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, employee 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 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 specialist 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 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 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 to be applied to 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 committments 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 as well as the return on plan assets. BASF SE will ensure the necessary contributions to adequately finance the benefits promised by BASF Pensionskasse VVaG. Some of the benefits financed via BASF Pensionskasse VVaG are subject to adjustments that must be borne by its sponsoring 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 new 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 of U.S. companies receive benefits from defined contribution plans. 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. 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 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 plan 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 management of the pension fund, where employer and employees are equally represented, manages and governs the benefit plan and assets.

United Kingdom

The BASF Group maintains defined benefit plans in the United Kingdom, which were closed to further increases in benefits 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, 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.

Following the closure of defined benefit plans, employees are granted benefits based on a defined contribution plan 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:

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

 

 

Germany

United States

Switzerland

United Kingdom

 

 

2014

2013

2014

2013

2014

2013

2014

2013

Discount rate

 

2.40

3.90

3.90

4.80

1.00

2.40

3.70

4.40

Projected pension increase

 

1.75

2.00

2.90

3.10

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

 

 

Germany

United States

Switzerland

United Kingdom

 

 

2014

2013

2014

2013

2014

2013

2014

2013

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

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 at least 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 financial year, which in Germany and the United States are derived from the BASF Group population and last updated for the pension obligations in Germany in 2010 and for the pension obligations in the United States in 2014.

Actuarial mortality tables (significant countries) as of Dec. 31, 2014

Germany

 

Heubeck Richttafeln 2005G (modified)

United States

 

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

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:

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

 

 

Increase by 0.5 percentage points

Decrease by 0.5 percentage points

 

 

2014

2013

2014

2013

Discount rate

 

(1,850)

(1,380)

2,100

1,550

Projected pension increase

 

1,240

860

(1,070)

(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

Composition of expenses for pension benefits (in million €)

 

 

2014

2013

Expenses for defined benefit plans

 

286

325

Expenses for defined contribution plans

 

274

254

Expenses for pension benefits (recognized in income from operations)

 

560

579

 

 

 

 

Net interest expenses from underfunded plans for pensions and similar obligations

 

149

192

Net interest income from overfunded pensions

 

(2)

(2)

Interest cost for the asset ceiling

 

2

Expenses for pension benefits (recognized in the financial result)

 

149

190

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.

Net interest expense from underfunded pension plans and similar obligations declined compared with the previous year, mainly as a result of the lower net balance recognition as of December 31, 2013.

Development of defined benefit obligation (in million €)

 

 

2014

2013

Defined benefit obligation as of January 1

 

20,784

22,105

Current service cost

 

301

332

Interest cost

 

806

756

Benefits paid

 

(959)

(953)

Participants’ contributions

 

54

57

Actuarial gains/losses

 

 

 

for adjustments relating to financial assumptions

 

4,095

(1,262)

adjustments relating to demographic assumptions

 

118

54

experience-based adjustments

 

38

(17)

Effects from acquisitions and divestitures

 

23

Past service cost

 

(37)

(38)

Plan settlements

 

(357)

Other changes

 

3

(16)

Currency effects

 

628

(257)

Defined benefit obligation as of December 31

 

25,474

20,784

In the Netherlands, pension obligations and plan assets were transferred to an insurance company with discharging effect in connection with a plan settlement.

As of December 31, 2014, the weighted average duration of the defined benefit obligation amounted to 16.1 years (previous year: 14.7 years). The significant decrease in discount rates led to an increase in the weighted average duration of the defined benefit obligation.

Development of plan assets (in million €)

 

 

2014

2013

Plan assets as of January 1

 

17,186

16,705

Standardized return on plan assets

 

659

566

Deviation between actual and standardized return on plan assets

 

678

388

Employer contributions

 

397

239

Participants’ contributions

 

54

57

Benefits paid

 

(784)

(574)

Effects from acquisitions and divestitures

 

24

Past service cost

 

(33)

Plan settlements

 

(379)

Other changes

 

(23)

4

Currency effects

 

464

(190)

Plan assets as of December 31

 

18,252

17,186

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 increase in employer contributions arose from a payment in the amount of $250 million to the plan assets of U.S. companies.

The estimated contributions for defined benefit plans for 2015 are €291 million.

Development of asset ceiling (in million €)

 

 

2014

2013

Asset ceiling as of January 1

 

82

Interest cost for the asset ceiling

 

2

Changes recognized directly in equity in the business year

 

(84)

82

Asset ceiling as of December 31

 

82

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.

Development of the net defined benefit liability (in million €)

 

 

2014

2013

Net defined benefit liability as of January 1

 

(3,680)

(5,400)

Current service cost

 

(301)

(332)

Interest cost

 

(806)

(756)

Interest cost for the asset ceiling

 

(2)

Standardized return on plan assets

 

659

566

Deviation between actual and standardized return on plan assets

 

678

388

Actuarial gains/losses of the defined benefit obligation

 

(4,251)

1,225

Changes in asset ceiling recognized directly in equity

 

84

(82)

Benefits paid by unfunded plans

 

175

379

Employer contributions

 

397

239

Effects from acquisitions and divestitures

 

1

Past service cost

 

37

5

Plan settlements

 

(22)

Other changes

 

(26)

20

Currency effects

 

(164)

67

Net defined benefit liability as of December 31

 

(7,222)

(3,680)

Thereof defined benefit assets

 

91

47

provisions for pensions and similar obligations

 

(7,313)

(3,727)

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

 

 

Pension obligations

Plan assets

Asset ceiling

Net defined benefit liability

 

 

2014

2013

2014

2013

2014

2013

2014

2013

Germany

 

16,864

13,386

11,394

10,941

(5,470)

(2,445)

United States

 

4,131

3,263

2,604

2,111

(1,527)

(1,152)

Switzerland

 

2,019

1,694

1,875

1,763

64

(144)

5

United Kingdom

 

1,769

1,525

1,840

1,543

71

18

Other

 

691

916

539

828

18

(152)

(106)

Total

 

25,474

20,784

18,252

17,186

82

(7,222)

(3,680)

Explanations regarding plan assets

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

Structure of plan assets (in %)

 

 

2014

2013

Equities

 

27

27

Debt instruments

 

55

56

Thereof for government debtors

 

11

13

for other debtors

 

44

43

Real estate

 

4

4

Alternative investments

 

13

12

Cash and cash equivalents

 

1

1

Total

 

100

100

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 €1,381 million in 2014 and €1,676 million in 2013. 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 bonds from 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 to a limited extent. In connection with the ongoing monitoring of default risk based on a given risk budget and on the continuous oberservation 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.

On December 31, 2014, plan assets contained securities issued by BASF Group companies with a market value of €10 million in 2014 and €8 million in 2013. The market value of the properties of legally independent pension funds rented to BASF Group companies amounted to €168 million on December 31, 2014, and €76 million on December 31, 2013. The increase was due to BASF Pensionskasse’s construction and leasing of a new office building in Germany.

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 2014.

The funding of the plans was as follows:

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

 

 

2014

2013

 

 

Defined benefit obligation

Plan assets

Defined benefit obligation

Plan assets

Unfunded pension plans

 

2,800

2,303

Funded pension plans

 

22,674

18,252

18,481

17,186

Total

 

25,474

18,252

20,784

17,186

Defined contribution plans and government pensions

The contributions to defined contribution plans included in income from operations amounted to €274 million in 2014 and €254 million in 2013.

Contributions to government pension plans were €573 million in 2014 and €557 million in 2013.