22 – 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 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 pensions plans, particularly with regard to the funding of the pension plans and the portfolio structure of the existing plan assets. The organization, responsibilites, strategy, implementation and reporting requirements are documented for the units involved.

Economic and legal environment

In some countries – especially in Germany, the United Kingdom, the Netherlands, Switzerland and Belgium – there are pension obligations subject to a governmental supervisory authority 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 for the investment in different asset categories. This could result in fluctuating employer contributions, financing requirements and the absorption of obligations from 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 primarily include unforeseen developments in goods 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, measues 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. As of December 31, 2013, approximately 3% remaining of the total pension obligations were related to final pay promises, and around 2% related to the assumption of healthcare costs.

The funding strategy of the Group is aligned with country-specific supervisory and tax regluations.

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 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. In 2004, the defined benefit plan at BASF was closed for new employees 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 deferred compensation schemes.

United States

Defined benefit plans for employees of U.S. companies are closed to new employees and are frozen to further increases in benefits from future years of service for most groups of the workforce. There is no entitlement to pension adjustments to compensate for cost-of-living increases. For future years of service, employees are granted benefits based on defined contribution plans.

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. In addition, the company-sponsored subsidy to such plans is not subject to annual increases.

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 committee, based on equal representation, manages and governs the plan promises and assets.

United Kingdom

The BASF Group maintains defined benefit plans in the United Kingdom, which were closed for further increases in benefit from future years of service. A part of the workforce still receives benefit increases depending on service period in connection with a career average plan. 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, represent the interests of the beneficiaries and ensure that the benefits can be paid in the future. The required funding is determined using technical valuations according to local regulations every three years.

Following the closure of defined benefit plans, employees are granted benefits based on defined contribution plans for future years of service.

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:

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

 

Germany

 

United States

 

Switzerland

 

United Kingdom

 

2013

2012

 

2013

2012

 

2013

2012

 

2013

2012

Discount rate

3.90

3.50

 

4.80

3.75

 

2.40

2.00

 

4.40

4.40

Projected pension increase

2.00

2.00

 

 

 

3.10

2.70

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Assumptions used to determine expenses for pension plans in each business year

 

Germany

 

United States

 

Switzerland

 

United Kingdom

 

2013

2012

 

2013

2012

 

2013

2012

 

2013

2012

Discount rate

3.50

5.00

 

3.75

4.75

 

2.00

2.50

 

4.40

4.90

Projected pension increase

2.00

2.00

 

 

 

2.70

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 was used for the first time starting December 31, 2013, 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. If the defined benefit obligation as of December 31, 2013 had been valued for the material currency zones using the method applied in the previous year, it would be €390 million higher. The net interest expense for the financial year 2014 will be €10 million lower as a result of the new procedure.

The measurement date for the pension plans is set as December 31 of the respective financial year, and is generally made based on the most recent actuarial mortality tables, which in Germany are derived from the BASF Group population and last updated in 2010.

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Actuarial mortality tables (significant countries) as of December 31, 2013

Germany

Heubeck Richttafeln 2005G (modified)

United States

RP2000 Combined Healthy Fully Generational Mortality Table

Switzerland

BVG 2010 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:

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

 

Increase by 0.5 percentage points

 

Decrease by 0.5 percentage points

 

2013

2012

 

2013

2012

Discount rate

(1,380)

(1,520)

 

1,550

1,700

Projected pension increase

860

850

 

(780)

(780)

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

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Composition of expenses for pension benefits (million €)

 

2013

2012

Expenses for defined benefit plans

325

170

Expenses for defined contribution plans

254

238

Expenses for pension benefits (recognized in income from operations)

579

408

 

 

 

Net interest expenses from underfunded pension plans and similar obligations

192

121

Net interest income from overfunded pension plans and similar obligations

(2)

(6)

Expenses for pension benefits (recognized in the financial result)

190

115

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 of the asset ceiling.

The year-on-year increase in expenses for defined benefit plans recognized in income from operations was largely due to higher service cost in 2013. This was the result of the significant, capital market-related reduction in the discount rate compared with the previous year. Furthermore, higher income from negative past service cost was recognized in 2012.

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Development of defined benefit obligation (million €)

 

2013

2012

Defined benefit obligation as of January 1

22,085

18,583

Service cost

332

257

Interest cost

756

852

Benefits paid

(953)

(929)

Participants’ contributions

57

56

Actuarial gains/losses

 

 

For experience-based adjustments

(17)

(15)

adjustments of demographic assumptions

54

adjustments of financial assumptions

(1,262)

3,552

Effects from acquisitions and divestitures

23

(4)

Past service cost

(38)

(97)

Other changes

(63)

(115)

Currency effects

(257)

(55)

Defined benefit obligation as of December 31

20,717

22,085

The weighted average of the remaining term of the obligations amounted to 14.7 years (previous year, 15.0 years).

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Development of plan assets (million €)

 

2013

2012

Plan assets as of January 1

16,705

15,546

Standardized return on plan assets

566

737

Deviation between actual and standardized return on plan assets

388

804

Employer contributions

239

265

Participants’ contributions

57

56

Benefits paid

(574)

(582)

Effects from acquisitions and divestitures

24

(4)

Past service cost

(33)

Other changes

(50)

(100)

Currency effects

(190)

(17)

Plan assets as of December 31

17,132

16,705

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 made during the year.

The estimated contribution payments for defined benefit plans for 2014 are €272 million.

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Development of asset ceiling (million €)

 

2013

2012

Asset ceiling as of January 1

(1)

Changes recognized directly in equity in the business year

82

1

Transfer in gas trading business disposal group

(5)

Asset ceiling as of December 31

77

Assets from overfunded plans can only be recognized to the extent that it is possible that the existing overfunded plans can be used for the reduction of future contributions or the return to plan sponsors. To the extent that these requirements are not met, recognition is not possible due to the necessity of an asset ceiling.

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Development of the net defined benefit liability (million €)

 

2013

2012

Net defined benefit liability as of January 1

(5,380)

(3,038)

Service cost

(332)

(257)

Interest cost

(756)

(852)

Standardized return on plan assets

566

737

Actuarial gains/losses of the defined benefit obligation

1,225

(3,537)

Deviation between actual and standardized return on plan assets

388

804

Changes in asset ceiling recognized directly in equity

(77)

1

Benefits paid by unfunded plans

379

347

Employer contributions

239

265

Effects from acquisitions and divestitures

1

Past service cost

5

97

Other changes

13

15

Currency effects

67

38

Net defined benefit liability as of December 31

(3,662)

(5,380)

Thereof defined benefit assets

47

41

provisions for pensions and similar obligations

(3,709)

(5,421)

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

 

Pension obligations

 

Plan assets

 

Net balance sheet

 

2013

2012

 

2013

2012

 

2013

2012

Germany

13,369

13,999

 

10,941

10,386

 

(2,428)

(3,613)

United States

3,263

3,816

 

2,111

2,301

 

(1,152)

(1,515)

Switzerland

1,694

1,828

 

1,763

1,738

 

5

(90)

United Kingdom

1,525

1,462

 

1,543

1,489

 

18

27

Other

866

980

 

774

791

 

(105)

(189)

Total

20,717

22,085

 

17,132

16,705

 

(3,662)

(5,380)

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 defined benefit obligation, taking into consideration investment risks and adherence to 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.

Liability-driven investment (LDI) techniques, such as hedging the risk of changes in interest rates and inflation, are used in particular pension plans, especially in the British and American plans.

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Structure of plan assets (%)

 

2013

2012

Equity instruments

27

28

Debt instruments

56

57

Thereof for government debtors

13

14

for other debtors

43

43

Real estate

4

4

Alternative investments

12

10

Cash and cash equivalents

1

1

Total

100

100

Almost all of the equity instruments are priced on an active market. The category debt instruments includes promissory notes and debentures (Pfandbriefe), which were acquired through private placements with a market value in the amount of €1,676 million in 2013 and €2,018 million in 2012. 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. There is no active markets for plan assets in real estate and alternative investments – except in exceptional cases.

The asset class debt instruments comprises promissory notes and debentures (Pfandbriefe) in addition to corporate and government bonds. Government bonds primarily concern those countries enjoying the highest credit ratings such as the United States, the United Kingdom and Switzerland. Corporate bonds mainly comprise investment-grade bonds, whereby particular high-yield bonds are also held. There may be a change of plan asset allocation due to a change in current market assessment based on continuous monitoring of default risk in relation to a given risk budget and creditworthiness of issuers. Alternative investments largely comprise investments in private equity, absolute return funds and senior secured loans.

On December 31, 2013, plan assets contained securities issued by BASF Group companies with a market value of €8 million in 2013 and €21 million in 2012. The market value of the properties of legally independent pension funds rented to BASF Group companies amounted to €76 million on December 31, 2013, and €57 million on December 31, 2012.

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 took place between the legally independent pension funds and BASF Group companies in 2013.

The funding of the plans was as follows:

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

 

2013

 

2012

 

Defined benefit obligation

Plan assets

 

Defined benefit obligation

Plan assets

Unfunded pension plans

2,288

 

2,437

Funded pension plans

18,429

17,132

 

19,648

16,705

Total

20,717

17,132

 

22,085

16,705

Defined contribution plans and government pensions

The contributions to defined-contribution plans included in income from operations amounted to €254 million in 2013 and €238 million in 2012. Contributions to government pension plans were €557 million in 2013 and €547 million in 2012.