

 

10,633

9,620

Total of pension plans that are not fully funded

20,364

14,939

 

12,790

9,620

Fully funded pension plans

1,757

1,800

 

5,823

5,952

 

22,121

16,739

 

18,613

15,572

The shift between plans that are partially funded and those that are fully funded was attributable to the increase of the defined benefit obligation of individual plans, which resulted in particular from the considerable reduction in the discount rate.

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Deviation between actuarial assumptions and the actual development (million €)

 

2012

2011

2010

2009

2008

Defined benefit obligation

22,121

18,613

17,695

15,264

11,814

Thereof impact of experience adjustments

7

33

21

(2)

36

Plan assets

16,739

15,572

15,226

13,810

10,325

Thereof impact of experience adjustments

726

(328)

569

1,120

(2,163)

Funded status

(5,382)

(3,041)

(2,469)

(1,454)

(1,489)

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Expected payments resulting from pension obligations existing as of December 31, 2012 (million €)

2013

966

2014

977

2015

1,003

2016

1,058

2017

1,086

2018 until 2022

5,841

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Composition of expenses for pension plans (million €)

 

2012

2011

Service cost

259

250

Amortization of past service cost

(2)

(6)

Gains/losses from curtailments and settlements

(75)

5

Expenses for defined benefit plans charged to income from operations

182

249

Expenses for defined contribution plans charged to income from operations

245

216

Expenses for pension benefits charged to income from operations

427

465

 

 

 

Interest cost

853

832

Expected return on plan assets

(819)

(818)

Expenses for pension benefits in the financial result

34

14

In 2012, contributions to public pension plans were €557 million (2011: €550 million).

The estimated contribution payments for defined benefit plans for 2013 are €239 million.